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Hope 8.7% Fiscal Deficit Decline A 'Sustainable Trend'

By NEIL HARTNELL Tribune Business Editor A former finance minister yesterday expressed hope that the 8.7 per cent decline in the fiscal deficit for the 2011-2012 Budget year's first quarter represented the start of a "sustainable trend", even though the Government still incurred $95.5 million worth of red ink. James Smith, also an ex-Central Bank of the Bahamas governor, said the $9.1 million year-over-year reduction in the Government's fiscal deficit for the three months to end-September could be a sign the public finances were starting to "head in the right direction", although more evidence was needed. The Central Bank of the Bahamas, in its October 2011 report on monthly economic and financial developments, attributed the reduced fiscal deficit to revenue increases outpacing the rise in government spending over the same period. But, although a modest bit of good news, the report still could not disguise the fact that at $95.5 million the deficit remained relatively high. Two key revenue earners, international trade taxes (Customs duties) and real estate-related Stamp tax, both increased year-over-year with the latter identified as boosting 'non-trade' Stamp taxes by "two thirds" - a possible sign that the property market may be recovering. "Total receipts expanded by 4.9 per cent ($13.4 million) to $284.6 million over the comparative period last year, supported by an $18 million (7.5 per cent) gain in tax revenue, as realty transactions boosted 'non-trade' Stamp taxes by two-thirds," the Central Bank reported. "International trade taxes also grew by 5.4 per cent ($7.7 million), owing to a 26.2 per cent increase in the excise tax component. Business and professional taxes firmed by 62.5 per cent ($4.1 million), buoyed solely by growth in the general business segment." That was the good news. For the Central Bank report also highlighted continued weakness in the stopover tourism segment, the Bahamas' highest income-generating earner. "Other 'miscellaneous' taxes fell by 44.2 per cent ($9.4 million), and taxes on selected services decreased by 13.7 per cent ($1.4 million), due to lower hotel occupancy tax collections," the Central Bank said. "Non-tax revenues were lower by $4.7 million (15.6 per cent) at $25.2 million, reflecting mainly a timing-related reduction in dividend payments." Noting the reduction in hotel occupancy-related taxes, Mr Smith told Tribune Business that the Bahamas still had to adjust to "the very fact demand for tourism has not returned to what it used to be, as the US economy is still limping along. "That's our key statistic; what the visitors are spending," the current CFAL chairman said. He added that the Government's fiscal deficit, especially its size, was directly linked to the level of employment and activity within the Bahamian economy. The better the real economy's performance, the more goods were imported by companies and individuals, generating more revenue for the Government. "Lower deficits reflect lower unemployment, because when you have more people employed, you have more national income and more imports, so on the revenue side you do not have to do too much because the economy is performing," Mr Smith said. "When you go into a recession, and revenue is falling and not coming back, it creates higher primary deficits because, even if you raise taxes, you're not going to get what you want because of higher unemployment levels." Mr Smith, who acted as minister of state for finance during the Christie-led PLP administration of 2002-2007, said the revenue improvements seen during the fiscal 2011-2012 first quarter had to be measured against what happened with the Government's spending. "To the extent any increase in revenue is higher than spending, we're moving in the right direction," he added. The Central Bank data indicated the Bahamas was indeed moving in the right direction, although it remains too early to determine if this is a sustainable trend. Government spending rose by a total 1.1 per cent, or $4.3 million, to $380.1 million during the 2011-2012 fiscal first quarter, a lower growth rate than that for revenue. However, the spending increase was fuelled entirely by a $15.3 million (4.6 per cent) rise on the recurrent side, meaning the Government continues to spend more on its fixed costs. Recurrent spending hit $346.1 million for the three months to end-September 2011, the increase driven by a 36.9 per cent or $20.5 million growth in goods and services purchase, and a 1.2 per cent or $1.6 million increase in civil service emoluments. The Government's total spending was kept in check by a 30.3 per cent, or $11.2 million year-over-year decline, in capital spending. Asset acquisitions dropped by $7.9 million, while infrastructure outlays dropped by $3.2 million. "That would be a welcome trend if it was sustainable and not reflecting any seasonal elements," Mr Smith said of revenue increases outpacing spending. "I guess we all think that if there's any positive increases in taxes collected that's always a good thing, given where we are, and hopefully it's a sustainable trend rather than a one-off or a seasonal outturn." And he told Tribune Business: "It's really where we are headed that is important. We want to see a slowdown in the rate of increase [in the debt] in the beginning, because it means we're headed in the right direction. It took quite a while to get where we are now, and it's not going to turn around all that easily."

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