By NEIL HARTNELL
Tribune Business Editor
The Government’s 2017-2018 fiscal deficit overshot the deputy prime minister’s year-end forecast by $105m due to a late spending “ramp up”, a top official admitted yesterday.
Marlon Johnson, the Ministry of Finance’s financial secretary, told Tribune Business there was “a much higher than anticipated spike” in spending towards the fiscal year-end because multiple government agencies were seeking to pay bills in the period when they were incurred.
He added that efforts to prevent the “carry over” of unpaid spending obligations into the next fiscal year had effectively blown KP Turnquest’s prediction, made on May 30 when he presented the 2018-2019 budget, that the 2017-2018 deficit would come in at $310m.
The Government’s first-ever fiscal strategy report, tabled in Parliament yesterday to ensure compliance with the newly-passed Fiscal Responsibility Act, confirmed that the actual 2017-2018 deficit was $414.9m - almost $105m higher than Mr Turnquest’s forecast made just five-and-a-half months ago.
The outcome was also $94.6m higher that the $320.2m deficit projected in the initial 2017-2018 Budget, coming in 29.6 percent above target, and meaning the Government incurred considerably more “red ink” than initially thought. As a result, it will have to work much harder to meet this year’s $237m deficit goal and comply with the Fiscal Responsibility Act’s mandate.
Mr Johnson, though, described the frequent eight and nine-figure differences between the Government’s fiscal year-end deficit estimates and the actual outturn as “a chronic issue” that had plagued multiple administrations.
To correct this, he revealed the Ministry of Finance is now meeting with key government agencies on either a monthly or bi-monthly basis to better track their spending and head-off negative trends “we believe to be unwise”.
The Financial Secretary added that it was also working closely with the Ministry of Works, and other agencies that received capital funding, to “reforecast” spending projections as the fiscal year progressed while also “monitoring the commitment ledger much more closely”.
Mr Johnson said the “tightened up oversight” will ensure the Government’s year-end fiscal forecasts are more accurate, while pointing out that the $415m deficit for 2017-2018 still represented a “substantial cut” of more than one-third to the “red ink” incurred by the Christie administration during its final year in office.
The explanation for the latest deficit overshoot may not satisfy everyone, though, given that the revenue and spending figures detailed in the Fiscal Strategy Report largely match those outlined by Mr Turnquest when he made his Budget presentation.
“Provisional data on the fiscal outturn for fiscal year 2017-2018 reveal that the performance was somewhat weaker than projections presented at the time of the 2017-2018 Budget,” the Government’s Fiscal Strategy Report said.
“The deficit widened to an estimated $415m relative to the budget of $320m, and equated to an estimated 3.3 per cent of GDP compared to the forecasted 2.6 per cent. However, this still represented a sharp improvement from the $661m budgetary shortfall in 2016-2017, which stood at an elevated 5.5 per cent of GDP. Overall, the revenue outcome was some 5.1 per cent below budget expectations, while total expenditures were lower by 0.7 per cent.”
The deficit outcome, which measures by how much government spending exceeds its revenue income, was also much higher than the Deputy Prime Minister’s May 30 prediction. “The GFS deficit outturn in 2017-2018 is projected at $310m, a net improvement of $13m over the Budget forecast of $323m,” Mr Turnquest said then.
Mr Johnson told Tribune Business yesterday that the expanded deficit resulted from government ministries and agencies ensuring that all spending commitments made during the 2017-2018 fiscal year were met before the period ended.
“The reality is that towards the end of the year we saw a ramp up in expenditure in May and June, with agencies trying to meet the Ministry’s mandate to come current with commitments made in that year,” he explained.
“We wanted to avoid the carry over effect which led to that $300m unpaid arrears situation [from the 2016-2017 fiscal year]. As agencies made sure they utilised the funding available, and paid off as much of their obligations as possible, we saw a much higher than anticipated spike in the last few months which threw the estimates off.”
Mr Johnson said the gulf between the Government’s year-end deficit estimate and actual performance was nothing new, with the Ministry of Finance now taking action to better align Budget forecasts with outturn.
“The Ministry is doing quite a bit to avoid this chronic issue,” he added. “We see this phenomenon where the Government comes with a Budget presentation, makes a prediction, and the prediction does not pan out. We have to do a better job in forecasting what the actual spending and deficit will be.”
Research by Tribune Business uncovered that the former Christie administration encountered similar problems, most notably for 2014-2015, when then-prime minister Perry Christie projected that the deficit would be $198m. It ultimately came in at $381m, a negative variance of $183m.
This pattern was repeated for 2015-2016, when the $310m deficit was more than double Mr Christie’s year-end forecast of $150m. Mr Johnson said the Ministry of Finance “feels confident” that the “operational changes” it has made, with more controls and interaction with all other government agencies, will rein in unanticipated capital and fixed-cost spending.
And he suggested that the higher-than-expected deficit for 2017-2018 still represented some positives, given that it was still much lower than the prior year’s outcome and indicated that government ministries were taking seriously instructions to pay off bills in the years they were incurred.
“We feel pretty confident that the level of carry over has been minimised,” Mr Johnson told Tribune Business, noting that this had contributed to the $661m fiscal deficit in 2016-2017. “We’re still seeing some carry over, but want to make sure that’s managed.
“What we’ve found happening is that spending in the current year is used to address bills from the previous year, and we’re managing that much more closely. We’ve tightened up the oversight quite a bit to make sure we’re doing a better job forecasting spending patterns towards the end of the year.”
The Financial Secretary added that 2017-2018’s $415m deficit still represented a more than one-third, or 37.2 percent, year-over-year decline on the $661m deficit run-up by the last Christie administration.
“It really was a substantial step,” Mr Johnson said of the narrowed deficit. “The next step is [a deficit of] $237m. Even though we were off we were very encouraged that the deficit is substantially reduced and continues to trend downwards.”
The Fiscal Strategy Report blamed last year’s “fiscal underperformance” on “the less buoyant outturn for recurrent revenue” even though the economy grew by 1.4 percent in line with forecasts. Total revenues were $110m below forecast at $2.042bn, equivalent to 16.3 percent of GDP as opposed to the target 17.2 percent.
While VAT and motor vehicle taxes exceeded forecast, “licences to conduct special business activities (in large measure business licences) were some $53m, or 32 percent, lower than projected and excise taxes were $18m under forecast”.
“Below budget outcomes were also posted for taxes on international trade and transactions, of $41 million (8.6 per cent), and taxes on property of 14 percent or $20 million. Such lacklustre performance of revenue is a matter of pressing concern that is aggressively being addressed by the Ministry of Finance and its Revenue Enhancement Unit.”
These trends were noted in the May Budget presentation, along with recurrent spending coming in $55m below target as a result of the Government’s across-the-board 10 percent spending cut relative to 2017-2018 allocations.
“As a result, expenditure on the wage bill was reduced during the fiscal year by some $62m, or 8 percent, from budget,” the Fiscal Strategy Report said. “Interest payments, however, exceeded the budgeted allocation by $21m, primarily consequent on commitments arising from new debt obligations incurred during the period.
“Outlays on goods and services were $31m or 7 per cent above budget, and considerably exceeded the initial savings foreshadowed during the 2017-2018 mid-year Budget presentation. The hike in outlays during the closing month of the fiscal year reflected the Government’s insistence on agencies settling their payment obligations within the appropriate fiscal year, to the extent possible, as to minimise ‘carry over’ into the ensuing fiscal period.”
As a result, the Government’s direct debt increased by $372.4m to $7.245bn during the 2017-2018 fiscal year. As a percentage of Bahamian gross domestic product (GDP) it rose by 2.9 percentage points, from 54.8 percent to 57.8 percent - putting it further away from the 50 percent target set in the Fiscal Responsibility Act.