The Tribune

• Warning of spending cuts ‘domino effect’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Opposition’s finance spokesman yesterday warned the failure to hit VAT targets for 2022-2023 could place the current year’s forecasts in “even more jeopardy” and potentially trigger spending cuts to meet the $131m deficit goal.

Kwasi Thompson, who was minister of state for finance in the Minnis administration, told Tribune Business that missing revenue targets in the 2023-2024 fiscal year could spark “a domino effect” that forces the Government to make expenditure cuts to achieve its deficit forecast and retain credibility with ratings agencies, investors and the wider capital markets.

Speaking after Simon Wilson, the Ministry of Finance’s financial secretary, conceded that the Government is unlikely to meet its 2022-2023 full-year VAT target of $1.412bn, he added: “What is telling for me is the Ministry of Finance’s concession that it may not meet this year’s VAT target. That is telling, because in the last two months of the fiscal year, we know the deficits are very high.”

The Government incurred a combined $399.6m deficit for May and June 2022, the last two months in the 2021-2022 fiscal year. Spending exceeded revenue by $80.9m in May 2022, and then by $318.7m in June, due to the large number of bills - many of which the Ministry of Finance knows nothing about - being presented for payment by ministries, departments and agencies before year-end.

This creates an annual deficit spike towards the end of fiscal years - a trend that has become the norm. However, Mr Thompson said this phenomenon - combined with any VAT under-shoot - could leave the Government struggling to meet its revised $520.6m fully-year deficit target.

Mr Wilson, though, previously told this newspaper that the 2022-203 deficit is close to that forecast although he did not provide an exact figure. He also pointed out that the VAT under-shoot was being offset by better-than-projected international trade taxes, and the Government stood a reasonable chance of hitting its total revenue and total tax goals for the 2022-2023 full-year.

Total revenues and total tax revenue, at $2.356bn and $2.079bn, respectively, stood at 82.4 percent and 81.9 percent of full-year target after the first ten months, and appear much more in reach. However, Mr Thompson said: “We are very concerned they will miss last year’s revenue target, and if you miss last year’s revenue target that puts the fiscal deficit target in jeopardy.

“If last year’s deficit target is in jeopardy, it puts this year’s deficit target in jeopardy. I think we all ought to be very concerned with what is going on. We’re going to be watching it very closely to see where the Government ends up for the last fiscal year. Obviously, if you have difficulty in meeting the previous year’s target, that puts next year’s target in even more jeopardy. It’s a domino effect.”

VAT was projected to account for almost 50 percent or half the Government’s $2.857bn total revenues in 2022-2023. Yet despite collections of this tax likely under-performing the full-year $1.412bn target, VAT revenues are now projected to increase by almost $180m year-over-year to $1.591bn for the current 2023-2024 fiscal year.

This raises questions as to how the Government will hit this hiked target, although Mr Wilson voiced optimism that it is achievable through increased enforcement and compliance in areas such as the Family Islands, the marine sector, tourism services in general.

With revenue key to meeting the $131.1m deficit forecast for 2023-2024, Mr Thompson said any slippage on the Government’s income side would need to be offset by spending cuts or reductions to keep it on track. “This anticipated failure to meet the revenue projections also puts the forecasted $520.6m deficit at risk of being higher than expected,” he added of the 2022-2023 fiscal year.

“Although the deficit sits at $240m at the end of April, the deficits in the final two months of the previous year combined amounted to $399.5m. If the trend holds true, the deficit for the last fiscal year may be significantly higher than forecasted by the Government.

“The slowdown in the pace of revenue growth must also lead the Government to reconsider its lofty projections for revenue in the current fiscal year and the planned elevated expenditure that was tied to revenue numbers that may not materialise.

“The FNM reiterates its stance that this administration must take a cautious and prudent approach to public expenditure. Given the revenue trends, the Government must now expressly scale back on unnecessary and extravagant expenditure so that its current deficit target of $131.1m is not put at risk.”

Mr Thompson yesterday told Tribune Business that if revenue fails to meet expectations “we are emphasising and saying to the Government that they must make the necessary spending adjustments. They must cut down on the discretionary spending, the extravagant spending, to make the necessary adjustments”.

While not identifying areas where he believes cuts should be made, the Opposition finance spokesman added: “That’s what they’re going to have to do in terms of fiscal responsibility to ensure that, if revenues are not working out, you either find alternative sources of revenue - which this government has not been able to effectively do - or you cut down on spending.

“It’s hugely important. You have rating agencies looking at this, you have investors looking at this, you have the public looking at this. We keep emphasising about credibility with the rating agencies and investors, but credibility with the Bahamian public is even more important.”

Mr Thompson, in a statement, added: “Local and international creditors - as well as credit rating agencies - are watching to see if the Government meets its fiscal consolidation goals. If the Government’s planned reduction in the deficit is not met, it will drive public debt higher than currently projected. This will undoubtedly place undue pressure on our country’s credit ratings and its ability to raise new financing on favourable terms.”

He also voiced concern about the lateness of the Government’s fiscal reporting, given that the April 2023 report was released in mid-August when the legal date for disclosure was the first week in June. May’s report, which is supposed to be released in early July, is now also late and Mr Thompson said the status of the Fiscal Responsibility Council, a key watchdog on fiscal matters, is also uncertain.

“The Government still has not ensured the publication of the legally mandated 2021 and 2022 Fiscal Responsibility Council reports on the Government’s annual fiscal strategy,” Mr Thompson said. Despite another seemingly idle promise from the Prime Minister, Bahamians have still not received an update on the current composition of the Fiscal Responsibility Council, nor a timeline for when the council will produce its delayed reports.”