James Smith - former minister of state for finance says Government's projections for budget year 2010-2011 'may be too optimistic'

Govt projections for budget year 'may be too optimistic'
By ALISON LOWE
Tribune Staff Reporter
alowe@tribunemedia.net:


THE GOVERNMENT'S debt-cutting and revenue-raising projections for the budget year may be too optimistic and do not take into account the possibility of a double-dip recession or an event like a major hurricane, said a former minister of state for finance.

James Smith, a senator during the former PLP administration, yesterday suggested an effective step to boost the economy which has not yet been proposed could be achieved by having the Central Bank of the Bahamas lower the prime interest rate - simultaneously lessening debt burdens for regular Bahamians and for the country's "biggest debtor", the Government.

"The prime rate in The Bahamas has not changed since February 2005 despite the fact the prime rate has been dropping across world. In the same way you go to a stimulus package to increase aggregate demand in a recession you also want to provide grease for the private sector by lowering interest rates," said Mr Smith, Chairman of CFAL.

"I think Ministry of Finance should speak to the Central Bank on monetary policy and ways it could assist us in this crisis. They tend to err on side of caution so unless you nudge them they'll not move," he added.

Speaking during the wrap-up of the Budget debate for 2010/2011, Prime Minister Hubert Ingraham said the measures it contains -- including an expenditure reduction of 2.6 per cent or four per cent in real terms, enhanced revenue collection measures and some increased taxes - are "designed and intended to correct an imbalance which left alone would create an enduring economic crisis of enormous proportions."

Having "borrowed to sustain living standards to the extent we could" the Bahamas has a "high level of debt" which is unsustainable, he has said. In his Budget presentation he said the government plans to reduce, through its budgetary measures, the country's GFS deficit from 5.7 to 3 per cent by July of 2011. Speaking on Thursday, he described the steps being taken to achieve this as "not a painless medicine" but said "the alternative is demonstrably worse", pointing to recent economic crises in Greece, Spain and other European countries.

For 2010-2011, the Government is projecting that it will cut its recurrent deficit (fixed revenues minus fixed costs) to just $62 million, compared to $259 million for 2010, a reduction of more than 76 per cent. With capital spending set to exceed capital revenues by $240 million, the Government is projecting a total deficit of $302 million in 2010-2011, compared to $514 million in 2009-2010.

Stripping out the cost of debt principal redemption for both years shows that the Government's targeted GFS fiscal deficit for 2010-2011 is $227 million, a 46.4 per cent reduction on this year's $425 million deficit. As a percentage of GDP, the target GFS deficit for 2010-2011 is 3 per cent.

Mr Smith said he believes the government is "sending the right message" to international credit rating agencies - who determine at what rate the Bahamas can borrow money on the international market - when it shows "recognition that debt and the deficit are rising too rapidly."

However, he said, he would have preferred to see "a more realistic timeline" for reduction in these figures than that proposed by the Prime Minister of "two to three years." He said that he feels it is unlikely the deficit can be reduced by $200 million in the next year unless "some external event" like the privatisation of BTC comes into play.

"By increasing a number of taxes you might really slow down the economic growth rate in the country which depends primarily on imports for its revenue base, having an unintended negative effect," he said.

Meanwhile, he said such optimistic revenue projections do not take into account the possibility that the Bahamas may see a ripple effect from the economic woes plaguing the Euro zone at present - exemplified by the Greek crisis - or the likelihood that a hurricane could hit, taking up precious resources.

June 12, 2010

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Bahamas Blog International

The Bahamas Government’s Commitment to Fiscal Prudence Questioned

Hubert Ingraham on Fiscal Prudence

Ingraham Slams Budget

By Candia Dames

candiadames@hotmail.com

Nassau, The Bahamas

17th June 2005

There appears to be a disconnect between an expanding economy and the growth in government revenue, former prime minister, Hubert Ingraham, declared in the House of Assembly on Thursday as he questioned the government’s commitment to fiscal prudence.

During the budget communication on May 25, Acting Prime Minister Cynthia Pratt noted that the government is aiming to contain the ratio of government debt to GDP to under 38 percent in fiscal year 2005/2006.

Expert advice is that the government should limit the ratio of government debt to GDP to as near as possible to 30 percent "so as to avoid the problems which would arise from a ratio significantly in excess of that level."

The government also projects that in the two fiscal years that will follow 2005/2006; the ratio of government debt to GDP will still remain around the 37 percent level.

At the time, the Acting Prime Minister also noted that the ideal government revenue to GDP is about 20 percent, but she admitted that this is becoming increasingly hard to achieve because of the narrowness of the country’s revenue system, which is heavily dependent on customs duties.

The government also projects a GFS deficit of $172 million, which would be $30 million more than what was projected for 2004/2005.

However, Mrs. Pratt stressed that the economy is on the upswing with growth of 3.5 percent expected in 2005.

The projections were the basis for Mr. Ingraham’s declaration of an apparent disconnect.

In the five years immediately prior to September 2001, government revenue averaged roughly 19 percent of GDP, he said, adding that the actual results of the following three years show government revenue falling by more than 2 percentage points to under 17 percent of GDP.

"It is therefore not a sufficient economic policy to focus exclusively on foreign investment and its impact on economic growth when that economic growth is not simultaneously translating into increased government revenue," Mr. Ingraham reasoned.

"Nothing can more quickly and more effectively arrest that flow of inward investment than a fiscal situation which is not sustainable, where the level of debt continues to rise by an ever increasing proportion of GDP, and where doubts about the commitment of fiscal management may legitimately arise."

He also indicated that after falling continuously since fiscal year 1996/1997, government debt as a percentage of national income has been increasing steadily each year since fiscal year 2001/2002.

"It would have been desirable for this budget to give a signal of a commitment to change in this pattern," Mr. Ingraham said.  "It did not."

He also pointed to the projected outcome of a GFS deficit of 2.8 percent for 2005/2006, the same outcome projected for 2004/2005.

"As a result, government debt as a per centum of GDP is projected to grow by 1/2 of 1 percent in fiscal year 2005/2006, rising from 37 percent to 37 1/2 percent and projected to rise further in 2006/2007," Mr. Ingraham said.

"This [is going to happen] at a time when the economy is projected to grow by a nominal rate of more than 5 percent.  There is no better time to send the signal of fiscal prudence than now.  If it cannot be done now, when can it be done?  Next year with election in the air?"

He said the widening of the recurrent deficit over the last several years has to be a major concern for those who value prudent fiscal management.

"The recurrent balance is a critical element in fiscal management," he reminded.  "For governments, it reflects the long-term sustainability of its fiscal situation.  It is for this reason that my government’s fiscal policy focused so heavily on the recurrent account which led to a substantial lowering of the level of recurrent imbalances and eventually resulted in a surplus on the recurrent account for two fiscal periods running – 1999/2000 and 2000/2001, for the first time in 23 years."

The Bahamas 2005-2006 Fiscal Deficit is Projected to Increase Over the Previous Period

The Bahamas 2005-2006 National Budget Projects The Government Finance Statistic (GFS) Deficit of $172 million

Budget Deficit Soars

By Candia Dames

candiadames@hotmail.com

Nassau, The Bahamas

26th May 2005

The 2005-2006 budget projects a GFS deficit of $172 million, which would be $30 million more than the deficit expected when this fiscal year draws to a close on June 30.

The $172 million deficit would be 2.8 percent of GDP and would be the highest deficit since fiscal year 2002-2003 when the spending shortfall came in at $184 million.

There are several factors that are expected to contribute to increased spending in the 2005-2006 fiscal year, Acting Prime Minister Cynthia Pratt announced in the House of Assembly yesterday.

The recurrent expenditure is pegged at $1.214 billion, which is an increase of $39 million or 3 percent over the 2004/2005 budget.

"The single major component of the increase is the provision in the Ministry of Finance Estimates to pay increases for public servants and related groups, arising from the present negotiations, as well as some increase in benefits for retired public servants," Mrs. Pratt announced.

"Another important increase is for the improvement in insurance arrangements for the Royal Bahamas Police Force, the Royal Bahamas Defence Force and the other law enforcement officers."

This comes to a total of $8 million, the Acting Prime Minister announced.

In addition to the GFS deficit, one of the traditional highlights in the annual budget communication is the ratio of government debt to GDP given that financial experts continue to advise that this ratio should be kept as near as possible to 30 percent of GDP to avoid the problems which would arise from a ratio significantly in excess of that level.

Exceeding the 40 percent mark could mean that the government’s ability to borrow money would be severely constrained and it would be forced to sharply increase taxes, Mrs. Pratt reiterated during her communication, which she delivered on behalf of Prime Minister and Minister of Finance Perry Christie, who is still convalescing at home three weeks after suffering a slight stroke.

"Fiscal deficits arise if we spend more than we earn in revenues and if this situation continues for long enough we build up massive borrowing problems," Mrs. Pratt pointed out.

She added that circumstances are quite different if the ratio of government debt to GDP is closer to 30 percent.

"There would be much greater scope to avoid these drastic remedies because there would be the capacity to borrow until the economic situation improves and until revenues recover so as to again close the gap between revenue and expenditure.  This is what transpired in 2001 and 2002," the Acting Prime Minister said.

She said in order to bring the ratio of government debt to GDP as close as possible to 30 percent revenues must consistently attain the level of 20 percent of GDP.

"At that level, we can also provide the level of revenue resources which we need for ongoing public expenditure while containing the fiscal deficit," Mrs. Pratt said.

She also noted that successive governments have tried to attain the ratio of government revenue to GDP of about 20 percent.

At that level, Mrs. Pratt said, Bahamians could enjoy a reasonable level of public services without the introduction of taxation to pay for them.

"However, the ratio of revenue to GDP of 20 percent is becoming increasingly hard to achieve because of the narrowness of our revenue system, heavily dependent as it is on customs revenues and the non-taxation of services.  Thus, the expansion of essential public services has resulted in fiscal deficits emerging, which have been met by borrowing.

"As a result, the level of government debt to GDP has risen inexorably since the year 2000.  In recognition of this issue, in the 2005/2006 budget- the government is aiming to contain the ratio of government debt to GDP to under 38 percent."

The Acting Prime Minister also said that the government is continuing an aggressive process of addressing tax reform to improve its revenue situation.

The 2005-2006 budget projects recurrent revenue of $1.145 billion, an increase of $93 million or 9 percent over the 2004/2005 budget.

"The reason for projecting an increase of 9 percent over 2004/2005 is because of the strengthening of the economy, with growth in current terms of over five percent and the heightened emphasis being given to concrete and specific improvement in revenue administration," Mrs. Pratt said.

The Acting Prime Minister also announced that the government plans to improve all of the country’s national airports to raise them to the highest standards required.

"Accordingly, a variety of air navigational fees and related charges in the Family Islands are being increased to more realistic levels to meet part of the cost," she announced.  "In addition, it is intended to implement passenger facility fees at major airports as part of the cost recovery exercise."

Prime Minister Perry Christie's Consolative News on The Budget Deficit

Prime Minister Christie's comforting words on the deficit: ...new revenue figures seem set to improve the fiscal outlook and GFS deficit for next year

Deficit Forecast Revised

By Candia Dames

candiadames@hotmail.com

Nassau, The Bahamas

21/06/2004

More than three weeks after his deficit projections in the budget communication sparked criticism in some quarters, Prime Minister Perry Christie has revised those numbers, providing a more positive forecast.

Mr. Christie told the Journal shortly after Members of Parliament passed the 2004/2005 budget late Friday night that new revenue figures seem set to improve the fiscal outlook and GFS deficit for next year.

The budget projects a GFS deficit of $164 million, but the prime minister said it is likely that the figure will be less.

He said the new expectation is that the deficit for 2004/2005 could be closer to 2.5 percent of GDP as opposed to the 2.9 percent he projected in the budget communication on May 26.

At the time, the prime minister said, "If the process of reviewing the national accounts data leads to substantial increases in the GDP data, the actual level of GSF deficit could be considerably lower."

While speaking to the Journal, he said his hopes have been realized.

"We were projecting an outturn for 2003/2004 of $920 million," Mr. Christie said.  "We have now been informed that the revenue of $920 million has already been registered and it is likely that we will record an amount nearer to $950 million.  We believe that this is indicative of the improved techniques and procedures in revenue collections."

The prime minister said it is important for him and his government to see this as an indicator because they have argued in the budget presentation that there will be 3 percent growth in the economy this year.

When added to improved revenue collections, this would allow the government to "attack" the GFS deficit, he said.

"What I think is to be learnt from this is that the efforts of the Ministry of Finance to introduce technology and expertise inclusive of equipment for the enhanced collection of revenue is serving to be to the advantage of the government," the prime minister said.

"We have truly predicated our budget on this basis: We believe that rather than pass additional taxes, which in part was recommended by the [International Monetary Fund], that we are able to, based on historical evidence, take advantage of the capital inflows as a result of the Kerzner development."

He told the Journal that the government has every reason to continue with its optimism.

Only days after he introduced his "no new taxes" budget, Prime Minister Christie faced opposition in and outside of parliament.

Although saying that he was not seeking to put himself at odds with Mr. Christie and his government, Central Bank Governor Julian Francis spoke of the need for Bahamians to pay more taxes to finance government services.

Mr. Francis also warned against continued borrowing to cover the deficit.

When asked to respond to the governor's suggestions, Mr. Christie said, "It shows that if he has done that, and he is able to do it independently of the process of governance of the country, that there is something that we should be doing to harmonize the efforts of those who advise me in the Ministry of Finance and those agencies that are a part of the financial governance of the country, like the Central Bank."

He added, "We ought to make every effort to ensure that we're working together."

Mr. Christie's revision to his deficit forecast came only a day after former Prime Minister Hubert Ingraham told parliament that the new budget does not provide the right tonic for the country's fiscal predicament.

"I assert that now is not the time for reliance to be placed upon unrealistic revenue increases from existing taxation," Mr. Ingraham said.

He also urged the prime minister to "rein your colleagues in."

"They are spending and committing to spending too much," Mr. Ingraham said.  "You have to tell them there are no available government jobs now; they will come when there is strong economic growth and larger investment inflows.  And tell them unless spending is restrained, there won't be any jobs for them."

But a confident prime minister said Friday that, "The growing strength of the economy in 2004 and 2005 will generate significant additional revenues."

The budget debate is scheduled to begin in the Senate today to give Senators enough time to pass the spending plan in time for the new fiscal year, which begins July 1.

The Bahamas Government Warned Against Borrowing to Balance the Country's National Budget

The Bahamas government may face a fiscal crisis in the coming years if it continues to borrow at the rate the country has been borrowing at over the years

Governor And Minister At Odds

BY Candia Dames

candiadames@hotmail.com

Nassau, The Bahamas

09/06/2004

Some members of the Cabinet are reportedly peeved over recent remarks made by Central Bank Governor Julian Francis, who warned the government against borrowing to balance the budget.

When asked on Tuesday what he made of Mr. Francis’ warning, Minister of State for Finance James Smith said, “I think the governor should stick to monetary policy like all former governors did.  The comments on fiscal policy are not sometimes useful, but I’ll limit my comments to that for the time being.”

Mr. Francis also recently suggested that Bahamians should be made to pay higher taxes, although he stressed that it was not his intention to put himself at odds with the government. 

The governor said that it is the role of the Central Bank to be a policeman on these kinds of issues that also impact the development of the monetary sector.

He indicated that the government may face a fiscal crisis in the coming years if it continues to borrow at the rate the country has been borrowing at over the years.

According to the Estimates of Revenue and Expenditure, the government expects proceeds from borrowings to total $260,277,287 to fund the 2004/2005-budget shortfall.

This level of borrowing represents $60,921,40 more than what was borrowed this fiscal year.  This comes as the government continues to face warnings about the increasing national debt, which presently stands at around $2.4 billion.

The funds borrowed will be used to help cover the projected GFS deficit of $164 million, according to government officials.

In 2001/2002, the government borrowed $207,085,781; in 2002/2003, it borrowed $219,195,153; and in 2003/2004, the figure is estimated to be $199,355,879.

But Minister Smith said the government expects that it will actually have to do real borrowing of $176 million.

“I should point out that $90 million of [the $260 million figure] are loans that have already been committed for projects in the pipeline,” he told the Journal Tuesday.

 “For instance, the IDB road project, which is about $40 million, is included in that.  So the actual borrowing needs for 2004/2005 is really about $176 million.

“That’s the amount that we will probably have to go to market for, either locally or abroad, but that decision will be made later on in the year as we see how the revenue performs.  I should also point out that these are all projections or estimates.  If we perform much better on revenue or if we hold the line on expenditure, then surely we would have a reduced need for borrowing on the recurrent side.”

Prime Minister Perry Christie explained last Wednesday that there is no need for alarm regarding the size of the national debt, given that most of it is held domestically.

On Sunday, Governor Francis, who was a guest on the Love 97 programme “Jones and Company” said, “We can’t continue to add to the national debt indefinitely and that’s really the fundamental point that I’m trying to make.”

When asked whether this figure of over $260 million is significant, Parliamentary Secretary in the Ministry of Finance Michael Halkitis said that, “It is not insignificant.”

He added, “We have to keep things running.  There’s a lot to do, especially capital works in the Family Islands.  But we don’t believe there is any cause for alarm.”

Mr. Halkitis said the government is banking on an economic turnaround before the end of the upcoming fiscal year.

“We expect a lower shortfall the next year,” he said, indicating that borrowing should be substantially lower in 2005/2006.