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Govt: 'No Party Yet' As Vat Slashes Deficit 52%

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Marlon Johnson

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Ministry of Finance's top official yesterday said it was "not preparing to throw a party just yet" despite increased VAT revenues driving a 52 percent cut to the Government's fiscal deficit.

Marlon Johnson, acting financial secretary, told Tribune Business that the Minnis administration will gain "a better sense" of whether the VAT rate hike and other budget tax increases have worked once it hits the fiscal year's third quarter early in 2019.

Speaking after the ministry released its first quarterly update on the Government's fiscal performance, Mr Johnson said the results for the three months to end-September 2018 provided "cautious optimism" that it was "heading in the right direction" to slash persistent $300m-plus annual deficits that have driven The Bahamas' national debt to the $8bn mark.

The Ministry of Finance's "first quarter snapshot" revealed that a $60.1m year-over-year revenue increase, more than half of which came from VAT, drove the 52 percent reduction in the fiscal deficit for the July to September 2018 period.

The deficit, which measures the amount by which Government spending exceeds revenue, was itself slashed by $56.6m compared to the 2017 fiscal first quarter performance - falling from $108.6m to $52m year-over-year.

VAT revenues increased by $32m or 19.1 percent, jumping to $199.4m compared to $167.4m in the prior year, with the Government's income also further boosted by an 89.6 percent rise in stamp tax. That revenue item grew from $30.8m to $58.4 year-over-year.

The Government managed to retain most of the revenue increase by controlling total spending growth to just $3.5m for the three months to end-September 2018. A $39.1m rise in recurrent or fixed-cost spending, which initially appeared alarming, was offset by a $35.6m capital expenditure decrease driven by the absence of a one-off transaction from the year before.

The recurrent spending rise was blamed on $39.5m in payments to settle the first portion of the $360m unfunded arrears identified in the 2018-2019 Budget address, and which the Government has committed to settle over the next three years.

The first quarter outlay, which represents 21.6 percent of the $183.2m budgeted to settle those arrears this fiscal year, drove a 41.3 percent or $35.1m increase in the Government's spending on goods and services to $120.1m

As for the capital spending decline, the Ministry of Finance indicated it had returned to normal levels following last year's one-off $40m payment to redeem promissory notes (bonds) issued to Bank of The Bahamas as part of its 2014 taxpayer-financed bail-out.

Mr Johnson, though, told Tribune Business that the Government was not getting carried away by just one quarter's positive outcome. He indicated that it was more focused on establishing a consistent long-term trend of deficit reduction, then elimination, to set The Bahamas' public finances back on a sustainable path.

The acting financial secretary also emphasised that the 2018-2019 fiscal first quarter contained just two months of VAT filings at the new 12 percent rate, given that July's collection captured the last month (June) at the old 7.5 percent rate.

He suggested there was still not enough evidence to determine if the Budget's VAT rate hike will have the desired effect, telling this newspaper: "We're waiting to see. We cannot yet be pleased with that.

"We're trending in the right direction, but that only shows two months. Although it's positive, we still don't have a full picture of it. By the time we get into the third quarter [January to March 2019] we will have a better sense of the success of that element of the tax increases."

The Ministry of Finance's update, which said the near-$200m VAT take was equivalent to 19 percent of the full-year target, echoed Mr Johnson. It said: "This outcome does not reflect the full impact of the VAT rate hike, to 12 percent from 7.5 percent, which became effective July 1, 2018.

"Some tempering factors included the Government's accommodation to hotels and resorts, and development projects, to honour business booked/secured prior to September 30, 2018, at the old rate, and the first quarterly filing at the new rate being in October."

Mr Johnson, described spending control as the Ministry of Finance's "key watchword", acknowledging the challenges the Government has faced in achieving the necessary restraint given the continual "demands" from the public sector for expanded budgets.

"Our goal is to stay within the $237.6m projected deficit [for the 2018-2019 full year]," Mr Johnson told Tribune Business. "We see from the first quarter that we are heading in the right direction.

"Expenditure management is the key watchword. That's been our watchword; to try and manage expenditure and expenditure growth to make sure it stays within budgeted amounts." Total government spending was $565.8m for the three months to end-September 2018.

Describing the Ministry of Finance's post-first quarter outlook as "cautious optimism", Mr Johnson told Tribune Business: "We're not prepared to throw a party just yet. We're pleased we're on track from both a revenue and expenditure standpoint.

"The revenue growth has been achieved on the back of increased taxes and a healthy economy which, we believe so far, will continue to grow. Our anticipation was the economy would continue to see healthy growth notwithstanding the tax increases. It's cautious optimism. Once we get into the third quarter we will be in a position to determine how truly successful the Budget goals were."

The January to March period is typically the quarter when the Government revenues peak. It coincides with the winter tourism season, and includes the deadline for Business Licence fee payments and commercial vehicle licensing month. The majority of real property tax revenues are also collected during this time.

Mr Johnson, though, warned that the process of restoring the Government's finances to good health is a marathon, not a sprint, and that an unrelenting effort over many years - possibly even decades - will be necessary to achieve sustainability.

"We wouldn't have been too disheartened if the report had been adverse, if we had not made the fiscal deficit target, but we also would not have been jubilant if we had missed the target," he revealed.

"The deficit number year-on-year is down by half, but it's still early days. Even with settling those [$39.1m] arrears we were still able to manage the expenditure growth pretty well. As we improve our fiscal position, it will give us the headroom to deal with fiscal shocks down the road."

Mr Johnson conceded that the Government had been "fortunate" to-date to escape hurricanes and other events that could have blown its Budget projections, and fiscal targets, off course at at an early stage.

"A key area of focus for us is capping growth in expenditure," he reiterated. "That's a big challenge in a public sector environment as the demands continue. Keeping a lid on that and focusing on revenue capture - capturing the yield from the tax increases - are our focus."

Comments

bcitizen 5 months, 3 weeks ago

Where is the 65 million for Grand Lucaya? Next Quarter? Or is that special vehicle a way to hide it of the books?

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Economist 5 months, 3 weeks ago

Read the paper put out by the Ministry of Finance. It sets out what they have spent so far and that the balance is by way of mortgage.

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bcitizen 5 months, 3 weeks ago

I guess we need to see the government balance sheet then. If they have one they can produce to really understand what is going on with spending.

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John 5 months, 3 weeks ago

Only an idiot will not realize that the transition quarter from a 7.5% VAT to a 12% VAT will garnish more revenue for the government than an ordinary quarter. First off both the merchants aand consumers were caught off guard with the, almost instant, increase in VAT. So customers did not have time to adjust their buying habits (stocking up was not practical), and merchants did not have time to reduce their inventories of VAT items that were rated at 7.5%.. So government realized a windfall on all the inventory that merchants paid only a 7.5% on but had to submit returns to the government at 12%. Rupert Roberts acknowledged this when he did his first return, post VAT increase and realized the reduction was not as great as he expected after the bread basket items were zeroed out. And now that merchants (probably with the exception of food stores and restaurants are replenishing their inventory (that they will sell over the next 60-120 days) at 12% government is still realizing an increase in vat returns. But the taste of the pudding will be in March of 2019 when all the adjustments have been made and the effects can be felt. If there is no real growth in the economy, government may realize a fall in VAT revenue. If the size of the (economic) pie remains the same but government is taking a larger chunk (12% as opposed to 7.5%) of it, it means that someone else will be getting less. And it may mean the economy may shrink if no new money is injected. Consumers still have to pay electricity bills and other bills that is now costing them 4 1/2% more. If there is no salary increases their disposable income is less and so they will spend less simply because they have less to spend. So now government ust come up with ways to grow the economy. The more people working, they more persons paying taxes and the more revenue for government. But the real and true effects of the VAT increase will be felt by mid 2019. And if the NHI tax is put into effect, all other things being the same, this will definitely create a reduction in VAT revenue.

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DDK 5 months, 3 weeks ago

Mr. Johnson are we going to learn how much our debt to outside lenders has been brought down?

"VAT revenues increased by $32m or 19.1 percent, jumping to $199.4m compared to $167.4m in the prior year, with the Government's income also further boosted by an 89.6 percent rise in stamp tax. That revenue item grew from $30.8m to $58.4 year-over-year."

Was the rate of stamp duty increased as well?

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Dawes 5 months, 3 weeks ago

They took VAT off property sales and went back to stamp of 10%. That is the reason for that increase.

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DDK 5 months, 3 weeks ago

Yes. thank you. Is there no longer Stamp Duty on other transactions or is it just property sales?

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ThisIsOurs 5 months, 3 weeks ago

How many contracts are presently awaiting payment more than three months?

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ohdrap4 5 months, 3 weeks ago

it will be slashed even more if they increase it to 15% next budget, another windfall .

in the mean time, they can increase the income by anihilating the price control list lol.

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realitycheck242 5 months, 3 weeks ago

MR Johnson. now that the wind fall in vat revenue has began. Stick to the financial minister promise of beginning to reduce customs duty's in the next budget cycle before joining the WTO. START WITH THE 65% DUTY ON IMPORTED AUTOMOBILES That rate is one of the highest in the world.

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sheeprunner12 5 months, 3 weeks ago

Fiscal deficit down ....... So what??????? .......... If you cut each Ministry spending and collect more VAT, thats expected .......... But the PPL still hurting and wages still not keeping pace with Cost of Living ........... So, that is a hollow victory for Cabinet and not THE PEOPLE.

Just more ppl getting desperate to make end$$$$$$ meet ............ more smuggling and fraud and selling front.

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John 5 months, 3 weeks ago

And don’t forget how many have been fired under this administration. Not that it is necessarily a bad thing but people who do not have jobs cannot pay taxes or even pay other bills for that matter or even spend on consumer goods and help grow the economy. And speaking of economics which is Greek to Marlon Johns’s, as is public finances. Some peg the GDP of the Bahamas at around $11 Billion Dollars. The problem why there is such a shortfall of revenue is that may of the economic activities in the country exclude the payment of taxes to the government. (tax evasion ). Most of this economic activity (business), is carried out by foreigners who come here, rape the country then disappear leaving thousands, Bay millions in unpaid bills and taxes. And because it is so lucrative for them, to operate under the radar they come back a second and even a third time. One such operation was the Sun Wing airlift in Freeport, where these gangsters even had government paying for empty seats to Grand Bahama. To the government’s credit they were able to uncover the scam and they wasn’t scared to tell SunWing to go fly where the sun never shine. Then there were the payments to the extremely lucrative cruise lines that D’Aguliar put a stop to because they were taking the country to the cleaners (and it wasn’t Super Wash). Some hotels are doing the same thing while practically all the Bahamian hotels are closing. Some homeowners, again not Bahamians, have three and four and five homes that they rent out for short term or long term or year round and little or nothing goes to the government. They claim it’s either family or friends. And many build these homes and furnish them virtually duty free. And the Dominican catch the other day was just a small, ok tiny, indicator of what the country is losing in marine resources. The weekend fishermen in the Northern Bahamas carry just as much or even more annually.

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Dawes 5 months, 3 weeks ago

LOL last year the Government said due to all the bills left over by the PLP they would have to run an extraordinary large deficit. This year its back to normal and we are still spending more then we are raising. In addition everything seems to be collapsing. But yeah great job FNM, we are still in a worse position this year then last year. Why didn't you point out how much the debt increased by?

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bogart 5 months, 3 weeks ago

.......how much the debt increased by?......see todays tribune Business Section...bottom story .headline..."National debt grows $137m"

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