Privatization – the Budget Cure

First Published: 2002-08-23

by Anthony Ferguson & Larry Gibson
July 9, 2002

In one of our recent articles, we promised that we would review the 2002/2003 Budget. We thought it best to wait until the politicians would have completed their contribution in both the House and Senate before commenting.

The present situation.
Like 1992, we find ourselves in a situation, where we have a new administration coming to office saddled with a large accumulated budget deficit, which presents a major challenge for any Government. To the extent that we have large budget deficits, we are in effect mortgaging our long-term economic future, to the detriment of future growth, certainly short-term economic growth.

James Smith, the minister of state for finance, in his National Address captured the dangers of running large deficits quite succinctly when he said: “The really serious issue in relation to the public finances is that the 2001/02 level of fiscal deficit of 3% of GDP is not sustainable for a period of years for a number of reasons. One reason is that if it is not corrected within a reasonable time frame, more and more of Government’s revenues would have to be set aside to pay the interest on the debt and repay the principal. This would starve other essential Government programmes of resources. Furthermore, a rapidly increasing level of Government debt sends the wrong signal to international banks and investors.”

In a nutshell, the 2002/2003 Budget is as follows:

Recurrent Revenues- $970.0 m
Total Revenues- $970.0 m
Recurrent Expenditures- $1,035.0 m
Capital Expenditures- 155.0 m
Total Expenditures- $1,190.0 m
Total Deficit- $220.0 m

It is important that we understand how we define Budget deficits. Under our system, the Recurrent Budget is separated from the Capital Budget. The theory behind this is that capital expenditures produce future recurrent revenue to offset that cost. This is fine in theory, but the reality is that they rarely offset each other so cleanly. In fact, it is argued that Governments rarely price capital investments correctly, whereby the ‘future’ recurrent revenue justifies the underlying investment in economic terms.

Recurrent budget.
The Recurrent Budget captures ongoing revenues and expenditures necessary to keep the economy going. Examples of Recurrent Revenues for example are derived from customs duties, stamp taxes, property taxes, business license fees, car license fees, hotel taxes and departure taxes. These are collected annually and represent the majority of all the money the government takes in (for 2002/2003 this is projected to be $970.0 million). Conversely, Recurrent Expenses would be wages, utilities, rents and such type expenses, which the Government has to pay to stay in business. In this respect the Government is no different from any other business. Current expenses are projected to be $1,035.0 million for the 2002/2003 fiscal year. Doing the quick math, we are going into the Budget $65 million in the hole.

Capital budget.
The Capital Budget consists of the Government’s spending on non-recurring items. For the fiscal year 2002/2003 the Capital Budget is $155 million. Examples of Capital Budget items include infrastructure such as roads, docks, new schools, construction of government facilities, police and defense force equipment and so on. Capital items are typically items that are not duplicated each year. For example if you build a new road this year, you should not have to build it again or repair it for several years. The upkeep and maintenance will then be transferred to the Recurrent Budget.

When we add both the Recurrent Budget and the Capital Budget you will see that we still have a Total Deficit. The total funding requirements to support the 2002/2003 Budget is somewhere in the region of $220 million (as shown above) when projected Capital Expenditures are included. When adding in the estimated revenue shortfall of $100 million from the 2001/2002 Budget, this all adds up to a lot of Government borrowing within the next fiscal year. By contrast, when the United States talks about a Budget deficit/surplus they are referring to the sum of the Recurrent and Capital Budgets. They include the net result of both the Recurrent Budget and the Capital Budget.

The 1992 crisis.
The last time we found ourselves in a similar economic position (1992/1994), the Bahamian economy was rescued by massive foreign-led investments in the construction sector which resulted in significant inflows of foreign currency (mainly US$) as major investment were made in hotels, new office buildings and very high-end homes amounting to some $2.5 billion during the 1993-1999 period. It should be noted that the Gross Domestic Product (GDP) for The Bahamas last year was estimated at $5 billion. (GDP is the value of all goods and services produced in The Bahamas, and include all wages and salaries paid all the rents and utilities, all the construction projects carried out.)

In other words, during those 6 odd years, close to 50% of current GDP was invested in one sector alone. It can easily be another 20 years, if at all, before we can contemplate such significant foreign direct investment in the construction sector in such a concentrated timeframe. In simple terms, another construction boom of that magnitude is simply not likely within the medium term. Another, significant feature of our economy is that Central Government now accounts for 25% of GDP. Expressed another way, $25 dollars of each $100 of economic activity generated in the country is generated by Government both directly and indirectly. It is indisputable that the percentage of Government’s involvement in GDP is too large and care must be taken to restrict its growth.

Privatization, the only option.
This means that Government’s divestment of hotels, airlines, telephone, electricity, and water companies will have, by necessity to be expedited. Unlike 10 years ago, the white knight for the recovery of the Bahamian economy will not be the Sol Kerzner’s or Hutchinson Whampoa’s of the world but rather a major privatization initiative. We recognize that the formula for the privatization of each will have to be determined based on their own merit and the overall national interest.

Those anti-privatization advocates can kick and scream all they like; the reality is that privatization is the only viable policy that we can effectively mobilize in the current global economic environment. The benefits of privatization will be numerous. Central Government gets a windfall on the actual sale; new owners will also inject much needed capital into these entities; and in some cases, new entrants will enter these markets, causing competition and additional investment.

The economic outlook we face today has many parallels to the situation Mrs. Margaret Thatcher met in Britain when she assumed office in the 1980’s. In conclusion, we will not be reinventing the wheel but rather finally doing something that should have been done 10 years ago.

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