The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Standard & Poor’s (S&P) yesterday urged the Government to detail the $162 million in recurrent spending cuts that will enable it to beat 2012-2013 deficit projections, questioning how it had achieved this when revenues under-performed by 11 per cent.

Lisa Schineller, Standard & Poor’s (S&P’s) senior analyst for the Bahamas, said the Government needed to explain how it cut recurrent (fixed cost) spending by almost 9 per cent from initial Budget projections, particularly given its Mid-Year announcement that it had suddenly discovered an extra $100 million in expenditure requirements.

This, she added, could easily have pushed the Government’s recurrent spending for the 2012-2013 fiscal year to $1.921 billion, yet instead the Christie administration said this had been cut from $1.821 billion to $1.659 billion.

An explanation is important, Ms Schineller said, because it would lend “more credibility” to the Government’s fiscal predictions for 2013-2014, where it is forecasting a further reduction in the GFS deficit from 6.1 per cent of GDP to 5.1 per cent.

And the S&P analyst also told Tribune Business it was “hard for me to see” the Bahamas’ hitting its 2.7 per cent economic growth target for 2013, given that this country missed 2012 projections by close to one-third.

Ms Schineller also questioned whether the Bahamas would be “ready to meet” the July 1, 2014, deadline for Value-Added Tax (VAT) implementation, again seeking more specifics on how the Government’s key tax reform will work.

Unveiling the 2013-2014 Budget, Prime Minister Perry Christie said revenues for this fiscal year had underperformed due to “weaker than projected” economic growth.

Total recurrent revenues were now projected to hit $1.38 billion, some $170 million less than the forecasted $1.55 billion.

Placing this in the context of the Government’s forecast that the GFS fiscal deficit for 2012-2013 will come in 40 basis below projections, at 6.1 per cent of GDP as opposed to 6.5 per cent, Ms Schineller said: “The revenue contraction for year-to-date highlights all the problems in the tax base.

“Given the revenue data for the first eight months, can they meet the 6.1 per cent deficit target they’ve put in there? I have a question on that.

“I would want to know more, given the revenue performance, where are they really cutting to make that number for this fiscal year? We’d want to get a little more clarity. How are you going to meet this year’s number? What’s in the Budget for the year to June is quite a bit higher.”

Expanding on this theme, Ms Schineller told Tribune Business: “It’s not clear to me where exactly they’re cutting for this year to the end of June. If they can demonstrate that, it gives more credibility to [the Government’s pledge] of holding the line [on spending] in next year’s Budget.

“How did you crunch to meet the projections of a lower deficit? If revenues have not been performing and expenditure has been running at a good clip, am I going to believe their forecast for next year’s Budget?”

Ms Schineller said that if the Government had been able to achieve such significant recurrent expenditure savings in 2013-2013, this raised another issue - its impact “on the pace of economic growth”.

And, setting that aside, the S&P analyst said another issue was whether the Christie administration would “implement and follow through” with its Budget rhetoric.

Noting that the Government’s fiscal consolidation plans were inextricably linked to growth in the wider Bahamian economy, Ms Schineller expressed scepticism that this nation would hit projected GDP expansion targets.

“Given the performance we’ve seen in the last couple of years, is there more downside to that?” she asked.

The Bahamian economy had been forecast to grow by 2.5 per cent last year, but only expanded by 1.8 per cent, the under-performance also impacting revenue growth.

“I haven’t changed my 2.5 per cent growth forecast for this year in light of the 1.8 per cent they came in with, in part because we’re a little above consensus on the US,” Ms Schineller explained.

Noting that the IMF was projecting less than 2 per cent GDP growth for the US, and the Bahamas’ traditional reliance on its northern neighbour, she added: “It’s hard for me to see 2.7 per cent.

“There are downside risks, and given the first quarter tourism numbers it’s hard for me to see 2.7 per cent.”

The S&P analyst also noted the drop-off in foreign direct investment (FDI) inflows to $595 million for 2012, compared to $960 million and $970 million the previous two years.

Ms Schineller also questioned how far the Government had progressed with VAT, noting its announcement that draft legislation would be released for consultation this summer, with the Bill tabled in Parliament and passed before 2013 year-end.

S&P, though, wanted “more clarity, more specifics” on VAT and its implementation, given that government revenues faced “downside risks”.

The Prime Minister indicated that the Government would issue a second VAT ‘White Paper’ incorporating feedback it had received, and Ms Schineller said: “The plan to put in VAT is important because of what’s happening on the revenue side.

“Given the problems in the revenue base it reinforces the importance of doing something on that side. Is the private sector really ready for VAT?”