The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government is moving to cut recurrent spending projections by 5.6 per cent for the current fiscal year to compensate for a $120 million drop in revenues, with a Wall Street analyst yesterday saying execution would be “key” if it was to hit is deficit/debt reduction targets.

The Christie administration’s revised 2012-2013 Budget projections show a $101 million reduction in spending on its fixed costs, down from the $1.821 billion projected in the May Budget to $1.72 billion.

This, together with a more modest $37 million drop in planned capital expenditure, is designed to keep the Government on track to his its projected ‘6.5 per cent of GDP’ fiscal deficit target in the face of revenues underperforming Budget projections.

Revenues for the 2012-2013 Budget year are forecast now to be $1.43 billion, a $120 million or 7.3 per cent drop from the $1.55 billion projected in May.

Whether the Government hits these immediate term targets, and stays within its deficit projections for 2012-2013, is among the key question for Standard & Poor’s leading analyst on the Bahamas.

Dr Lisa Schineller told Tribune Business that while the Government was to be commended for clearly laying out the extent of the Bahamas’ fiscal problems, and setting aggressive targets for turning this around, the key was whether it could execute on this and achieve what it has set out on paper.

“Clearly, follow through is going to be key,” she said. “The fact they are putting the issues on the table with some clarity is important. That’s positive. But follow-up is key.”

Dr Schineller also credited the Government for placing tax reform, via the introduction of a Value-Added Tax (VAT), “on the table”, but described the July 1, 2014, timetable for implementing it as “a fairly aggressive agenda”.

She suggested that the Government seemed to have accelerated its plans to bring in VAT, likely a reflection of the seriousness of the Bahamas’ fiscal situation, and questioned how well prepared this nation’s infrastructure and systems were to handle it.

“The devil’s in the detail. How difficult will it be to implement this,” Dr Schineller asked. “It’s kind of an unprecedented reform that we’re talking about.”

The S&P analyst also questioned why the Government’s revenues were lagging behind forecast, even though the economy was said to have grown by the equivalent of 2.5 per cent of GDP in 2012.

And she also queried how realistic the Government’s plans to “cut and hold” spending were. S&P, Dr Schineller said, would be watching to see if the Bahamas hit its 2012-2013 projections, and what the outlook for the 2013-2014 Budget was.

The Government is targeting improved revenue yields equivalent to 4 per cent of Gross Domestic Product (GDP) as the centrepiece of its plan to generate a recurrent Budget surplus within three years.

Prime Minister Perry Christie, in his administration’s Mid-Term Budget statement, disclosed that planned “structural reforms” would improve revenue yields from their current 17.6 per cent of GDP to 21.5 per cent of GDP by the 2016-2017 fiscal year.

Laying out, at least on paper, the medium-term targets designed to tackle the Bahamas’ top policy priority, Mr Christie said more than half this increase - some 2.2 “net” percentage points of GDP - would come from the introduction of a Value-Added Tax (VAT) in 2014-2015.

With VAT accounting for 55 per cent, or roughly $176 million, of this projected increase, the Government is banking on gaining a further percentage point (roughly $80 million) from enhanced real property tax administration and enforcement.

The remaining balance will be generated by Customs reform and modernisation, expected to generate extra revenues equivalent to 0.5 per cent of GDP ($40 million), and the $20 million projected from the implementation of Excise Stamps on tobacco products.

If the Government hits its fiscal targets - and that remains a big ‘if’ - the Prime Minister said it would generate a recurrent account surplus of $127 million by its 2015-2016 fiscal year.

That would mean the Government’s revenues would exceed its recurrent spending (fixed costs), and the plan also involves generating a primary surplus (revenues exceed fixed costs minus debt principal and interest payments) by 2014-2015.

The third indicator the Government is targeting is reducing the GFS fiscal deficit (a measurement that strips out debt principal repayments) from a current 6.5 per cent of GDP to running a 0.8 per cent or $80 million surplus by 2016-2017.

And, describing the end product of all this, Mr Christie said: “Through these efforts, we expect to be able to arrest the growth in the debt-to-GDP ratio by 2014-2015, and to begin a gradual reduction in the ratio to just over 50 per cent of GDP by 2016-2017.”