The Tribune

• Finance chief: ‘Always plan’ to match prior year early

• VAT jumps $20m to slash November deficit by 24%

• But first five months at 141.5% of 12-month figure

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Government’s top finance official last night asserted that the fiscal deficit remains on target even though it exceeded the full-year target by $54.3m after just five months.

Simon Wilson, the Ministry of Finance’s financial secretary, told Tribune Business that the goal had always been to keep the deficit for the first six months of the 2023-2024 Budget cycle “even with the previous year or slightly above” - something that it had managed to accomplish for the period to end-November.

The fiscal figures for November 2023, released yesterday, revealed that while the deficit - which measures by how much the Government’s spending exceeds its revenue income - stood at $185.4m for the first five months, equal to 141.5 percent of the full-year target, it was almost exactly keeping pace with the prior year.

It was only $2.3m higher than the $183.1m worth of ‘red ink’ generated for the five months to end-November 2022, while a near-$20m year-over-year increase in VAT collections slashed the monthly deficit by 24 percent year-over-year.

“What we felt was that for the first months [of the 2023-2024 fiscal year] it would have been good for us to be even with the previous year or slightly above the previous year,” Mr Wilson told this newspaper of the fiscal deficit’s performance. While that objective appears to have been achieved for the five months to end-November, it still remains reliant on December’s yet-to-be-revealed outcome.

The financial secretary effectively explained that the Davis administration had sought to contain the fiscal deficit during the Budget year’s first half, which typically produces a weaker revenue performance due to there being less economic activity, and wait for the expected pick-up coinciding with the winter tourism season to drive increased income and monthly Budget surpluses.

“We have a number of measures in place now that we did not have available in the first six months,” Mr Wilson added. “We have the increased departure tax for cruise visitors, which came into effect on January 1, the environmental levy which came into effect on January 1.

“There is the new Business Licence Act and regulations. This is the first period under the new Act. It has increased licence fees for International Business Companies (IBCs) and financial services entities. We’ll see the effects of those now.

“We also have real property tax. This business cycle we increased the amount of bills we issued in terms of quantity and value. All things being equal, that will lead to an increase in real property tax revenue.”

Mr Wilson said the reduction in boat registration fees, both for new ones and renewals, with effect from March 1 will not have a major impact on the Government’s revenues and require compensating adjustments elsewhere. “I don’t know if that’s going to be any significant loss of revenue,” he added. “Those registration fees are pretty small. They’re not a big revenue item.”

The Government earns the bulk of its income during the first four months of the calendar year as this period coincides with peak tourism and economic activity; Business Licence fee payments; the bulk of real property taxes; and commercial vehicle licensing month.

This makes it difficult to project the full-year outcome on just five months’ data, with the Government also traditionally incurring large monthly deficits in May and June as government ministries, agencies and departments race to present bills for payment that the Ministry of Finance often knows little to nothing about.

Mr Wilson, meanwhile, said the Government anticipates no impact to its revenue from any tourism and economic fall-out stemming from saturation global media coverage of The Bahamas’ recent murder spike and related crime woes. “Nothing to that effect,” he replied to this newspaper’s questions.

“Obviously you have the coverage that is disturbing, but I think in a couple of instances when the facts come out it paints a different picture. I don’t see it being a big issue; nothing long-term.”

The Davis administration almost cut its November 2023 deficit by one-quarter year-over-year, lowering it from $86.3m the previous year to $65.5m almost entirely driven by the rise in VAT revenues. These rose by 25.2 percent year-over-year, growing from $77.3m to $96.8m, and helping to propel an 11.4 percent rise in total revenue from $187.2m in November 2022 to $208.6m.

Asked whether the VAT surge had been generated by enhanced enforcement and collections, Mr Wilson attributed it more to the Budget’s cyclical nature. “What happened is that usually in the late summer there’s a little lull in revenue,” he added. “In November, things start picking up, and continue into December and January.

“This is the cyclical nature of our economy. We just have to keep focused on the revenue plan and we’ll be OK. It aligns with that. We just have to be focused on our revenue administration plan. Every year when we look at our revenue it’s the same trend. We just have to be focused on it and stay consistent with the plan. There’s nothing for us to panic about. We just have to focus on executing the Budget plan.”

November 2023 was more aligned with the Davis administration’s stated fiscal goals, which are to drive revenues from the existing tax structure through better administration and compliance while holding spending flat year-over-year. Recurrent, or fixed-cost, spending fell by $4.5m for the month year-over-year, while total spending was flat against 2022.

The 11.4 percent rise in total revenue was also nearer the rate of increase required to hit the Government’s full-year revenue and, by extension, deficit targets. The Government has forecast 16 percent year-over-year revenue growth to hit its $3.319bn target for the 12-months, but has yet to hit that number during any of the first five months.

However, one financial source, speaking on condition of anonymity, suggested that the Government may be preparing the ground for fiscal adjustments to be made in the mid-year Budget that just be unveiled by end-February by releasing the November figures now.

They suggested that the data shows the deficit is likely to overshoot the Government’s $131.1m, or 0.9 percent of gross domestic product (GDP) target, and come closer to the International Monetary Fund’s $379m or 2.6 percent of GDP forecast.

While coming in at the IMF’s target “is not a bad news story”, since it still represents a major slash to the prior year’s $533m deficit, the source said it would trigger “fiscal responsibility” mechanisms in the Public Finance Management Act 2023 requiring it to present a plan for bringing the public finances back on track.

This, they suggested, would likely involve revenue enhancements (new and/or increased taxes) or spending cuts - neither of which the Davis administration wants to implement. As a result, they said it was likely the Government would stretch any adjustments out as long as possible to, potentially, the 2024-2025 Budget in May.

“I think they are now putting this out because they have to make the adjustments at the mid-year Budget,” the source added. “I think they’re trying to soften the market, soften the ground because they have to make adjustments.”

And, should the Government require additional net new borrowing beyond the $131.1m approved by Parliament due to a deficit overshoot, the source queried where this financing would come from. They suggested Bahamian institutional investors were “tapped out”, many being at their prudential and regulatory limits on government debt holdings, while international market credit remains expensive.