By NEIL HARTNELL
Tribune Business Editor
The government yesterday forecast it will narrowly beat this year’s fiscal deficit target despite a $185m revenue shortfall caused by VAT, gaming and enforcement underperformance.
Deputy Prime Minister K Peter Turnquest, unveiling the 2018-2019 mid-year budget in the House of Assembly, said the Minnis administration was on track to limit the full-year deficit to around $230m - some $5-$10m less than the “red ink” target set last May.
He said the Government will be able to achieve this, and offset its revenue gap, through “significant spending restraint” projected to slash recurrent expenditure by five percent compared to initial forecasts.
This, based on Tribune Business’s calculations, amounts to a $130m cut to projections that it would spend some $2.589bn on its recurrent or fixed-costs - typically civil service salaries, benefits and rents - this fiscal year.
Mr Turnquest yesterday identified the 12 percent VAT rate’s delayed introduction in key sectors such as hotels and construction, coupled with the Government’s web shop taxation settlement and later-than-expected creation of the Revenue Enhancement Unit, as the key factors behind why revenues are now forecast to fall 7 percent short of Budget predictions.
This amounts to a $185.43m undershoot of the initial $2.649bn target, this newspaper has calculated, although Mr Turnquest implied that the VAT rate hike and other tax measures had still produced their desired effect because full-year recurrent revenues will be more than $400m ahead of 2017-2018.
However, he confirmed long-standing predictions that VAT collections will be “somewhat under the Budget forecast” for 2018-2019 as a result of the transition period granted to the likes of hotels and contractors, which enabled them to honour reservations and contracts that were in effect prior to the budget at the former 7.5 percent rate.
Mr Turnquest added that the revised web shop taxation structure, which has reduced the “sliding scale” levy from six to two lower rates, and the switch to taxing patrons on their winnings rather than deposits and ticket sales, was forecast to reduce the Government’s tax take from the sector by $18m compared to initial estimates.
And he revealed there will be a “dip” in the $80m that was forecast to be collected via enhanced compliance/enforcement due to the delayed creation of the Revenue Enhancement Unit, which is supposed to target tax evasion relating to VAT, Business Licence fees, Stamp Duty and real property tax.
The deputy prime minister did not provide a figure for the projected VAT shortfall, although based on the total undershoot - and the losses relating to web shops and the Revenue Enhancement Unit - this is likely to be around $90m or half of the $185m.
“All told, we now estimate that revenues will fall short of the Budget projection by some 7 percent, but still come in some $400m higher than the last fiscal year,” Mr Turnquest told the House of Assembly.
However, he said “significant expenditure restraint” had kept the Government on course to hit the $237.6m full-year deficit target, equivalent to 1.8 percent of Bahamian GDP, as mandated by the Fiscal Responsibility Act’s goals.
“Based on expenditure trends in the first half of the fiscal year, it is now estimated that both recurrent and capital expenditure will come in somewhat lower than had been projected at the time of the 2018-2019 Budget,” Mr Turnquest said. “That, in large measure, reflects the Government’s dedicated commitment to stringent expenditure restraint.
“Accordingly, recurrent expenditure is now projected at a level some 5 percent below the Budget forecast. Capital expenditure was particularly subdued in the first half of the fiscal year but, with our commitment to significantly invest in new and modern public infrastructure, we expect the pace of spending in this area to pick up appreciably in the second half of the year. The estimated outturn for capital expenditure is nonetheless now expected to come in below the amount budgeted for the entire year.”
The deputy prime minister did not produce a revised full-year estimate for capital spending, which was initially forecast to total just under $300m. Just $86.949m, or less than one-third of this sum, had been spent at the fiscal mid-year point of end-December 2018 - thus giving the Government enough room to increase this and still come in under projections.
Confident that spending controls will offset the revenue shortfall, Mr Turnquest said: “With the fiscal outturn in the first half and projected developments in the second half, we now foresee a fiscal deficit in 2018-2019 slightly under the Budget forecast by some $5-10m. Thus we project presently a budget deficit of somewhere near $230m, which means we remain firmly on target.”
A further indication of the Government’s optimism that it will not be thrown off-target comes from the fact that no new borrowing measures, above and beyond what was approved in May’s budget, were unveiled in the House of Assembly yesterday.
Pledging to maintain the Minnis administration’s cost-cutting focus, Mr Turnquest said it was “taking a hard look” at all government programmes and services “to see where we can cut spending, enhance value for money, improve services to make them more efficient and effective, and identify savings and reallocations to accommodate higher priority policy objectives”.
He added that the Ministry of Finance was poised to take its regular monthly meetings with government agencies a step further by “mandating the creation of monthly spending plans by agencies, so as to foster proper financial planning and cash management, and minimise the accumulation of further arrears”.
Mr Turnquest added that the Government was continuing to work on a Public Debt Management Bill to improve governance of its existing $8bn-plus national debt, and ensure its “prudent management”.
This, he said, will lead to the creation of a Public Debt Management Office within the Ministry of Finance and, under it, a Public Debt Management Unit to co-ordinate strategy for minimising The Bahamas’ debt servicing costs.
“This development will eradicate the past practice of inefficiently managing the country’s debt portfolio, and will instead create a framework for actively managing the country’s debt, with the aim of achieving the overarching goal of the Fiscal Responsibility Act of reducing the debt-to-GDP ratio to a more sustainable level,” Mr Turnquest told the House.
He added that the Government was also set to complete its transition to its new Chart of Accounts by July 1 this year, bringing it more into line with international standards and setting the stage for accrual-based accounting come 2022.
“Last May, this government accepted the difficult decision of raising taxes and the tax burden on Bahamians,” the deputy prime minister said. “We did this knowing full well the political consequences and the harsh criticism that the Government would face, even from our own side.
“We realised that this sacrifice asked of Bahamians was not the politically popular thing to do, but it was the right thing to do. It was the right thing to do.”