Bahamas Budget Deficit Soars

Budget Deficit Soars





By Candia Dames

Nassau, 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."


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