‘NO WAY’ TO PAY THE BILLS WITHOUT NEW TAXES: Reformer says budget largest in Bahamas history

By NEIL HARTNELL

Editor-in-chief of the Tribune

[email protected]

A governance reformer said yesterday he was ‘confident’ some tax increases will be unveiled in tomorrow’s budget, which he called the ‘biggest’ in Bahamian history to date.

Hubert Edwards, head of the Organization for Accountable Governance (ORG) economic development committee, told Tribune Business there was “absolutely no way” to raise government revenue to 25% of domestic product gross (GDP) – the goal of the Davis administration – without implementing new and/or higher taxes.

And, given the Bahamas’ post-COVID situation with multiple challenges facing it, he argued that the 2022-2023 budget is the most crucial yet as “the country could languish below its potential for some time yet if we don’t get that”. right” on the short, medium and long-term reforms needed to put it back on a sustainable economic and fiscal path.

Mr Edwards argued that the Bahamas was in uncharted territory with a national debt of over $10.5 billion rising to as high as $11 billion; the underlying economic fundamentals that have been “turned upside down” by the COVID-19 pandemic; and bonds that continue to trade at deep discounts to their face value – and yields between 12 and 14% – in the international market.

In addition to these difficulties, the government and people of the Bahamas are also currently facing a cost of living crisis triggered by global inflationary pressures which will likely force increased social security spending and other measures – such as tariff reductions. targeted – to lessen the impact on the life of society. most vulnerable over the next fiscal year 2022-2023.

Yet the government must also earn sufficient revenue and reduce spending to restore fiscal sustainability while ensuring that investor, consumer and creditor confidence is sufficient for the economy to pull itself out of the hole created by the crisis. Hurricane Dorian, COVID-19 and recent cost of living pressures. As a result, Mr Edwards acknowledged the government faced a delicate “balancing act” with the budget given multiple competing objectives.

Noting that the high national debt will “likely remain an uncomfortable Achilles’ heel” for the Bahamas, the ORG executive added, “Primarily due to the stock of debt and the effects of the pandemic, this budget could be the most important in the life of the country.

“It must therefore pave the way, and lengthen the path, towards the future by taking positions that allow recent developments to mature effectively while laying the foundations and fixing the initiatives that will crystallize in the long term.

Asked by this newspaper to substantiate his claim that tomorrow’s budget, which will lay out the government’s fiscal strategies, spending plans and policy priorities for the next 12 months and beyond, is probably the most critical in history of the Bahamas to date, Mr. Edwards said: “This is the first time we have had this concentration of debt. The country has a large debt and we have never been there before.

“The underlying fundamentals of the economy have been turned upside down because of the COVID-19 crisis. I don’t think we’ve been here before, and the treatment and the response of the credit market in terms of dealing with our obligations, we haven’t seen this over such a long and sustained period of time as we are experiencing now.”

The Bahamian $825 million bond, with an interest coupon of 8.95% and maturing in 2032, closed yesterday’s trading on the Frankfurt Stock Exchange at a discount of more than 25%. % compared to its nominal value. The return demanded by investors was just over 14%, indicating that global financial markets still view the Bahamas as “high risk” and would demand double-digit interest rates in return for investing in any new debt issuance.

It’s a similar story with the $300 million bond, with a 6.95% interest coupon, set to mature in 2029. It also closed at a 25% discount to at face value with a yield set at just over 12.5%. “I really believe this budget needs to fix the fundamentals and put things right for the future,” Mr Edwards told Tribune Business.

“If we don’t get it right and get credit back on track to have a conversation with credit markets to create options and opportunities for new growth, the country could languish below potential for some time. time yet, which is why I consider this budget one of the most important announcements…

“There are tough decisions that need to be made, and made fundamentally. Making these decisions involves balancing a number of issues. They are not that easy. The fact that the administration has so many balls to juggle makes it a very difficult scenario, but underpins the importance of getting it right, changing lanes, changing course, making changes to the plan and to reforms that will create a different set of outcomes.

With ‘excessive cooling’ and a recession in the major economies on which the Bahamas depends a very real danger, as interest hikes are implemented to combat inflation, Mr Edwards said: ‘It’ is the interaction between these different things, which is why I believe that we are at a historic and critical moment.

Senator Michael Halkitis, Minister of Economic Affairs, has repeatedly promised that tomorrow’s budget will not include new and/or increased taxes. He indicated that some fees associated with government services could be increased to cover the cost of providing them, but repeatedly asserted that the government was focused on returning The Bahamas to economic and fiscal health.

The public position of the Davis administration has been that the new/increased taxes would only delay the economic rebound post-COVID, while deterring new hiring and undermining business and investor confidence. Ultimately, his position has been that it is far too early to implement such measures, although it has paved the way for new sources of revenue such as carbon credits should they materialize in the future. .

However, many have wondered how the government plans to increase revenue from the equivalent of 18.2% of GDP, as planned for the 2021-2022 financial year, to a ratio of 25% by 2025-2026 without new and/or increased taxes. As noted in its Fiscal Strategy Report, this would require a $1.3 billion increase in revenue over the next four fiscal years – a 55.7% jump – to reach a budget surplus of $71.9 million. by fiscal year 2024-2025.

Based on ORG’s recent pre-budget roundtable, at which Mr. Halkitis was a panelist, Mr. Edwards projected that an increase in an existing tax/taxes was likely in the next budget based on the minister’s answer to one of his questions. The ORG chief said he asked Mr Halkitis to answer ‘yes’ or ‘no’ to whether tomorrow’s budget would put the Bahamas on a path to a revenue-to-GDP ratio of 25%, and the Minister answered in the affirmative.

“I’m confident there will be,” Mr Edwards said of the tax hikes, due to the minister’s response, although he ruled out further levies. “I interpreted that as there would be an increase. There’s absolutely no way to go from 18% to 25% with the same taxes and fees and no increase. It’s not possible.”

The Davis administration must keep multiple audiences, each with their own competing goals, needs, and desires, happy through tomorrow’s budget. For starters, it will need to protect the most vulnerable Bahamians from the cost of living crisis, while doing what it can to dampen inflation despite relatively little headroom.

He will need to ensure that essential public services are still provided, while balancing this with the need to foster and improve investor and business confidence so that the Bahamas economy continues to emerge from COVID-19. and to create the necessary jobs and employment opportunities.

These goals must be achieved while taking into account the external audience of the IMF, World Bank, rating agencies and other lenders and creditors, all of whom wish to see the Bahamas return to fiscal sustainability as soon as possible through the increasing tax revenue and reducing public spending. that eliminate annual budget deficits. They will be looking for a realistic plan on the way forward that sets out benchmarks and measurable goals for The Bahamas to achieve.

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