The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A key Ministry of Finance adviser last night warned that the 112 per cent increase in the half-year fiscal deficit to $314.2 million was an “early warning signal” that the Government must take “very decisive measures” to stabilise the national finances.

James Smith told Tribune Business that the Christie administration needed to resist the traditional pre-general election urge to increase government spending, after the Central Bank revealed how far Hurricane Matthew has blown the fiscal consolidation plan off-course.

Warning that the 2016-2017 fiscal deficit may return to the $500 million-plus range seen at the start of the Christie administration, should the half-year trend hold, Mr Smith said the Government needed to better align initiatives such as National Health Insurance (NHI) with its financial capacity.

He was speaking after the Central Bank, in its monthly economic report for January, revealed that the Government’s fiscal deficit for the six months to end-December 2016 had more than doubled year-over-year.

Attributing much of this to the fall-out from Hurricane Matthew, the Central Bank said: “The Government’s budgetary operations for the first six months of fiscal year 2016-2017 were dominated by hurricane rebuilding outlays and disruptions in revenue collection, which contributed to an expansion in the deficit to $314.2 million from an estimated $147.9 million in first half of the previous fiscal year.

“Total expenditure rose by $121.9 million (11.7 per cent) to $1.166 billion, while revenue contracted by $44.4 million (5 per cent) to $851.8 million.”

The $314.2 million in first half ‘red ink’ is more than triple the $100 million full-year deficit that the Government projected in its 2016-2017 Budget last May, and equal to the full-year projection given last week by Moody’s, the international credit rating agency,

Mr Smith, a former minister of state for finance and Central Bank governor, said the first half fiscal deficit was equivalent to about 3 per cent of Bahamian gross domestic product (GDP) or economic output.

Should this trend hold for the full year, the now-Ministry of Finance adviser warned that it would hit 5-6 per cent of GDP for 2016-2017 - equivalent to the $500-$600 million deficits that the Christie administration ran in its first two years in office.

“If the rule of thumb after six months is to double it, we don’t want to be back up to 5-6 per cent of GDP,” Mr Smith told Tribune Business.

“I think it’s an early warning signal that we have to begin addressing it immediately... I would take it as the first blush early warning signal to take some very drastic measures.

“A great part of the explanation is the extra expenditure incurred by a natural disaster, but when it [the deficit] begins to balloon like that, you also have to take extra counter-measures. The most important thing is to recognise it for what it is, and adopt some counter-cyclical measures shortly.”

Prime Minister Perry Christie, at a PLP candidates ratification ceremony on Friday, again blamed Hurricanes Joaquin and Matthew for derailing the Government’s fiscal consolidation plans, effectively blaming ‘acts of God’ for the Budget woes.

Simon Wilson, the Ministry of Finance’s financial secretary, earlier this month estimated that Hurricane Matthew cost the Government some $100 million in revenues.

And given that the Government was forced into $150 million of unanticipated borrowing in Matthew’s aftermath, as it sought emergency funding to effect repairs to homes and infrastructure, it is possible the Category Three/Four storm may inflict a total $250 million hit to deficit projections.

However, the Central Bank data shows not all the 112.44 per cent deficit increase can be blamed on Hurricane Matthew. For recurrent spending, which goes on the Government’s fixed costs, such as the civil service wage bill and rents, grew by $52.6 million or 5.5 per cent year-over-year during the 2016-2017 first half.

This spending category is not impacted by Matthew, as it represents the Government’s normal operational or running costs, with the Central Bank attributing much of the increase to pre-NHI launch activities.

“Current outlays rose by $52.6 million (5.5 per cent) to $1.005 billion, led by a $29.9 million (6.5 per cent) increase in transfer payments to $488.5 million,” the Central Bank report said.

“Specifically, subsidies and other transfers rose by $27.2 million (8.2 per cent), owing mainly to expansions in health-related outlays on National Health Insurance (NHI) initiatives, while transfers to non-profit institutions grew $3.8 million (24.9 per cent).

“In addition, consumption expenditure firmed by $22.7 million (4.6 per cent), reflecting an increase in personal emoluments of $13.9 million (4.2 per cent). In addition, purchases of goods and services firmed by $8.8 million (5.5 per cent).”

Mr Smith told Tribune Business that the Government needed to better plan its social initiatives, and align them with its finances and their affordability, given the Bahamas’ deteriorating fiscal position.

“I think that a number of initiatives are coming online at the same time, and going forward one would have to stagger them, moving only when we have the capacity to do so,” he said.

“We’ve got to do a bit more planning in terms of the timeline for executing initiatives based on our fiscal capacity.”

Mr Smith added that spending controls were “the quickest way” to arrest deterioration in the Government’s fiscal position, adding that increased taxes and revenues “can’t do it” due to timing issues related to when monies are collected.

The CFAL chairman said “even economic growth over two quarters will not do the job”, as there was a lag time between improved GDP expansion resulting in increased revenues and a narrowing of the debt.

Mr Smith, though, warned that “the timing element is not working in our favour”, given that the need for spending controls and restraint was occurring just when the Government is feeling general election pressures.

“We’ve made that expenditure three to four months earlier because of the hurricane, and something’s got to be done to control spending increases going forward,” Mr Smith said.

The Government will likely argue that its ongoing crackdown on tax cheats, which is said to be yielding $15 million a month in extra revenues on New Providence alone, and is targeting $400 million within two years, will repair some of the Matthew-related damage.

The second half of its fiscal year is also when it collects the majority of its revenues, as this coincides with the peak winter tourism season and increased economic activity, plus the payment of all Business License fees and bulk of real property taxes.

However, the timing of the tax crackdown’s start, just one month after Hurricane Matthew, indicates that the move was forced upon the Government by the hole blown in its finances by the storm.

The Central Bank, too, acknowledged the damage done to a fiscal consolidation plan that was progressing far more slowly than expected based on the Government’s targets.

“The potential for near-term improvement in the Government’s operations remains contingent on sustained revenue enhancement initiatives and expenditure constrain,” the Central Bank said. “However, the unplanned hurricane-related spending will diminish the current period’s consolidation potential.”

The Central Bank said capital spending grew by $71.7 million or 80.2 per cent to $161 million during the 2016-2017 first half, due to the demands imposed by hurricane rebuilding, and coast and infrastructure repairs. Infrastructure spending almost doubled by $66.5 million to $135.6 million.

Meanwhile, the revenue decline was due largely to a $39.5 million, or 4.9 per cent, drop in tax collections. Value-Added Tax (VAT) revenues fell year-over-year by $15.4 million or 4.9 per cent to $302.1 million, a fall blamed on filing extension deadline and economic disruption related to Hurricane Matthew.

“Selected taxes on services decreased marginally by $0.5 million (5.3 per cent) to $9.7 million, as gaming taxes narrowed by $0.4 million (3.9 per cent),” the Central Bank said. “The disruption was also reflected in other ‘miscellaneous’ taxes, which fell by $31.1 million (15 per cent) to $176.1 million, amid a $21 million (49.8 per cent) decrease in unclassified receipts, and an $18.1 million (36.7 per cent) reduction in property tax collections.

“In contrast, business and professional fees increased by $2.7 million (20.9 per cent) to $15.4 million, departure taxes by $5 million (9.2 per cent), and ‘other’ stamp taxes - mainly on mortgages - by $4 million (8 per cent).

“In addition, non-tax revenue fell by $4.7 million (5 per cent) to $89.9 million, with an $11.8 million (40.7 per cent) timing-related reduction in income from ‘other sources’ outpacing the $7.2 million (11.4 per cent) expansion in fines, forfeits and administrative fees.”