By NEIL HARTNELL
Tribune Business Editor
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."