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From:TheBahamasWeekly.com Bahamas Information Services Updates  COMMONWEALTH OF THE BAHAMAS 2018/19 MID-YEAR BUDGET STATEMENT Presented to the Honourable House of Assembly By The Hon. K. Peter Turnquest Deputy Prime Minister And Minister of Finance On Wednesday, February 27 2019 Introduction Mr. Speaker, It is my honour to present the 2018/19 mid-year budget statement, as mandated by the Financial Administration and Audit Act, as well as the Fiscal Responsibility Act, 2018. This statement gives a provisional account of fiscal developments during the first half of the 2018/19 financial year; an update on the progress of the initiatives set out in the 2018/19 budget communication; and the outlook for the remainder of the fiscal year. In May of last year, this Government presented a landmark Budget that is centered on ending the past practice of artificially under budgeting and over spending, and instead applying sound fiscal management strategies to the use of the nation’s public financial resources. In fact, the past practice of unrealistic and flat out reckless budgeting had resulted in a buildup of arrears to the tune of $360 million. Settling these old bills once and for all was also a focal objective of the 2018/19 Budget. The transformative 2018/19 Budget set the tone for enhanced and more effective accountability, transparency and responsibility, as it adopted the framework for responsible fiscal management set out in the Fiscal Responsibility Act, even before it was enacted last October. This framework, with its legally binding objectives and fiscal targets, establishes a new standard for fiscal management, performance, and reporting. No longer will government be allowed to mismanage taxpayer dollars for indefinite periods without having to report to the people in writing. Instead, Bahamians, as they should, will be informed regarding the decisions made about their hard earned dollars, so that they become and remain aware of what the parliamentary custodians of their affairs are doing with their money. Finally, the People’s Budget established a sound and credible plan for addressing the needs of the current fiscal period and, as documented in the inaugural Fiscal Strategy Report that was laid before the House last November, a strategy for securing favorable outcomes in the deficit-to-GDP and debt-to-GDP ratios for the next three years. Since the Budget Communication, we have made noteworthy progress in realizing the goals set out for the full fiscal year. Specifically, the Fiscal Responsibility Act has been enacted, and the first ever Fiscal Strategy Report has been published and debated in Parliament. These efforts to improve public financial management have certainly not gone without notice. International agencies are already seeing the value in our commitment and have provided several independent and impartial assessments documenting our actions and the resulting progress. Last week, Moody’s Investor Service changed the outlook on our credit rating from negative to stable, and affirmed our overall rating at Baa3. The upward revision in the outlook was attributed to a strengthening in our fiscal policy framework; namely, the new fiscal legislation and reporting initiatives. Our fiscal consolidation efforts were highlighted as supporting our debt stabilization objective and the soon to be established Disaster Relief Fund was recognized for promoting greater economic resilience. The credit rating agency also noted that though our debt ratios remain in line with our Baa-rated peers, such as Russia, Romania, South Africa, and Italy, our relatively high wealth levels enhance our economy’s capabilities to absorb sudden shocks. The report concluded that this reality, paired with our recent measures to respond to climate-related risks will help to mitigate the underlying credit vulnerability that natural disasters pose. The House would recall that the proposed Disaster Relief Fund will be funded initially with the extinguished claims from the dormant accounts as now provided for in the law. As our Prime Minister has committed, those funds will not be used for any other purpose. Complementing the sentiments shared by Moody’s, the International Monetary Fund (IMF) similarly provided positive commentary on domestic economic developments in its Mission to The Bahamas in December of last year. In particular, the Fund noted that the new fiscal legislation will support our efforts toward fiscal sustainability and to set debt on a downward trajectory. In addition, they welcomed our transparent and lucid approach to eliminating accumulated arrears, and our plans for expenditure control as key provisions in achieving better fiscal and debt ratios. Together, these developments substantiate our commitment to fiscal prudence and a new era of public financial management. As even external observers have noted, the efforts of this Minnis led government are the precise steps—the right prescription if I may use that metaphor—that need to be taken to strengthen the fiscal and economic health and well-being of the country. We are all aware that our credit rating is a crucial indicator in helping potential investors determine the stability and prospects of our country. It can be the deciding factor for international investors that may have projects they would like to bring to The Bahamas—the investments that we know are critical to our economy for job creation, foreign currency inflows, and higher economic growth. Mr. Speaker, Our efforts and successes with fiscal reform are not only about securing good credit ratings, new investment flows and balanced budgets. Fundamentally, fiscal responsibility is about social wellness and economic strength. When countries fall into a fiscal hole they often have to cut benefits and scale back on programmes and social services. The approach we are taking allows us to maintain a social and economic environment for Bahamians to maximize their potential and fulfill their goals and aspirations. When we make judicious use of the public purse and avoid careless and ruinous actions, we can provide assurance to the people that we have the resources and the flexibility to meet both the opportunities and challenges of a 21st century global community. In this vein, the government recognizes the need to remain focused and resolute in our efforts to strengthen our fiscal position. We are not under the delusion that we have completed the task of righting the fiscal ship. Much more work needs to be done; much more reform needs to happen. As this side has demonstrated, we are up to the task. We will not be distracted. The Fiscal Responsibility Act mandates that for FY2018/19, the fiscal deficit should total $237.6 million, which represents a significant improvement of 42.7 percent or $177.3 million, as compared to the previous fiscal year. That, in turn, will result in a corresponding 45.5 percent reduction in the deficit-to-GDP ratio to 1.8 percent. Given this development, we anticipate a corresponding reduction in the debt-to-GDP ratio of approximately 1.1 percentage points to 56.7 percent at the end of June 2019. I am pleased to assert that, so far, we are well on our way to materializing our objective, to meet a fiscal deficit that is slightly lower than had been forecasted. We remain soberly cognizant of the potential risks that can arise over the three-year horizon laid out in our Fiscal Strategy Report. Nonetheless, we are confident that this Government’s continued efforts to effectively manage this and future budgets in a way that is responsible, transparent, stable, and fair, will render favorable results. Indeed, I would stress yet again that we are pursuing the aggressive three-year fiscal plan of the last Budget not for some theoretical or academic purpose, but rather as a means of promoting stronger economic growth and job creation. These are the fundamental economic objectives that truly matter to Bahamian citizens and to their daily lives. International and Domestic Economic Developments Mr. Speaker, I believe it is essential to begin our discussion of the fiscal performance in the first half of the fiscal year with an overview of international and domestic economic developments. These not only shape the course of the financial year, but also inform prospects for the near-term outlook. According to the International Monetary Fund’s (IMF) most recent World Economic Outlook (WEO), global growth is estimated to have softened by 10 basis points to 3.7 percent in 2018, as compared to the previous forecast; this is against the backdrop of weaker performance in some of the advanced economies, particularly in Europe and Asia. Specifically, factors such as new fuel emission standards in Germany, natural disasters in Japan, along with weakening financial market sentiment, trade policy uncertainty, and concerns regarding China’s outlook, weigh heavily on activity in the large economies. These factors have underpinned a further downward revision for global growth forecasts to 3.5 percent in 2019, and 3.6 percent in 2020. Despite the more challenging global environment, the economic outlook for the United States, our dominant trading partner, remains relatively more buoyant. Indeed, the U.S. economy grew by an estimated 2.9 percent in 2018, supported by increased private sector activity, sizable fiscal stimulus, and higher consumer spending—particularly in the second quarter of the year. Growth was accompanied by improvement in the unemployment rate by 50 basis points to 3.9 percent, and consumer inflation eased to 1.9 percent from 2.1 percent, owing to a reduction in energy prices. Growth in the U.S. is anticipated to slow modestly to 2.5 percent in 2019, partly reflecting the winding down of the fiscal stimulus, and the continued tightening of monetary policy by the Federal Reserve. As for the other major economies, their economic performance lagged that of the U.S. in 2018, and near-term prospects remain more modest. Real growth in the Euro area averaged 1.8 per cent last year, which is expected to soften to 1.6 per cent in 2019. Following a 1.4 percent expansion in 2018, the United Kingdom’s real growth for 2019 and 2020 is placed around 1.5 percent each year, on the assumption of a smooth resolution of, and transition to Brexit. We do watch the developments in Britain closely, as the prospects for an orderly Brexit continue to diminish amid greater political uncertainty in the U.K. If the transition proves disorderly, it is likely to have a dampening effect on economic growth across Europe and around the world. The expansion in real GDP for China slowed by 30 basis points to an annual rate of 6.6 percent for 2018, its slowest pace in nearly three decades, amid the government’s continuous struggles to contain ballooning debt and ongoing trade tensions with the US. Real growth is forecast to soften further to 6.2 per cent per year in 2019 and 2020. Similarly, growth in Japan contracted by 80 basis points to 1.6 percent in 2018, against the backdrop of several natural disasters during the summer. Real output is expected to continue its downward trajectory, with projections of 1.1 percent for 2019, and 0.5 percent in 2020. Global oil prices increased by 30.3 percent to $71.64 in 2018, with the pass through effects of this rise evident in an uptick in Bahamas Power & Light’s (BPL) fuel charge in October, and a firming in the price of both gasoline and diesel at the pump over the year. Mr. Speaker, A stronger U.S. economy was indeed the pillar on which our domestic economic growth pace maintained its momentum in 2018, with the most favorable gains posted by our tourism industry. You may recall that the Prime Minister recently noted the IMF’s growth forecasts for The Bahamas continue to stand at 2.3 percent for 2018 and 2.1 percent in 2019, as was projected in the May Budget. Quite remarkably, this will be the first time in 12 years that The Bahamas will have seen projected growth of over 2.0 percent for consecutive years. While this performance is encouraging, the government understands that the country will need to post multiple years of sustained strong growth if we are to provide sufficient employment and economic opportunities to maintain and improve the standard of living for all Bahamians. Thus, we remain strongly committed to finding innovative ways to bolster economic activity, through expanded support for Bahamian entrepreneurs, better educational and training opportunities, and greater efforts to facilitate an accelerated pace of private sector investment across the country. Preliminary data from the Ministry of Tourism showed a 7.9 percent strengthening in total visitors for 2018 to 6.6 million, rebounding from the year-earlier 2.1 percent falloff to 6.1 million. Supporting this outcome, air arrivals surged by 16.7 percent to 1.6 million, reversing 2017’s decrease of 4.0 percent, and the sea component recovered by 5.5 percent, from a 1.5 percent contraction. A breakdown by island revealed that the rebound in total arrivals was largely explained by growth in arrivals to the Family Islands. Benefitting from various cruise line-related activities in private islands located in the Family Islands, total visitor arrivals to the Family Islands improved by 14.9 percent for the review period, with sea arrivals growing by 15.7 percent and air arrivals by 10.6 percent. Similarly, total arrivals to Grand Bahama increased by 9.1 percent to 0.7 million, as the sea component grew by 9.6 percent and a 5.4 percent gain in the high-value-added air segment. In New Providence, total visitor arrivals firmed by 4.1 percent, with air arrivals advancing by 19.2 percent to 1.2 million, while the sea component fell by 1.5 percent to 2.6 million, reflecting cruise lines’ shift to making their private islands the first port of entry, as opposed to the Capital. Indications are that construction activity continued to be dominated by varied-scale foreign investment projects, although domestic private sector investment showed modest signs of recovery. Using total mortgage disbursements for new construction and repairs as a proxy, an 8.5 percent increase to $86.7 million signaled an expansion in domestic activity for the first nine months of 2018. The more forward looking indicator—total mortgage commitments for new construction and repairs—fell by 8.6 percent to $94.7 million, suggesting relatively mild domestic construction activity in the near-term. The economy benefitted from the completion of a number of Foreign Direct Investment (FDI) projects last year, including the opening of the final phase of the Baha Mar Resort—the Rosewood Hotel—and the official opening of the entertainment complex at The Pointe. In addition, other FDI projects that have already received approval and are in their infancy stages, include the $194 million Sterling Hurricane Hole Community Resort and Marina, the $5.2 million Pinder’s Bay Ltd project that is to feature 28 residential beach front bungalows and a club house, and the $580 million South Abaco investment, for the development of a 5-star Residential Resort and Marina. Approximately nine companies have been approved under the Commercial Enterprises Act, some of which would have contributed to FDI, as well. With more projects in the pipeline, we can expect to realize further gains in the rate of economic growth and employment opportunities in the short to medium term. Preliminary results from the Department of Statistics’ latest Labour Force Survey reveal that the jobless rate for The Bahamas featured a 70-basis point uptick to 10.7 percent for the six months to November 2018. While the number of employed persons rose by 2,305—the bulk of which were absorbed by the private sector—the total labour force grew by 4,250, due in part to a 6.7 percent decline in the number of discouraged workers to 2,030, and the seasonal intake of school leavers into the labour force. Encouraging was the gain in the number of self-employed persons by 11.9 percent over the six months to November, totaling 32,475 persons. While these results show that our initiatives to create jobs through support of small businesses and entrepreneurship are beginning to produce concrete economic and employment benefits, it is clear that our efforts will have to be enhanced to meet the demand of the market. A breakdown by island showed a 1 percentage point rise in the jobless rate in New Providence, while trends for Abaco and Grand Bahama contrasted with declines of 3 percentage points and 0.5 percentage point to 7.7 percent and 11.9 percent, respectively. It is also notable that the unemployment rate among youths moved lower to 23.1 percent from 24.1 percent in May. Price developments is yet another important economic indicator that we monitor, because of the direct impact on the ability of our people to purchase goods and services. The rate of increase in consumer prices rose to 3.8 percent for the 12 months to September 2018, from 1.0 percent in the previous year, reflecting the one-time pass-through effects of the increase in Value-Added Tax. Mr. Speaker, Rolling on the cusp of the seemingly strong performance in 2018, the prospects for a resilient 2019 and 2020 are contingent upon the execution of our plans to bolster productivity and investment. In the near-term, it is anticipated that tourism sector output will provide an impetus to growth, benefitting from the seasonal increase in airlift and the completion of varied-scale foreign direct investment projects. Employment prospects are also poised to improve, driven by private sector investment initiatives, while inflationary pressures are expected to remain contained amid lowering global oil prices. Fiscal Performance in the First Half of FY2018/19 Mr. Speaker, I now turn to a review of the Government’s fiscal performance in the first half of the 2018/19 fiscal year. Our 2018/19 Budget was indeed a watershed budget, as it was guided by the stringent fiscal requirements of the then-pending Fiscal Responsibility Act. The subsequent Fiscal Strategy Report of November then set the stage for the medium-term framework that will underpin the development of the 2019/20 Budget. In that framework, we projected that to completely eliminate the deficit from its level of 5.5 percent of GDP in 2016/17 and the debt to GDP ratio eventually from 57 percent to no more than 50 percent, we would have a fiscal deficit to GDP ratio of 1.8 percent this fiscal year, a deficit of 0.8 percent in the subsequent year, and a surplus of 0.1 percent in the following year; and corresponding debt to GDP ratios of 56.7 percent, 55.3 percent and 53.8 percent, respectively. What is more, our framework forecasts a fiscal surplus of $9.4 million in FY2020/21, and $15.1 million in the subsequent fiscal year. Mr. Speaker, In the first six months of the current fiscal year, the fiscal deficit contracted by 31.0 percent or $78.7 million to $175.3 million, in comparison to the same period in the previous fiscal year. I repeat: We saw a near $80 million reduction year on year in the deficit at the midpoint of the year. The outturn for revenue showed a $129.5 million or 14.7 percent increase in total receipts to $1,010.3 million, representing 38.1 percent of the budgeted amount. We know that historically, revenue collections are typically higher in the second half of the fiscal year, when several annual payments, such as Real Property Tax, Business Licences and Bank and Trust Company Licences are collected. Nevertheless, with the timing of VAT payments at the old vs. the new rate during the year, as well as the concession granted to hotels in respect of previously booked reservations, we now expect total VAT collections in 2018/19 to be somewhat under the Budget forecast. Another important development that will impact the revenue outcome is the new agreement between the Government and the Bahamas Gaming House Operators Association. At the time of the 2018/19 Budget Communication, a sliding scale gaming tax was announced; effective July 1, 2018, a six-tier scale of tax rates was to apply, ranging from 20 per cent to 50 per cent, depending on the magnitude of each house’s revenue. The then proposed reform also included a 5 percent stamp tax on deposits and any non-online games or digital sales. After extended discussions, the Government and the Gaming House Operators have agreed to a new scale, which, effective January 1, 2019, will tax gaming houses with net taxable revenue from $0 to $24 million at a rate of 15 percent, and those with net taxable revenue over $24 million at a rate of 17.5 percent. In the new agreement, instead of a stamp tax on deposits, a 5 percent tax on winnings between $0 and $1,000 will be applied, and on winnings over $1,000, a rate of 7.5 percent will be applied. As well, all back taxes will be collected before the end of this fiscal year at the previous 11 percent rate. With this new agreement, projected revenues to be collected from the gaming houses will be somewhat below the amounts that had been included in the 2018/18 Budget, in the sum of approximately $18 million. In the Budget we had also projected some $80 million in incremental revenue to be secured by the Revenue Enhancement Unit. As that Unit will now be fully established in the second half of the fiscal year—later than anticipated—we are projecting a dip in the incremental revenue this fiscal year. All told, we now estimate that revenues will fall short of the Budget projection by some 7 percent, but still come in some $400 million higher than the last fiscal year. Expenditure outcomes for the first half of FY2018/19 showed a $50.9 million or 4.5 percent increase in spending to $1,185.6 million, with recurrent outlays higher by $94.9 million or 9.5 percent to $1,098.6 million. Yet, total expenditure and recurrent expenditure were both below the budgeted halfway mark, at 41.0 percent and 42.4 percent, respectively. Under recurrent expenditure, compensation of employees—which covers spending on wages and related personnel costs—was reduced by $27.5 million or 7.4 percent to $345.8 million, and was only 43.6% of the budgeted amount. Primary expenditure grew by $31.7 million or 3.2 percent to $1,024.7 million. In contrast, capital expenditure fell by $44 million or 33.6 percent over the six-month period, to $86.9 million. Arrear payments contributed to the overall increase in expenditure. As I mentioned before, this administration made the identification, the documentation, and the settlement of the mountain of arrears left by the previous administration one of its chief objectives. And we are doing exactly that. We committed to paying $172 million in this fiscal year and have already paid $65.1 million, or 37.8 percent of the total budgeted amount. Out of the $65.1 million spent, the bulk went toward clearing up arrears with CTF Holdings Ltd (Baha Mar) ($11.0 million), PHA Medical Suppliers ($8.2 million), Consolidated Water ($6.0 million), Carnival Cruise Line ($6.0 million), various Garbage Collection Vendors ($5.4 million), and the University of the West Indies ($5.4 million). Based on expenditure trends in the first half of the fiscal year, it is now estimated that both Recurrent and Capital expenditure will come in somewhat lower than had been projected at the time of 2018/19 Budget. That, in large measure, of course reflects the Government’s dedicated commitment to stringent expenditure restraint. Accordingly, Recurrent Expenditure is now projected at a level some 5 percent below the Budget forecast. Capital expenditure was particularly subdued in the first half of the fiscal year but, with our commitment to significantly invest in new and modern public infrastructure, we expect the pace of spending in this area to pick up appreciably in the second half of the year. The estimated outturn for capital expenditure is nonetheless now expected to come in below the amount budgeted for the entire year. With the fiscal outturn in the first half and projected developments in the second half, we now foresee a fiscal deficit in 2018/19 slightly under the Budget forecast, by some $5-10 million. Thus, we project presently a budget deficit of somewhere near $230 million, which means we remain firmly on target. During the Annual Budget Exercise in May, I shall update the projected outturns, based on the results of three full quarters of the fiscal year....
Full Final 2018/2019 Mid-Year Budget Statement attached
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