The Tribune

• Gov’t revenue ‘tracks 5%’ ahead of prior year

• But SOE transfers keep deficit ‘below’ forecast

• Market ‘scepticism’ on deficit, ‘strategy revamp’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Real property tax collections are pacing 20 percent ahead of the previous record year, the Government’s top finance official disclosed yesterday, as he predicted it will be “very close” to its full-year deficit target.

Simon Wilson, the Ministry of Finance’s financial secretary, told Tribune Business that sustaining “accelerating” real property tax revenues beyond their traditional March-April peak will be critical in determining whether the $131.1m deficit goal set last May remains within reach.

The other critical factor he identified was controlling subsidies and transfers to loss-making state-owned enterprises (SOEs) such as the Water & Sewerage Corporation and Bahamasair. Mr Wilson conceded to this newspaper that the Government was “slightly below” its deficit forecasts for the early part of the 2024 calendar year, which he attributed to the “timing” of subvention payments to the SOEs.

However, international financial institutions remain sceptical that the Davis administration will hit what has been branded as an “overly aggressive” full-year target - and that was before the recently-published mid-year Budget showed the $258.7m half-year deficit was almost double the $131.1m goal for the full 12 months.

Santander, the global bank that took the lead role in placing the Government’s recent $500m loan backed by an Inter-American Development Bank (IDB) guarantee, told institutional investors in a February 8, 2024, note that “more substantial progress on fiscal consolidation” is needed to push the yields demanded on The Bahamas’ existing outstanding bond issues back into single digits.

Writing before the mid-year Budget, the analysis - based on the first five months of the current fiscal year through November 2023 - argued that the Government would have to produce either a monthly balanced Budget or surplus over the remaining months through June 2024 to stand a chance of hitting its $131.1m target - equal to 0.9 percent of gross domestic product (GDP) or economic output.

However, while generating a monthly surplus where the Government’s revenues exceed its spending was not deemed challenging for the four months through April 2024, given that they coincide with the peak winter tourism season, Santander said the Davis administration would then be confronted by the traditional $200m-$300m deficit caused by the traditional spending surge prior to the June fiscal year-end.

The note, headlined: ‘The Bahamas: Missed Target?’, said: “On five months into the fiscal year, the cumulative fiscal deficit has already missed the full-year target at $185m versus $131m. The target was overly aggressive on reducing a fiscal deficit of 4 percent of GDP in fiscal year 2022-2023 to 0.9 percent of GDP in 2023-2024.

“This doesn’t mean that there won’t be improvement with the monthly deficit in November 2023 improving over November 2022. The total revenues were quite robust while spending was flat. It’ll be important to monitor if there is a more proactive shift towards lower spending or any activist approach to either validate or revise the fiscal target.”

Santander thus left open the possibility that the revenue-rich first four months of the 2024 calendar year could swing the Government’s fiscal deficit back towards target. While the Davis administration was on “trend” to match the prior year’s $533m of ‘red ink’ through end-November 2023, it acknowledged there was “a pick-up in VAT revenues” and a still-strong performance on international trade taxes.

“The uptick in revenues was met with a deceleration in spending that was flat year-over-year,” the February 8, 2024, note added. “There hasn’t yet been a more pronounced shift that would infer significant improvement on the fiscal deficit.

“The completion of the ambitious target this fiscal year would require better-than-expected performance with monthly balance to surplus for the remainder of the year. This is not unrealistic for the months of high seasonal tourism and potential for some additional tax revenues. The December 2022 through April 2023 fiscal performance posted only a small cumulative deficit.

“However, the challenge is always managing the spike in fiscal year-end spending in June that produces large monthly deficits of $200m-$300m.” Santander described the deficit as “stubborn”, and added that the International Monetary Fund’s (IMF) Article IV report echoed “market scepticism” over the Government’s belief it can raise revenues to 25 percent of GDP without new and increased taxes.

“The underlying trends through fiscal year 2022-2023 were not encouraging with revenues stalling at 21 percent of GDP and still high structural spending on higher debt service,” Santander said, adding that “more substantial progress on fiscal consolidation” is needed to send yields on The Bahamas’ outstanding bonds below double-digit levels.

“It’s hard to expect a normalisation on still high 10 percent Eurobond yields without a trajectory towards nominal fiscal balance necessary to lower the still high 80 percent debt-to-GDP ratios,” it added. “The next few months will be critical on whether authorities revise targets or revamp their strategy.

“The uncertainty about the medium-term fiscal consolidation should imply still-high yields until there is a conviction about the commitment and path towards debt sustainability and lower vulnerability to external shocks.”

Mr Wilson, though, yesterday said January compared well to the previous 2022-2023 fiscal year with revenues 5 percent up year-over-year and expected to continue to grow. He added: “It’s climbing back up. The revenues are performing pretty strongly in this quarter. End of the quarter we’ll have a good idea” for how the 2023-2024 full-year will turn out.

The Government ran four consecutive monthly Budget surpluses during the January to April 2023 period worth just over a collective $30m. However, when asked about the early 2024 fiscal performance, Mr Wilson said it was “slightly below expectations” from a deficit/surplus perspective.

“But that is because of some internal transfers we can adjust,” he added. “Transfers between SOEs and the Government. That’s a timing issue, accounting issue, not a cash flow issue. This is the time when we put it on the books. There’s no cash flow expectation per se. Revenues are there and expenditure is largely under control.”

Asked how likely the Government is to meet its $131.1m full-year deficit target, Mr Wilson added: “I think we can probably be very close to the deficit target, very close to the deficit target. The key for us is two things. One, the acceleration of property tax.

“The question is: Is that going to be maintained post-March and April? If it is, that clearly helps us hit the deficit target. We are seeing a lot more property tax activity. Last year was our highest year yet for property tax, and we’re tracking 20 percent more than that.”

The Government collected a total $161.5m in real property tax for the full 2022-2023 fiscal year - a sum equal to 95.3 percent of the $169.4m target. A 20 percent increase on the prior year’s $161.5m, if maintained through to end-June, would result in income worth $193.8m for the Public Treasury that is almost equivalent to the $195.32m Budget goal.

Mr Wilson said a combination of “enforcement, collection, compliance and administration is driving that” increase in real property tax revenues. This includes the recent supplements advertising delinquent commercial properties and vacant land for sale, as the Department of Inland Revenue exercises its power of sale against defaulters.

Other factors driving the improved property tax revenues will be timing, as taxpayers seek to pay this year’s bill by end-March to obtain a 10 percent discount, plus the increased billings and valuations driven by the Tyler Technologies mapping exercise as the Government seeks to eliminate some $900m in arrears. Annual property tax billings have increased to a collective $340m from $250m.

“Revenues are tracking ahead of the prior year around 5 percent, and we think that number is going to grow as property tax continues to accelerate,” Mr Wilson told Tribune Business. “Our biggest period for property tax is the next couple of months, so we will see what happens.

“Expenditure control is also key. The SOEs are key. That’s very important. If they are not properly managed it could derail the whole Budget exercise.”