"The budget is not just a collection of numbers, but an expression of our values and aspirations." - Jacob Lew

Last week, we reviewed the prime minister's communication on the national budget that he delivered on May 27, 2015. In the first of a four-part series, we addressed the foundational and conceptual framework upon which the budget was formulated. We observed that the prime minister's tone and tenor were generally upbeat as he thematically expounded his government's commitment to building a stronger Bahamas which included three core priorities: "a safer Bahamas, a more prosperous Bahamas and a modern Bahamas."

This week, we would like to Consider This... Do the budgetary revenue provisions create a sense that they will put us solidly on the correct trajectory to achieve the stated national objectives of building a stronger Bahamas?

Budget overview
The national budget, which is approved by Parliament each year, is a continuous work in progress. Although the draft estimates of revenue and expenditure (draft estimates) are presented to Parliament each year by the minister of finance, the budget is not a static document. The draft estimates provide the details of the government's anticipated revenue and expenditure that are enacted into law by revenue and expenditure bills that are scrupulously scrutinized during the budget debate before being passed by both houses of Parliament and signed by the governor general.

The government's fiscal year begins on July 1 and ends on June 30 each year. For the fiscal year 2015/2016, the government has estimated that total revenue will be $2.336 billion. That figure is divided between recurrent revenue of $2.047 billion and capital revenue of $289 million.

The capital revenue includes $286 million from borrowings and $3 million from grants. Since borrowings are not really revenue in a technical sense, capital revenue anticipated for the fiscal year is zero. It should be noted that capital revenue includes revenue that is generated from the sale of state-owned assets such as the sale of BTC to Cable & Wireless several years ago.

Total estimated expenditure is pegged at $2.340 billion, which is also divided between recurrent expenditure of $2.098 billion and capital expenditure $242 million. When we consider the recurrent revenue of $2.047 billion and recurrent expenditure of $2.098, the recurrent deficit is expected to be $51 million. Since the capital revenue, exclusive of borrowings and grants, is zero, the total capital deficit is estimated at $242 million. The total deficit is therefore pegged at $293 million; that is, the sum of the recurrent deficit of $51 million and capital deficit of $242 million.

We often hear the term GFS deficit during the budget debate. GFS, or government finance statistics, is an adjustment made to the annual deficit to take into account the debt that is expected to be redeemed during the fiscal period. Hence, given the expected debt redemption of $152 million for fiscal 2015/16, the GFS deficit is computed at $141 million; that is, the total deficit of $293 million less debt redemption of $152 million.

The GFS deficit is an important statistic because it is often presented as a percentage of gross domestic product (GDP). It is anticipated that The Bahamas' GDP for fiscal 2015/16 will be $9.22 billion; therefore the GFS deficit as a percentage of GDP will be -1.51 percent. This compares very favorably with the statistic of only a few years ago, when the GFS deficit as a percent of GDP was -5.5 percent and -6.5 percent for fiscal years 2011/12 and 2012/13, respectively.

Revenue
As indicated earlier, the total revenue for the next fiscal year is projected at $2.336 billion dollars, which is comprised of tax revenue of $1.713 billion dollars, non-tax revenue of $334 million dollars and capital revenue of $289 million.

Tax revenue
In the category of tax revenue, import and export duties will decrease by $67 million dollars from $415 million in the preceding year to $348 million for 2015/16. The vast majority of this revenue, $335 million, will come from import duties, with the balance of $17 million attributable to export duties. The decrease in import and export duties is a result of the government's commitment to generally decrease Customs duties, which will be replaced by value-added tax.

Excise and motor vehicle taxes will remain at the same level as last year at $300 million and $39 million, respectively, with a slight increase of $5 million over the preceding year in property tax to $151 million for fiscal 2015/16.

Overall, tourism tax is expected to decline by $5.5 million, reflecting an increase in air and sea departure taxes to $1.5 million and $15.3 million, respectively, and the elimination of hotel guest taxes of $22.3 million which was earned in the preceding year. The eliminated hotel guest tax will be augmented by value-added tax applied to guest room rates. Tourism taxes therefore, from air and sea departure taxes for the ensuing fiscal year, will be $50 million and $90.5 million, respectively.

The government expects to realize a windfall of $30 million from gaming taxes of $50 million in 2015/16, compared to $20 million in the preceding year. This increase primarily represents the tax revenue from the web shops that were regularized last year.

The budget forecasts a decrease of $92 million in stamp tax. The principal reductions are $15 million for realty transactions between $100,001 and $250,000 and $25 million for realty transactions over $250,000. There are also substantial reductions in stamp taxes for realty transactions under $20,000 and for transactions between $20,001 and $100,000.

The most significant increase in tax revenue will be derived from value-added tax (VAT), which was introduced on January 1, 2015.  For the ensuing year, VAT is projected to generate $544.7 million, $200 million of which is expected to be collected by the Customs Department and $344 million by the newly created Central Revenue Agency.

Non-tax revenue
In the category of non-tax revenue, $334 million is budgeted, which is an increase of $16 million over the preceding year's figure of $318 million. The primary items in the non-tax revenue include $281 million from fees and service charges including $140 million in business licence fees, $45 million in immigration fees and work and resident permit fees of $4.2 million. Other non-tax revenue of $19 million from government properties includes $11.3 million from the lease of the AUTEC base in Andros. Interest and dividends of $27 million are also characterized as non-tax revenue. The largest item in this category is $20 million in dividends from BTC.

Revenue and GDP
Over the past six years, the recurrent revenue as a percent of GDP has been in the area of 16 percent to 18 percent. Given the same ratio for recurrent expenditure at 18 percent to 20 percent, the differential has enlarged the recurrent budget deficit and has resulted in either increased taxes or borrowings. The latter has contributed to the increase in the national debt to $5.4 billion.

The introduction of VAT, enhanced revenue collection and improved tax administration measures have presented the opportunity for the government to narrow the gap between recurrent revenue and expenditure and thereby reduce the deficit and ultimately, the national debt. The temptation of any government, however, is to increase spending in the face of increased taxes. We will say more about this in the fourth and final part of this series.

Conclusion
Next week, in our third installment in this series, we will review the expenditure provisions of the budget. In our fourth and final installment, we will critically assess whether the budget realistically addresses its stated objective: building a stronger Bahamas.

o Philip C. Galanis is the managing partner of HLB Galanis and Co., Chartered Accountants, Forensic & Litigation Support Services. He served 15 years in Parliament. Please send your comments to pgalanis@gmail.com.

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