The 2022/23 budget presentation has attracted vibrant and robust discussions from certain quarters and an uncanny level of silence from others, a reality that I believe is suggestive of the complexities involved. Objective assessment suggests that there are positive aspects to the budget but also that these have significant associated risks. In seeking to provide fair, objective and balance commentary, I will readily admit that it is not as easy to navigate the current budget communique. The issues as comparatively more complex in an environment of significant disruptions and ever-increasing uncertainty. One should however always be reminded that a budget is a set of projections made based on assumptions, all of which caries risk of not materializing. The major issue with the current budget is the extent to which the normal risks have being heightened and new vulnerabilities present.
The Thinking
Before looking at these risk factors let us set a framework for understanding where we are. Firstly, the budget is highly reflective of the administration’s manifesto - “Our Blue Print for Change”. The 10-point framework to “Recover, Rebuild, and ultimately Revolutionize the economy” is dominant throughout. Three areas that stands out the most are, “Compassionate Social Relief and Strengthened Security”; “A Plan for Each Island”; and “Bahamian Empowerment”. These are captured in the priorities stated by prime minister in presenting the budget. These are “to help Bahamians cope with a cost-of-living crisis”; “the creation and expansion of jobs and ownership opportunities for Bahamians”; and “addresses various security issues, to make our communities and homes safer and our borders more secure”.
Speaking to his party’s stance on taking office, the prime minister noted, “We were keen not merely to jump-start the economy to stimulate economic activity and growth, but to do so in compassionate ways, that brought hope and dignity back to people”. While there is room for, discussions, debates and disagreements, it is useful to see the budget within this stated context. These are the priorities and addressing them, according to the prime minister, the expected outcomes is expected to do three things. Firstly, put the administration “firmly on course to continue to rescue the economy”. Secondly, “help us navigate some of the new challenges facing the global economy”. Finally, “maximise the opportunities and deliver the growth necessary to support national development”. Any analysis that lose sight of these issue risks ignoring the fact that it acknowledges the urgent need - rescuing the economy; it acknowledges the known headwinds and their global influences; and it clearly states the need for growth and importantly, the fact that the three main priorities posited by the prime minster are all significantly “people centric”. The focus suggested by the latter point will naturally create tensions given known macro pressures.
The Story
Numbers alone will not tell the full story. Before diving into the numbers, developing a reasonable appreciation for what the thinking and priorities of the budget are can help to avoid emotional responses or utterances. An initial high-level assessment, guided by the stated intentions, taking into consideration the fiscal, social and economic realities, current economic performance to date, and factoring in announced policy changes provides a sound basis for interrogating the information presented. In this case a question such as what might be the impact of inflation on the performance to date and what will happen when inflation is tamed, especially if that happens more rapidly than is currently anticipated. This approach allows then for a sober inquisitive exploration of the effects and changes. For example, how does a particular policy shift affect the overall debt and country’s credit worthiness? What other approach to reforms for SOEs are possible given no cuts in allocations? What story can be gleaned from the trajectory of projected deficit or surplus? How does projected revenue stack up against pervious best performances and what where the conditions then compared to now? By doing this, it possible to avoid getting too deep into the weeds making comparison based on popular lines or heads or just targeting those that might carry the greatest emotive value.
Based on this approach, following in the prime minister’s presentation, I noted that it represents a very complexly weaved story indicative of the delicate challenges the country is faced with. That overall, the budget was excellent in dealing with social support (the totality of all measures to directly benefit citizens) and in seeking to protect vulnerable segments of the population. However, there were tensions given the decision not hike taxes, as these measures placed pressure on the limited fiscal space. That the budget represents a very delicate balancing act seeking to navigate the tensions created by the high inflationary environment and a recovering economy with revenue arguably performances buoyed by inflation. Finally, I noted that the failure to have a fuller discussion regarding the national debt and the debt management strategy was likely the most significant area of risk to government’s overall plans.
Moody’s Statement
Following its recent declaration in January that the country’s fiscal projection may be overly optimistic, Moody’s delivered its assessment of the 2022/23 projections. While I was certainly not as clinical in my assessment, the points noted above contains shades of the points that Moody’s proffered. In my view, it provided a very balanced statement that is general not as pessimistic as some seem to suggest. The report points out the positive trajectory in projected deficit, moving from $700M this year to a projected surplus in 2025 and concludes that this is a– a favourable development from a credit perspective - credit positive. The report acknowledges the reason for deficit not narrowing more, due to overhang of liabilities from last fiscal, while highlighting the reduction from the January 2022 deficit projection of 7.4% to 6%. Further, it indicates that performance will mainly be driven by the current economic recovery being experience, with fiscal consolidation being more rapid than previously expected. Importantly, the report points to the fact that the projections are consistent with economic recovery.
It then points to certain risks to achieving the results projected. These include the cost of debt. In an environment with increasing risk premia and continued need for borrowing, the risk is whether the cost of debt as projected might not increase and consequently expand the deficit. The reliance on collections and enforcement as a means of increasing revenue intake, without implementing any new taxes, is another area of risk. Essentially, there is the risk that efforts might fail to yield expected results thereby widening the deficit. Finally, holding spending restrains as projected over the next two fiscals could adversely affect opportunities for growth. We saw this before post 2017 where while our trading partners were showing reasonable growth, the country stagnate at rates of 2% or less. The reporting on the Moodys’ statement has been slanted. By leading with the risks as if they are stand-alone issues, rather than conveying them as qualifiers, the important message it seeks to convey has been clouded – the expected reduction of deficits is a positive, but there are clear risks in achieving this. The collections/enforcement approach might not be enough, the cost of debt may increase and holding spending could hurt growth. It is a very important and potent message that should not be underestimated or ignored.
VAT Effect
VAT at 10% without zero rated and exempt items have created a significant amount of discussion. Coupled with the state of high inflation, it has drawn varying level of questioning including its impact on poor persons. VAT is the most significant contributor to national revenue and therefore this kind of attention is inescapable and will continue. This is especially so when one considers that the projections appears to be built on the assumption that the adjustments will prove to be sustainably revenue positive. To determine whether this is the case, will need more information than have been reported to date and should consider the impact that inflation may have on current performance. As we focus on the objectives and the potential risks in the budget, having regard for the level of increase projected for VAT, it will be important to monitor its actual performance. VAT has proven to be one of the most efficient and predictable tax for the country and any results below projections could hold serious implications for the overall fiscal performance.
Conclusion
Taking all the points made here into consideration, one major take away must be that the margin of error for economic and fiscal management, in this and subsequent years, is very narrow. Before the presentation, I expressed the view that this could be one of the most important budgets in the history of the country. I maintain the view that this budget and the others up to fiscal 2025 will be defining for the country. Despite the myriad of issues and numbers to be discussed and analyzed, this budget is all about the debt, the big picture is about the national debt. The outcomes are directly linked to the national debt and the extent to which the country might secure growth is intrinsically linked to the extent to which the national debt strategy is managed.
If there are weaknesses in the projections, and time will tell, then highlighted risk factors by Moody’s and others may come into play. However, if the administration has done its homework and rigorously modelled the numbers, as expected, then based in the trajectory of the deficit things should be generally fine. The words of the prime minister provides for sober reflection as he conclude his concluded his presentation, “This is a time of great challenge for our country, but also a time of great opportunity. The perils are real – but so is the promise of what we can become, if we move forward together.” How we choose to explore, understand and navigate the nuances of this budget and act accordingly will be fundamental how these perils will be managed to secure positive outcomes.
Hubert Edwards is the Principal of Next Level Solutions Limited (NLS), a management consultancy firm. He can be reached at info@nlsolustionsbahamas.com. Hubert specializes in governance, risk and compliance (GRC), Accounting and Finance. NLS provides services in the areas of enterprise risk management, internal audit and policy and procedures development, regulatory consulting, anti-money laundering, accounting and strategic planning. He also chairs the Organization for Responsible Governance’s (ORG) Economic Development Committee. This and other articles are available at www.nlsolutionsbahamas.com