In the week following Prime Minister Philip Davis' accounting of the nation's financial position up to the halfway point of the 2023/2024 fiscal year, there has been widespread discourse on the government exceeding its deficit targets for the entire year during the period.
The prime minister revealed last week that for the first half of the fiscal year, the government's net deficit was $258.7 million, which exceeded the budgeted forecast by $127.6 million.
He argued, however, that the Primary Balance - which improved from $3 million in the first half of the 2022/2023 fiscal year to $42.4 million for the first half of the 2023/2024 fiscal year - was "the best measure of fiscal health."
Colina Financial Advisors Ltd. (CFAL) seeks to provide perspective on which is a better measure of fiscal health, the Primary Balance or the GFS Deficit.
First, let us explain the difference between the two.
The fiscal balance is the difference between a government's revenues and its expenditures. It shows the extent to which expenditure each year is financed by the revenues collected in that year. When the government spends more than it collects as revenues, it has a fiscal deficit; when it spends less, it has a fiscal surplus.
The Primary Balance is the fiscal balance excluding net interest payments on public debt. That is, the primary balance is the difference between the amount of revenue a government collects and the amount it spends on providing public goods and services.
A country has a primary deficit if it is spending more on public goods and services than it collects in taxes. This means the government must borrow money to pay for the everyday public goods and services it provides for citizens, which may not be sustainable. The Primary Balance is, therefore, a critical indicator of the short-term sustainability of a government's finances (OECD 2021).
Against this backdrop, the analysts at CFAL agree that the Primary Balance would be the best indicator of fiscal health for a government with zero debt or interest payments.
However, given that The Government of The Bahamas has a national debt of $11.77 billion and total annual interest payments in excess of $600 million, the GFS Deficit would be the best metric to indicate The Bahamas' fiscal health.
Interest payments are one of the biggest line items in successive budgets, exceeding spending on education, social services, healthcare, capital expenditure, and many other core services provided to citizens.
Because the government cannot stop paying its interest payments, it is futile to analyze the deficit without consideration.
During his presentation, Prime Minister Philip Davis referenced earnings before interest, taxes, depreciation, and amortization (EBITDA), which is an alternate measure of profitability to net income.
It is a signature metric referenced by companies that do not post a profit and is typically acceptable for startup companies.
However, all companies eventually seek to post a profit, or in the government's case, a surplus to be noteworthy.
That the GFS Deficit does not account for principal repayments on debt is acceptable given that it is not common for governments to reduce levels of national debt, particularly in the post-COVID environment where significant debt levels were taken on to keep economies afloat.
Currently, interest payments consume 1 out of every 6 dollars in revenue that the government receives.
It remains important for the government to manage its debt and keep it at sustainable levels so that its debt servicing costs do not become overwhelming and consume too much expenditure.
In a perfect world, it would be good to run surpluses and pay down the debt, but in the 50 years since The Bahamas became an independent nation, we have yet to achieve this.
The analysts at CFAL do acknowledge progress in the improvement of the Primary Balance, however this should not be used to provide a false sense of security as the GFS deficit remains high and is significantly ahead of the government's initial estimates.
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