By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Record inflation generated less than $10m of the VAT revenue increase in the first six months after the rate cut, the Ministry of Finance asserted last night, with the 2021-2022 deficit slashed by 48.4 percent year-over-year.

The ministry, unveiling the Government’s full-year fiscal performance for the 12 months to end-June 2022, argued that wide-ranging price increases did not drive the majority of VAT revenue gains seen during the second half as it sought to further portray the two percentage point rate cut as a financial and economic success that has aided consumers.

Disclosing that VAT revenues for the six months to end-June 2022 were up by 26 percent, or $93.5m, year-over-year against 2021 comparatives, the Ministry of Finance said that stripping out what it described as “the highest inflation” recorded in recent years still produced a 23.4 percent increase in income from the Government’s main tax.

Tribune Business calculations showed that the latter percentage was equal to an $84.15m revenue increase year-over-year, suggesting that less than $10m could be attributed to inflation’s impact. Many observers have argued that the Government’s VAT revenues will have benefited from broad-based price increases since, as the tax is levied as a percentage, its income automatically increases as the price paid by consumers increases.

In what seems to be a riposte to those arguments, the Ministry of Finance said: “In January 2022, the Government began the launch of its expansionary fiscal policy by reducing the nominal rate of VAT from 12 percent to 10 percent, and eliminated many zero-rating categories to improve equitability in the domestic tax structure. This new policy was implemented with effect on January 1, 2022.

“Despite the reduction in the nominal VAT rate, revenue outturn from VAT receipts grew period-over-period by 30.3 percent to $591.3m for the first six months of 2022. The same total increased over the first half of 2021 by $93.5m (26 percent), and when compared to the 2020 figure of $360.2m.

“However, over the period inflationary pressures intensified to the highest recorded in The Bahamas in recent years. Accounting for the 6.2 percentage change in inflation year-over-year, VAT receipts grew 23.4 percent over the six months following the policy change. [The] 2022 growth, adjusted for inflation, represents the highest in recent years compared to the 29.1 percent decline in 2020, and 23 percent increase in 2021.”

Meanwhile, the Ministry of Finance said it had almost halved the deficit, which measures by how much government spending exceeds its revenue income, compared to the $1.336bn incurred during 2020-2021 when the COVID pandemic was at its peak.

The reduction to $689.5m worth of projected ‘red ink’, a drop of 48.4 percent, was largely driven by tourism’s revival, and that of the wider economy, as COVID restrictions were progressively lifted through 2021 and into 2021. Increased economic activity resulted in total revenues increasing by $700.7m (36.7 percent) compared to the 2020-2021 fiscal year.

“At an estimated $2.609bn, total revenue exceeded targets by $269.8m representing 111.5 percent of the budget and reflecting economic upturn,” the Ministry of Finance said. On the expenditure side of the Budget, the Government was aided by the winding down of COVID-related unemployment benefits, business support and other forms of social assistance, where the outlay was slashed by more than 50 percent as jobs and work hours were restored.

“Aggregate expenditure firmed by $54.5m (1.7 percent) to $3.298bn, accounting for 95.6 percent of total target expenditures. As economic conditions improved over the year, government continued to wind down many of its COVID-19 social support programs such as unemployment assistance programme and food distribution initiatives.

“Compared to the prior year, social assistance spending contacted by $124.7m, totaling $120.4m at end June 2022. Compensation of employees totaled $725.3m, public debt interest payments were made of $551.8m, and $491.6m in subsidies were provided.”

The deficit reduction remains modest good news, though, given that the increased borrowing to cover the deficit and ensure the Government could meet all its financial obligations meant the Government’s direct debt increased by $892.5m during the 12 months to end-June 2022. This took the total amount owed to creditors to $10.804bn.

The Ministry of Finance said the latter figure was equal to 85.2 percent of Bahamian economic output, or gross domestic product (GDP), which it said represented an improvement from 12 months earlier when the ratio was 100.9 percent - meaning the country’s debt was then bigger than its economy.

However, last night’s report shows that The Bahamas’ total national debt, which includes liabilities guaranteed by the Government on behalf of state-owned enterprises (SOEs) such as the Water & Sewerage Corporation and Bahamasair, is more than $300m higher at $11.188bn. That, according to this newspaper’s calculations, places the debt-to-GDP ratio at 88 percent.

Assessing the Government’s revenue performance for the 2021-2022 full year, the Ministry of Finance report said: “VAT receipts improved by $395.7m (53.5 percent) to $1.136bn when compared to the prior year and were 122.7 percent of the budget target.

“Collections of stamp taxes on financial and real estate transactions grew by $25.5m (44.4 percent) to $83m for 142.2 percent of the budget. Excise tax outturn were estimated at $46.5m (19.7 percent of budget), a $129.8m decline from the previous $176.3m as a result of reallocations and delays in tax remittances amidst pending tax reforms.

“Taxes on specific services (gaming taxes) increased by $13.5m (35.6 percent) totalling $51.3m, amounting to 95 percent of target collections as unemployment levels declined amidst business reopening after expiration of COVID-19 emergency orders.”

Fee income also rose. The Ministry of Finance report added: “Increases in immigration related receipts of $31.2m (32.5 percent) to $127m were 97.6 percent of budget. Chief among these receipts were $70.4m in work and residency permits, tourist health visa collections of $31.8m and $24.8m in other Immigration fees.

“Improved customs fees of $9.9m (24.6 percent) to $50.2m were 83.6 percent of budget. Receipts from miscellaneous and unidentified collections firmed by $53.1m, amounting to $90.6m in collections and 1,343 percent of the budget. Included in this amount is a $24.5m dividend from BTC in December 2021, the first in more than a decade.”