The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Bahamas “is fiscally improving but structurally under-powered” as it enters tomorrow’s Budget, a well-known financial commentator is asserting, as he called for a revision to the 50 percent-debt-to-GDP target’s timing and the start of an “honest conversation” about taxation.

Hubert Edwards, writing on his LinkedIn page, said that - despite the first Davis administration’s progress towards eliminating the annual deficit and other forms of fiscal consolidation - the Bahamas needs to generate greater, sustained momentum from achieving higher annual economic growth rates than the 1.6 percent long-run average forecast by the International Monetary Fund (IMF).

Hailing the Government’s energy reforms as the potential “master variable” for realising greater gross domestic product (GDP) growth ambitions, he argued that this nation needs a “serious strategic response” for generating faster economic expansion and job creation.

Turning to the fiscal situation, ahead of the second Davis administration’s unveiling of the 2027-2028 Budget in the House of Assembly tomorrow, Mr Edwards wrote that the 2030-2031 target for achieving a 50 percent debt-to-GDP ratio needs to be “revisited” and pushed back because its attainment is “not viable without either significant new taxation or expenditure compression [austerity] that would retard the very growth the country needs”.

Backing the Government’s focus on improving the financial performance of loss-making state-owned enterprises (SOEs), and reducing annual taxpayer subsidies to them, he added that this was “among the richest sources of available fiscal space” if it gets this right.

And Mr Edwards urged the Government to use the Budget to trigger discussion on the tax base that The Bahamas needs to finance its growth and development ambitions over the next 15 years. Calling on it to ensure there are sufficient resources to deliver on Speech from the Throne and campaign promises, he urged Bahamians “to treat stability as the floor, not the ceiling” and understand that the less-than-2 percent long-term annual economic growth forecasts is a recipe for “managed decline”.

Arguing that the Davis administration is returning to office “with stronger political capital than any” of its predecessors over the past 30 years, having become the first two-term government since the 1997 general election, Mr Edwards forecast that the 2027-2028 Budget is unlikely to see any major tax increases although some fees may rise to keep pace with cost recovery and inflation.

“On the revenue side, expect continued reliance on VAT, Customs duties and Business Licence fees, the established pillars of the tax architecture that has served the country well but remains structurally insufficient,” he foreshadowed. “There are likely to be increased ‘fees’ in various areas but no direct upward shift in any of the major taxes.

“Domestic Minimum Top-Up Tax (DMTT) will feature as a fiscal contribution from large multinational groups. But it is an instrument of response, not a structural tax reform. The country’s underlying revenue architecture, cyclically vulnerable and heavily consumption-linked, will remain the dominant feature.”

As for what Wednesday’s Budget should contain, Mr Edwards said: “The country needs a Budget that honestly confronts a prevailing reality: The Bahamas is fiscally improving but structurally underpowered. The IMF projects medium-term potential growth at approximately 1.5 percent, a growth rate which demands serious strategic response.

“Tourism recovery, financial services activity and construction have performed creditably since the pandemic. They cannot, on their own, eliminate the structural deficit in growth potential. The Budget should respond directly to this important reality.”

And, turning to the Government’s finances, he added: “A recalibration of the fiscal strategy itself would be valuable. The hard target of 50 percent debt-to-GDP by fisval year 2030-2031 should be revisited. That target, as currently configured, is not viable without either significant new taxation or expenditure compression that would retard the very growth the country needs.

“A more pragmatic framework leans into growth rather than surplus accumulation, deploys deficit financing strategically and lays the foundation for productive investment. The Budget should, by its underlying policies, set out a ten to 15-year growth trajectory as its primary organising principle of fiscal policy. Surpluses should be targeted as by-product of a growing economy, not the objective that potentially constrains it by limiting spending in critical areas.”

Mr Edwards argued that “strict public sector corporate governance requirements, including those already documented in the Public Financial Management Act, supported by comprehensive board mandates, director training, Board and director evaluations, robust internal controls and risk management” are an essential foundation and pre-requisite for reforming Bahamian SOEs that consume more than $500m (half a billion dollars) annually.

“Successful SOE reform is among the richest available sources of fiscal space. SOE inefficiency crowds out capital spend on infrastructure and productive investment, holds back the country’s ambition to improve its sovereign debt profile, and repeats almost perpetually annual outlays in this area too often represent catching up on what should have been done years earlier,” Mr Edwards said.

“Critical to SOE reform must be the underlying principle that all initiatives are geared at fundamentally shifting the prevailing culture associated with them and public sector. SOE reforms should be used as a sand box for application to the wider public sector.”

Looking ahead to meaningful long-term reform, Mr Edwards reiterated that execution is critical for the Government to deliver on its mandate. “An honest tax architecture conversation should emerge from this Budget. It need not introduce a comprehensive tax overhaul, and it is not expected to do so. It should, however, frame the question publicly: What tax base does The Bahamas require to fund its development ambitions sustainably over the next 15 years?

“Delaying it does not defer the reality; it will only reduce the country’s ability to respond on its own terms. The Bahamas is rich with policy ideas but has not always demonstrated the administrative capacity to convert good ideas into lasting outcomes. Against this backdrop, the Speech from the Throne’s announcement of a National Investment Policy, FDI Compliance Unit, continued land registry modernisation and mandatory development approval timelines are important precisely because they target the execution gap.

“The Budget must resource these initiatives concretely. They are part of the path to the new economic architecture the country needs. Great care must be taken to ensure they do not become unfunded mandates.” Mr Edwards said the Davis administration has a “genuine opportunity” to move The Bahamas forward, but needs to produce a Budget that is “brutally honest” on some of the country’s challenges and the strategies needed to “shift this trajectory”.

“The Budget must answer a direct question, for citizens and residents, investors, rating agencies, the business community, and above all the generation that inherits what is being built today,” he argued. “That question is whether the country is prepared to treat stability as the floor, not the ceiling.

“Having regard for population growth, greater demand for public goods and services, and the geopolitical pressures already reshaping economic realities, a country that is stable at sub-2 percent growth potential is not holding steady, it is declining on a managed schedule.”