The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Tax Coalition co-chair yesterday said the Central Bank had sent up a “big red flag” over Value-Added Tax’s (VAT) likely impact on consumer spending, adding that the fiscal numbers had not hit position “where we can beat our chests with success”.

Gowon Bowe told Tribune Business that while the fiscal data showed signs the Government’s finances were starting to move in the right direction, they had yet to post a quarter where there was a surplus or ‘break even’.

And he questioned whether the numbers for the first five months of the 2013-2014 Budget year might turn out to be “a mirage”, given the Government’s ancient cash-based financial reporting system.

Mr Bowe added that the “weak consumer demand” noted by the Central Bank, which led to a $21 million or 8.2 per cent drop in international trade taxes for the first five months, sent a clear warning that the Government had to be careful its fiscal/tax reforms did not further depress this vital economic component.

“I think they’re quite positive,” Mr Bowe said of the fiscal data reported by the Central Bank, although he was careful to repeatedly hedge his assessment.

For instance, while the Government’s total spending for the five months to-end November fell $17.4 million (2.4 per cent) to $716.3 million, Mr Bowe said this was solely due to a drop in capital spending as public investment/infrastructure projects came to an end.

Recurrent spending, which covers the Government’s fixed costs such as salaries and rents, rose $7.1 million (1.1 per cent) to $634.4 million, and the Coalition for Responsible Taxation’s co-chair said such growth needed to be minimised or reduced.

“The revenue indicators are positive, and we’re seeing some movement in the right direction, although they are not where they need to be,” Mr Bowe told Tribune Business.

“It’s not to the point where we should be beating our chests as success. The fiscal trajectory is in the right direction, but we have yet to see a quarter where we’ve achieved a surplus or break even. Ask for small mercies first.”

He then added his voice to those calling for the Government to move to an accrual-based financial reporting system, warning that the existing cash basis could give a misleading picture of the fiscal performance.

An accrual-based reporting system, Mr Bowe explained, would pick up spending obligations the Government has already committed to or bills received, but not paid.

The existing cash system misses these, and leaves open the possibility that the 2013-2014 figures to-date could be misleading if major expenditures - already in the system - end up being booked in the third and fourth quarters of the fiscal year.

“What we really need to push for is a modern system of financial reporting for the Government that allows an accrual basis,” Mr Bowe told Tribune Business.

“Until we get accrual accounting we have to take the numbers with a grain of salt. Let’s just ensure that [the first five months] is not a mirage.”

Mr Bowe, meanwhile, said the Central Bank’s warning on weak consumer demand was “very clear”, as reduced spending in the economy translated into reduced tax revenues regardless of whether VAT was in place or not.

Noting that consumer spending had fallen in all countries in the aftermath of VAT’s introduction, he warned the Government that implementing the tax in an already-depressed environment could ultimately force it to fill the hole left by the private sector via extra public spending. Which is what happened in the recession, and helped drive the public finances into their current predicament.

“The fact the Central Bank highlighted it means it’s a big red flag for them in terms of economic performance,” Mr Bowe told Tribune Business.