The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The government will “scale back” spending for the 2018-2019 fiscal year if revenue further underperforms, it was revealed yesterday, amid a $21.7m year-over-year fall in trade taxes.

KP Turnquest, deputy prime minister, yesterday told Tribune Business that the combined decline in customs duties and excise taxes was now of “more interest” to the government than the factors that had driven a projected $185m revenue shortfall for the current fiscal year.

He revealed that the Minnis administration plans to probe why trade-related taxes declined year-over-year for the six months to end-December, suggesting that it likely reflected the completion of construction activity on major foreign direct investment (FDI) projects.

The VAT-related transition periods offered to the hotel and construction industries; the web shop taxation settlement; and the delay in setting up the Revenue Enhancement Unit (REU) were on Wednesday identified as the key factors behind the projected $185m revenue shortfall for the 12 months to end-June 2019.

Mr Turnquest, though, said the government was prepared to further cut spending to align with income if this became necessary. He emphasised his determination to avoid the overly-optimistic and aggressive revenue estimates of previous administrations that contributed to the widening $300m-plus deficits The Bahamas has incurred over the past decade.

Acknowledging that he had been “a critic” of unrealistic revenue estimates, the deputy prime minister said this practice had exacerbated The Bahamas’ fiscal woes because the Government’s spending plans were directly tied to its projected revenues.

The Government has “held the reins” on recurrent spending, which is forecast to come in $130m or 5 percent lower than initial budget projections this fiscal year, to ensure that this aligns with its lower income and keeps it on track to hit the $237.6m full-year deficit target.

Serving notice of his intention to continue this practice, Mr Turnquest said The Bahamas had little choice but to “build back in the headroom” necessary to avoid “piling disaster on top of disaster” - as happened with the $150m emergency borrowing in Hurricane Matthew’s aftermath.

The deputy prime minister, voicing optimism that VAT revenues were not underperforming as a result of Bahamian businesses and consumers cutting back on spending in response to the increased 12 percent rate, said the Government planned to conduct a similar investigation into why trade-related taxes were down on 2017-2018 comparatives.

“The reality from my view is that VAT is performing. It’s a little bit behind, but not because of people holding back,” Mr Turnquest told Tribune Business, pointing to the significant revenues foregone from allowing the hotel and construction industries to honour pre-existing reservations/contracts at the old 7.5 percent rate.

“The area of more interest is on the Customs and trade side, which is down a bit. We’re looking at that to see what’s driving that. I suspect it has to do with construction on a number of projects winding down. That leaves a bit more to review from our side, but VAT is performing, and as we came into the New Year it was coming more into line with our projections.”

However, for the first six months of the 2018-2019 fiscal year, the Government’s Excise Tax earnings were down $17.484m year-over-year, standing at $108.291m compared to $125.776m for 2017-2018. A similar pattern occurred with Customs duties and other import taxes, which were down by $4.266m at $132.536m as opposed to $138.802m in 2018-2019.

Mr Turnquest yesterday acknowledged the Government’s long track record of missing revenue projections because they, together with the economic growth forecasts upon which they rely, were largely too ambitious.

“I was a critic of it myself,” he told Tribune Business. “I’m very cognisant of it. This year there are factors not necessarily in our control that would have thrown our projections off a bit. We want to be as realistic as possible.

“I’m a very conservative person to start with, and I’m always going to be in line rather than aggressive with revenue projections. We have a history of failing to make these projections, and that causes these deficits to be chronic because the expenditure is based on revenue.

“If you’re not realistic on one side you’re going to be 100 percent wrong on the other. As we look towards next year’s Budget we’re going to be analysing very closely what the revenue performance was this year to see if we have to scale back some of the expenditure we have for the coming year and determine what we have available to facilitate spending.”

To meet the deficit and debt-to-GDP targets set by the Fiscal Responsibility Act, the Government has focused on what it can control - spending - and reduced this to offset revenues coming in some 7 percent lower than projected.

Mr Turnquest said the Government “does not anticipate any diminution of [public] services” as a result of the spending retrenchment, although non-essential projects may have to be “prioritised in a responsible way”.

He added that the Minnis administration was firmly committed to meeting the monthly civil service wage bill and honouring all contractual obligations, and said: “We are very mindful of our objective.

“Our plan has not changed in terms of how we plan to manage through the year. We’re cognisant of the revenue shortfall, taking that into consideration and doing our best to be prudent, judicious and responsible.”

Mr Turnquest continued: “I’m not going to say that it’s easy..... This is a political game. It’s not easy to hold the reins but I think everybody recognises we are in sensitive times and we have to start building back in the headroom we need to from the borrowing side and overall fiscal position so that in the event something terrible happens we can deal with it.

“Hopefully this will be another year that God smiles on us and we have no major hurricanes, and get to do the things we need to do to prepare if something happens. Part of the problem in the past was nobody was thinking ahead to what could happen, and modelling from a financial point of view, the infrastructure point of view, how we will respond in the event of disaster.”

The deputy prime minister said The Bahamas had failed to conduct a national “emergency drill” and work out how it can respond financially if struck by a major hurricane. The aftermath of Hurricane Matthew in October 2016, he added, had exposed the problems that result from a lack of disaster preparedness and planning.

“We have to be realistic about the circumstances we are in, and what we face,” Mr Turnquest told Tribune Business. “We can’t wait for a storm to happen before we figure out what to do.

“That’s what happened to the last administration. They had to rush out and borrow $150m with no control over how it was spent. It piled one disaster on top of another.”