The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas has “limited scope” for cutting its unemployment rate below 9 percent without a major productivity boost or economic expansion, the Government’s own models and forecasts have predicted.

The Fiscal Strategy Report 2026, released alongside last week’s Budget for the 2026-2027 fiscal year, revealed that the Government’s own financial and economic modelling framework projects that there will only be modest decreases in the present unemployment rate to around 9 percent by the 2028-2029 fiscal year with little change thereafter.

This “plateau”, the report added, suggests the Bahamian economy - with a jobless rate of around 9.5 percent at the end of the 2025 second quarter - is already operating at close to its structural unemployment capacity. If correct, that means The Bahamas could - even at peak economic activity - be faced with a jobless rate where still close to one out of every ten Bahamians looking for work is unable to find it.

“Labour market conditions exhibit limited adjustment over the projection period,” the Fiscal Strategy Report said, looking out over a ten-year period to 2035-2036. “The unemployment rate declines from 9.5 percent to 9 percent by fiscal year 2028-2029 and remains broadly unchanged thereafter. This plateau suggests that the economy is operating near its structural employment capacity, with limited scope for further reductions absent significant productivity-enhancing reforms or labour market expansion.”

The outlook for such productivity growth does not appear optimistic. “Output per worker is projected to slow from 2.7 percent in fiscal year 2024-2025 to 1.8 percent in fiscal year 2025-2026, stabilising at 1.7 percent thereafter,” the Fiscal Strategy Report said.

“A sensitivity analysis assuming zero productivity growth for two years shows nominal GDP growth falling by 1.7 percentage points to 4.8 percent, with some long-run shock effects. The fiscal balance-to-GDP ratio also weakens, as productivity shocks typically raise government spending pressures while dampening economic activity.”

However, over that ten-year period, the Government’s model is forecasting that annual economic output or gross domestic product (GDP) will increase by some $8.7bn in nominal terms or just over 49 percent. The growth is projected from $17.6bn in 2025-2026 to $26.3bn by 2035-2036, “implying a steady deceleration in growth from 6.2 percent to approximately 3.8 percent over the forecast horizon”.

As for real GDP growth, which strips out the impact of inflation, the Fiscal Strategy Report added that this is “projected to moderate from 2.9 percent in fiscal year 2025-2026 to a stable range of 1.7 to 1.9 percent over the long-term.

“The persistence of this relatively narrow growth band reflects structural constraints within the economy, including capacity limitations in tourism and modest productivity growth. Consequently, long-run output expansion is primarily driven by incremental gains in labour productivity rather than capital and land accumulation or cyclical demand effects,” it said of the Government’s forecasting.

The prospects for the Government’s own finances, though, appeared more optimistic. “The fiscal outlook over the medium to long-term horizon reflects a sustained improvement in the Government’s overall fiscal position, supported by continued growth in revenues and disciplined expenditure management,” the Fiscal Strategy Report asserted.

“The overall balance (deficit) is projected to remain in surplus throughout the forecast period, increasing from 0.4 percent of GDP in fiscal year 2025-2026 to 1.2 percent of GDP in fiscal year 2026-2027, and strengthening further to 2.8 percent of GDP by fiscal year 2027-2028. Over the medium term, the surplus is expected to stabilise at approximately 1.6–1.9 percent of GDP, before rising gradually to 3.7 percent of GDP by fiscal year 2035-2036.”

Similar positive trends were forecast over the central government’s, and The Bahamas’, debt. “Government debt is projected to follow a firmly downward trajectory across both the medium and long-term, declining from $11.4bn in fiscal year 2025-2026 to $8bn by fiscal year 2035-2036,” the Fiscal Strategy Report added.

“In GDP terms, the debt ratio is expected to fall from 64.6 percent in fiscal year 2025-2026 to 52.2 percent by fiscal year 2028-2029, and further to 47.9 percent by fiscal year 2030-2031, placing the Government on a clear path toward achieving its fiscal objective of reducing public debt to no more than 50 percent of GDP in the early 2030s.

“Thereafter, the debt‐to‐GDP ratio continues to decline steadily, reaching 30.3 percent by fiscal year 2035-2036. The sustained reduction in debt is underpinned by strong and persistent primary surpluses, continued economic growth and prudent debt management,” the report added.

“The composition of public debt also evolves over the projection horizon, with external debt declining from $5.1bn in fiscal year 2025-2026 to $2.8bn by fiscal year 2035-2036, while domestic debt decreases more gradually from $6.3bn to $5.1bn. This rebalancing supports a reduction in external vulnerabilities while maintaining a stable domestic financing base.”

However, the Fiscal Strategy Report admitted that past government projections for annual tax revenues and deficits have often been too optimistic, with missed targets causing increased financial strain and forcing unexpected, unplanned borrowings to cover the holes and funding gaps that result.

“The Government’s revenue strategy for 2026-2027 is anchored in the principles of fairness, simplicity and adequacy, and is supported by improvements in revenue administration, tax policy initiatives and institutional reforms,” the report said.

“Under the medium-term fiscal framework, revenues are projected to rise to 23.5 percent of GDP in 2026-2027, 24 percent in 2027-2028, and 24.5 percent in 2028-2029, before returning to 25 percent in 2029-2030 and remaining at that level over the medium term.”

However, the Fiscal Strategy Report then warned: “Historical forecast performance indicates, however, that revenue projections have been characterised by systematic optimism and elevated volatility, with average over-estimation in the Budget year and increasing dispersion at longer horizons. Revenue outcomes have proven particularly sensitive to macroeconomic conditions and external demand.

“The revenue chart illustrates uncertainty around the baseline projection for 2026 to 2028. While the central projection is consistent with the Government’s revenue targets, the widening confidence bands indicate a material probability of weaker outcomes beyond the Budget year. This underscores the importance of conservative revenue assumptions and prudence margins in medium-term fiscal planning.”

It was a similar theme with the annual GFS deficit, which the Davis administration is hoping will become a surplus in the current 2025-2026 fiscal year and continue thereafter. “Historical forecast error analysis indicates that uncertainty around the fiscal balance remains material. Past projections have exhibited a systematic optimistic bias, with fiscal deficits consistently underestimated across forecast horizons,” the Fiscal Strategy Report said.

“This reflects the combined effects of revenue shortfalls and expenditure pressures materialising more strongly than anticipated, particularly beyond the Budget year. The fiscal balance chart illustrates the uncertainty surrounding the projected transition to sustained surpluses from 2026-2027 onward.

“While the baseline projection envisages a strengthening fiscal position, the lower percentiles of the distribution indicate a non-negligible risk that fiscal outcomes could remain weaker than projected under adverse macroeconomic or fiscal scenarios. This… underscores the importance of maintaining contingency buffers and preserving flexibility in fiscal management to safeguard medium-term fiscal objectives.”

While spending estimates have proven more accurate, as this is an easier element for the Government to control, the Fiscal Strategy Report 2026 added: “Historical evidence shows that expenditure forecasts have been relatively accurate in the Budget year but systematically under-estimated in outer years, reflecting implementation of pressures and evolving policy commitments.

“The expenditure chart shows limited near-term dispersion but a widening and upward skewed distribution over the medium term, indicating a higher likelihood of expenditure overruns than underspending.”