The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Prime Minister yesterday denied that the Government’s Budget forecasts are “fantasy” as he asserted that recent monthly fiscal deficits for June were elevated due to paying off outstanding bills.

Philip Davis KC, leading off the House of Assembly’s Budget debate, admitted that achieving the 2023-2024 full-year deficit target of around $210m will require “a heightened degree of expenditure constraint” over the next few weeks to month’s end to either balance the books or generate a modest surplus.

Hitting back at the Opposition and other critics, who have argued that the full-year deficit forecast is highly unlikely to be met, he said: “I have taken a hands-on approach to this Budget and have ensured that it was a collaborative effort across the entirety of government.

That is, across every ministry, agency and department in support of the Ministry of Finance’s meetings with ministers, permanent secretaries and heads of public corporations. This has led to better accountability and a more comprehensive and accurate Budget. So we did not arbitrarily come up with figures. Extensive work has been done to ensure that our projections reflect reliable and accountable figures.”

Acknowledging that the Government still has “a lot of work to do to rebuild the fiscal buffers” so that The Bahamas has the financial headroom to cope with climate change and further devastating hurricanes, he added: “We have projected a deficit of 1 percent to 1.5 percent based on the expenditure and revenue performance up to April 2024.

“I will admit, however, that achieving this target has required a heightened degree of expenditure constraint and focus on revenue collection. However, as we have demonstrated over the last three years, our fiscal plans are based on reality, not fantasy.

“In addition, it should be noted that the fourth quarter deficit experienced in the last two years was the result of deliberate policy decisions to eliminate, as much as possible, the arrears for vendor payments left by the previous administration. I am happy to report that, as the arrears report in the mid-year Budget presentation has demonstrated, this policy has succeeded and we have substantially reduced vendor arrears.”

The Government, in its Fiscal Strategy Report, said it had reduced payment arrears owed to vendors to a sum equal to 2.1 percent of nominal gross domestic product (GDP) at year-end 2023 as opposed to 3.7 percent the year before.

However, there is evidence that major monthly deficits towards the end of the Government’s fiscal year - typically May and June - are a structural issue rather than a temporary problem caused by accelerated payment of outstanding bills as suggested by the Prime Minister.

Santander, the major global financial institution, last week became the latest to add its voice to those arguing that the Government still has much work to do to hit its $210m deficit target for the current 2023-2024 fiscal year.

While the Davis administration must maintain a balanced Budget, or slight surplus, during the three months to end-June to reach this goal, the bank noted that such an outcome will fly in the face of past experience.

Pointing out that June alone has generated an average $180m monthly deficit for the past decade, Santander warned that “there will be less tolerance on [any] fiscal slippage” during the current fiscal year due to the revised 2024-2025 surplus target.

For the past two fiscal years, 2021-2022 and 2022-2023, the Government has sustained deficits totalling $353.5m and $293.7m, respectively, for the fourth quarter as a result of government ministries, departments and agencies racing to bring forth bills that the Ministry of Finance knew nothing about so that they can be paid and cleared before the fiscal year-end.

Meanwhile, reaffirming his administration’s plan to crack down on suspected VAT avoidance on high-end real estate deals worth more than $1m, Mr Davis said: “Another peculiar feature of this tax is that most of the revenue is collected on purchases by Bahamian companies owned by non-Bahamians.

This has always been a feature of the tax, either with the current structure of VAT or the previous structure of Stamp tax. This has only increased with the repeal of the Immovable Properties Act. The very nature of the tax, be it Stamp Tax or VAT on real estate, makes it susceptible to abuse.

“Over the last two years, as a tax authority, the Department of Inland Revenue detected some unusual activity in this tax. Unusual in that significant real estate transactions, although announced by realtors, were not immediately followed by the presentation of conveyances for stamping.”

Mr Davis said the tax authorities have also detected an increase in the use of “inter vivos” transfers of real estate, meaning properties have been gifted to other family members, to trusts “and other exotic structures”.

“Inter vivos transfers or deeds of gifts have legitimate estate planning purposes, although their uses in The Bahamas are limited because we have no estate taxes,” he added. “So limiting inter vivos transfers to natural persons does not impede the estate planning ability of any real estate owner.”

Turning to other revenue measures, Mr Davis said long-term residential rentals will again be exempt from VAT because its implementation was hurting tenants. “In order to prevent a clear tax avoidance strategy currently being employed by foreigner owners of property, we are clarifying in the Real Property Tax Act that, despite a life tenant of a property being a Bahamian, the property will not be considered Bahamian-owned if the beneficiaries are not Bahamian,” he added.

“The real property tax should be paid by the foreign owner despite a Bahamian being designated as a life tenant. The Bahamian living there will not be required to pay the tax, but only the foreign owner.”