Ahead of the 2018/2019 Budget to be revealed on Wednesday, Leader of the Opposition Philip Davis, released a statement Sunday evening warning the Bahamian public of potential increases in value-added tax (VAT) and other taxes as an outcome of the budget’s demands.
The statement is printed in its entirety below:
Budget 2018/2019 represents opportunities and challenges for the Government. It represents a real opportunity to present a growth agenda which this Administration is sorely lacking. In its first year, the Administration seem more fixated on making alarmist statements on the issues of fiscal management and accountability, which damaged the reputation of the country rather than improving the lives of Bahamians.
WHAT IS THE CURRENT FISCAL STATE?
As a result, in the first year in office many of the gains made by the previous administration have evaporated. For example, there has been anemic revenue growth notwithstanding the opening of Baha Mar. Revenue for the first 9 months is trending on par with actual revenue for the last fiscal year. This is disturbing as the last fiscal year’s revenue yield was decimated by Hurricane Matthew. With the phased opening of Baha Mar and the absence of major storms impacting New Providence, revenue yields should have been at least 10% above the last fiscal year. A 5% increase in recurrent revenue would have allowed the Government to fully execute its capital budget.
On the expenditure side of the budget it should be concerning that notwithstanding the relentless pursuit of victor’s justice through widespread yet very selective terminations of contractual employees, expenditure levels have not dropped in comparison to last year. This is concerning as vendors are not being paid on a timely basis to such an extent that arrears have risen to levels which is creating unsettling chatter among the business community about the Government’s solvency.
To achieve its target deficit, the Government has reduced capital expenditure to near historic lows as a percentage of GDP. This act by the Ministry of Finance ignores the fact that a government’s operations is a continuum, so any reduction in capital expenditure is essentially a deferment of expenditure and not a true budget savings. This deferment has a visible and negative impact on maintenance of infrastructure and the commencement of new projects.
The FNM administration has also sabotaged the Government’s ability to mobilize Bahamian resources using Public Private Partnerships (P3) to offset capital expenditure by walking away from P3‘s agreed to by the previous administration for what can only be described as naked political reasons. This means that staff would have to remain in the condemned General Post Office building for an indefinite period; the Road Traffic Department’s emergency residence in the National Stadium has now become permanent; no new police facility for Harbour Island; and great uncertainty on whether the investors which are funding the construction of the new complex in Eight Mile Rock would ever be paid by this Administration.
WHAT DOES THE PUBLIC SERVICE EXPECT?
The budget is first and foremost an operating guide to the Public Service on how the Government implements its agenda. It also speaks to how the Government addresses critical needs in the society driven by demographic, societal or economic shifts. In critical areas of health, education, infrastructure (public works) and national security there is a glaring need for more resources. This need is driven by the insatiable demand of the Bahamian public for improved public services to the standards of developed countries. This is a basic and accepted fact which represents a challenge for all Governments in a modern Bahamas. This demand is also driven by geography as we are next to the largest developed country in the world.
These demands however, must be balanced against the key public policy promises of the new administration. These promises can best be described as fiscally contradictory and at worse highly irresponsible. The promises include the following:
I. Eliminate VAT on a variety of goods and services at an undetermined cost;
II. introduce economic empowerment zones in New Providence at an undetermined cost; reduce the deficit by over 50 per cent ($170 million) in the upcoming fiscal year;
III. provide free tuition at the University of The Bahamas at a cost of $30 million;
IV. Increase the use public private partnerships; and
V. through the draft Fiscal responsibility Act to keep recurrent expenditure growth to less than 3 per cent of the previous year’s level/and or ½ per cent less than the growth in nominal GDP.
WHAT CAN THE PUBLIC REALLY EXPECT?
A noted Bahamian economist, James H. Smith, describes the Government as a big aircraft carrier, in terms of its ability to change direction. That might be true for the Government as whole, but it is not true for fiscal policy. Revenue and expenditure decisions have an instant and lasting effect. So, the decisions made by the administration in its first year would be felt immediately in this budget and for the years to come, unless counteracting action is taken.
So, it is safe to assume, given the current situation, that the public can expect any or all of the following:
a) An increase in the VAT rate to offset the elimination of VAT on certain goods and services, the introduction of the economic empowerment zones in New Providence and to absorb the increase in the subvention to the University of The Bahamas.
b) An increase in selective Customs and excise tariff rates as well as real property tax rates to account for the anemic revenue growth of the past fiscal year.
c) Introduction of new and additional taxes to fund the deferred capital expenditure and assist in the ambitious deficit reduction target of the draft Fiscal Responsibility Act.
d) A capital budget which relies heavily on P3’s but with significant implementation challenges in mobilizing Bahamian investors due to the Government’s indifference to the current P3 investors.
e) No real increase in the recurrent allocation for any of the critical areas such as health, education and national security, so the manpower and skills deficit in national security, health and education would continue to widen.
f) A freeze on public service increments or a reduction of public service employment levels. Public sector salary increments automatically upwardly adjust recurrent expenditure by about 1 per cent per annum. Increments along with the increase in interest expenses and principle amortization would likely breach the 3 per cent rule.
g) Reduction in subvention to public corporations would certainly mean job losses.
h) Reliance on the sale of assets to fund current expenditure.
For a Government without a real growth agenda, this is a bleak outcome and a recession inducing budget. However, it is unavoidable and although the Budget Communication would include the usual soaring oratory flourishes, behind those words would be a grim picture and it would grow grimmer as we traverse the fiscal path outlined by this Government.