Budget Communication

Mr. Speaker,

Those words are not spoken lightly nor flippantly, for it is indeed a deep honour for our Government to have been entrusted by the Bahamian people with the responsibility to manage the affairs of state of our beloved Bahamaland.

It is a responsibility that we sincerely heed.  Our personal commitment to the betterment of the lives of our citizens is unwavering.  And that commitment has motivated the policy choices we carefully weighed for the new budget. It underpins the decisions we make to advance the proactive socio-economic transformation agenda that we presented to the electorate only two years ago. 

From day one, we committed ourselves to catapult our economy out of the lethargic state in which we found it. Now that we are two years in, we can report to the Bahamian people that we have improved our fiscal outlook; we have exercised fiscal restraint that has led to economic growth; and we have restored confidence in the ability of the Government to pursue responsible fiscal management. We have fundamentally introduced high standards of transparency and accountability in the management of taxpayers’ money, demonstrating how a Government performs in the best interest of the nation and not for political expediency.  This is the first budget that will be fully enacted under the legal framework of the Fiscal Responsibility Act, 2018. 

Mr. Speaker,

In a nutshell, we have:

• through the Fiscal Responsibility Act, provided a legally binding framework for responsible fiscal management with specific annual targets for the deficit, as well as effective public and parliamentary scrutiny of our fiscal performance;
• introduced the practice of proper budgeting for known commitments, to avoid the buildup of unpaid arrears;
• provided for the clearing up of the mountain of old bills and unbudgeted commitments left behind by the previous administration, totaling some $360 million; and,
• established a sound multi-year fiscal plan to address known fiscal pressures, finance our growth agenda in a fiscally responsible way and to meet the mandated and crucial deficit and debt targets.

It is two years in, and against some extraordinary odds we have delivered stable and steady governance instead of irresponsible and unplanned fiscal management. We secured positive economic growth at 1.6 percent last year, following the persistent economic stagnation that had characterized The Bahamas during the term of the former administration.  We delivered a framework for good governance—not with superficial platitudes, but with the power of legally binding mandates. 

We made this progress while operating under tight fiscal constraints, and yet, we still increased direct social assistance last year by over $600,000, and maintained focus on human development as a key priority during the last two years of tightening our purse strings. This included millions invested in new initiatives for education, entrepreneurship, economic empowerment and the development of neglected communities. 

Mr. Speaker, our critics often like to ridicule our focus on fiscal reform, on fixing the fiscal deficit. We find this very odd, because a part of our core responsibility as leaders of state is to be responsible managers of taxpayers’ money. It is the hard-earned dollars of the people that we collect, and it is those very same dollars that our citizens expect the Government to spend judiciously on programmes, services and infrastructure to serve their critical needs. 

May I remind our citizens that politically motivated and irresponsible boosts in Government spending are not sustainable solutions to securing stable economic growth. Excessive fiscal deficits and unsustainable borrowing compromise our standard of living and undermine the Government’s ability to perform its basic functions and compete in the global economy.  These quick fixes are inevitably doomed to failure; they erode confidence, worsen the fiscal position of the nation and compromise the future prosperity of our youth. That is not a gamble we are prepared to make.  

The poor governance practiced prior to 2017 exposed a complete lack of a strategic plan for the way in which public funds should or would be used.  This resulted in improper budgeting, unrecorded expenses, reckless spending and the inability of the country to achieve sustained economic growth and fiscal stability. Year after year, our country was faced with a rising level of public debt and a number of credit downgrades, thereby reinforcing the negative impacts on borrowing and economic growth. We were trapped in a vicious, self-reinforcing cycle of rising deficits and debt and depressed economic conditions. 

In giving us a mandate to govern, the Bahamian people were clear in their choice of a government that is committed to safeguarding the fiscal health of our nation and this is not something to be treated carelessly, nor to be taken for granted or to disregard when inconvenient. No government should have the luxury to choose to abandon its obligations and responsibilities for the social and economic welfare and development of its people OR to abandon its obligations to care for the fiscal health of the nation. There is no either or. We have to do both, and more. We must never lose sight of this fact. 

For the first time in a long time, we have a Government that can actually handle the full weight of this responsibility and we are steadfast in our resolve. We have a properly structured economic and fiscal policy agenda and we will be unwavering in executing our mandate. 

Mr. Speaker,

Having said this, I am pleased to assert, at the very outset of this Budget Communication, that our Government is indeed staying true to our overarching economic and fiscal policy agenda outlined in the November 2018 Fiscal Strategy Report.  To that end, I can also assert that we are continuing to adhere to the principles established in the three-year fiscal reform plan that we set out in last year’s Budget Communication, contrary to the misconceptions and fear-mongering that was laid out by the leader of the Opposition last week.

In line with that policy, I am also pleased to announce that in the 2019/20 Budget:

• there are NO new tax categories, and  
• there is NO increase in Value Added Tax.

Our central approach to revenue is about making the Government more efficient and productive in the administration and collection of existing taxes and increasing compliance by making the tax system more transparent and fair. 

Accordingly, what you will see in the new budget, Mr. Speaker, is an approach to expenditure that is about being purposeful, strategic, and intentional about planning for what is necessary and needed. This includes activities to:

• eliminate spending on unnecessary line items; 
• increase Government efficiency and productivity; and
• focus spending in a more targeted and strategic way.

Mr. Speaker,

You would be interested to know what we found after doing a ministry-by-ministry, line-item-by-line-item analysis of actual government expenditure compared to budgeted sums. We found a historical pattern of over-budgeting. 

In the category of personal emoluments, for example, we found that the budget included allocations for salaries that were no longer being paid. How is this possible? You have situations where the employment register is outdated and does not reflect some of the employees who retire, leave the Public Service and move into pensioner status. Although these individuals are not being paid, their salaries are still being budgeted for. It is noteworthy to mention that personal emoluments constitute roughly 30 percent of the country’s total expenditure! Therefore, over-budgeting in just this area alone can reduce available spending in other key areas of the economy.  

As a result, you will see a reduction in the budgeted amount for salaries, along with line items in every single Ministry. This budget cut does not mean a cut in the actual headcount, or in actual programmes. It simply means we are budgeting properly to account for the actual commitments of the Government. 

Time after time, in area after area, we have found cases where agencies did not spend all of their allocations. In fact, when the assessments were conducted, on average, most agencies spent roughly 60 to 70 percent of their budgets.  As a result of our in-depth review, we identified opportunities to surgically trim the budget, decrease fiscal inefficiencies and reverse the historical pattern of improper planning resulting in over budgeting with little outcomes. This, Mr. Speaker, is responsible, effective fiscal management. 

In the past, the budget exercise often involved agencies looking at their previous budget and adding on a few dollars for their new proposals. This legacy approach turned into a very shallow and superficial process of budgeting. We have turned that practice on its head and approached the budget process in a surgical manner. Our work is far from over as we work to continue to improve our budgeting process, but you will see the results of our efforts, so far, reflected in various line item reductions in the new budget.

It is important to remember that when we allocate money in the budget and Parliament approves that spending, we are not talking about an abstract exercise. Those numbers represent obligations we are imposing on hard-earned taxpayers’ money. Taxpayers have sent us here to spend their money wisely and not waste it. We have to break out of the thinking that we need to spend more money to do more. To the contrary, we have an opportunity to spend the money we have more wisely and even deliver more benefits with increased efficiency and productivity. 

Mr. Speaker,

I will now move on to summarize our approach to economic development in the new budget. The Minnis led government has a clear economic vision of a modern country where Bahamians are empowered and independent: free from dependency on political patronage and free from the limiting constraints of an inefficient government bureaucracy. 

We have a focused approach to bring this vision to life. At the foundation is our commitment to: 

• expand support for Bahamian entrepreneurs and small businesses;
• increase the Ease of Doing Business; 
• build 21st century infrastructure as a new foundation for growth; 
• invest in education to break the cycle of poverty;
• invest in renewable energy to create a sustainable future; and 
• lead the digital transformation to a modern government.

All in all, we are talking about citizen empowerment: making the Government work for Bahamians, instead of making the citizens feel like they work for the Government.  

Mr. Speaker,

In my presentation, I will provide more details about this summary, and more information will be presented about the new Budget during the Budget Debate.  

However, I now turn to a brief review of what the Government has achieved during the current fiscal year in respect of the implementation of its transformational policy agenda.    

Mr. Speaker,

One of our most impactful programmes this year was the investment made by the Government in entrepreneurs and young people through the Small Business Development Centre (SBDC). 

Earlier I mentioned that central to our economic philosophy is breaking the cycle of dependence on Government, which requires us to empower our citizens and facilitate growth and expansion, particularly in the small business sector. Collectively, small businesses account for a large share of private sector employment. Their success is key to driving an expansion in the job market and economic growth: equitable, inclusive and sustainable growth. The importance of this sector to the general health of the Bahamian economy cannot be overemphasized. When they do well, our economy does well, which is why I am pleased to announce that approximately13 businesses have been approved for funding that collectively total just under $1 million in grants, equity and loans. 

To date, more than 3,500 small businesses are registered with the SBDC.  Approximately 73 percent of this total are startup businesses, while just over 25 percent of the businesses registered are existing companies.  

The bulk of registrants are in New Providence, at 46 percent of the total; followed by Grand Bahama, where 21 percent of registered businesses are located. The SBDC has approved $87,500 in grants, $205,000 in equity, and $652,500 in government guaranteed loans.  Since its official launch in September of last year, the SBDC has administered roughly $200,000 worth of training and advisement to aspiring businesses that sign up with the development center; this includes training, advising and research and site visits. 

Mr. Speaker, 

I want to congratulate and read into the record the names of the first crop of entrepreneurs who accessed capital through the SBDC. They were courageous enough, passionate enough, and dedicated enough to invest in their dreams and take advantage of this opportunity and persevere. 

• Kelsey Bridgewater, Island Breeze, Founder   
• Petula Clammons-Henfield, Better Days Pizzeria, Founder    
• Don Brown, WonderTech, Founder    
• Keniqua Burrows, Exuma Christian Academy, Founder       
• Shaquille & Anthonique Coleby, Pulpy, Founders      
• Donaita Outten, Fineena Artis, Founder, 
• Jennis Thompson, A Stitch in Time, Founder 
• Vanessa Miller/Kevin Knowles, Jujukanoo, Founders 
• Albertha Rolle, Greene Corporate Services, Founder 
• Brian Williams, Remarkable Carz Rental Service, Founder
• Juan Bethel, Vue AV, Founder 
• Elvis Percentie and Melissa Darville, Shiver, Founders 
• Benjamin Davis, Drive Greene, Founder 

These are the first, but many more will follow. 

It is important to note that these entrepreneurs went through the SBDC’s rigorous process to access capital and no politician had any say whatsoever in the outcome. The system was designed to be independent and merit-based to remove any need or opportunity for these entrepreneurs to knock on a politician’s door. Their only qualification is that they were Bahamian, and that is how it will continue to be. 

As long as the Minnis Administration is in place, no Bahamian should feel as though they have to come to a politician to get a fair shake in their own country. The systems we put in place should work for the Bahamian people, and the SBDC is a clear example of this principle operating in practice.  We do not care if a person is PLP, DNA, FNM or has no party affiliation. We care about citizen empowerment, particularly as it relates to supporting entrepreneurs and facilitating an expansion of jobs and economic growth. 

To date, the Bahamas Development Bank, the Bahamas Entrepreneurial Venture Fund, and two commercial banks have joined in as funding partners in this initiative. While I am pleased about that, I expect to see all commercial banks committing to do much more to provide tangible support for microfinance and small businesses in The Bahamas—either through the government’s loan guarantee initiative—or through their own programmes. They must realize, as I do, that to build their marketplace of large commercial clients, they have to plant the seeds that will allow today’s entrepreneur and small business to become the strong vibrant multi-million dollar business client that they all seek.

I put the banks on notice that I will be meeting with them collectively to discuss this issue and to consider the options for requiring them at a minimum to publish and publicize their ongoing performance and portfolio makeup in respect to microfinance in the country and loans and facilities extended to Bahamian small businesses.   

Going into the new budget year, the Government is expanding its allocation to the small business sector from $5 million to $8.5 million, inclusive of capital and recurrent outlays. These funds will be used to both fund operations and grants, as well as to underwrite loan guarantees, and provide for equity financing. This $8.5 million will be leveraged to provide as much as $12 million in financing for Bahamian MSMEs during the upcoming fiscal year. 

Further, the Government is considering a $25 million Credit Enhancement Program with the IDB to continue to expand financing of MSMEs. The project is intended to boost economic activity by providing financing for small businesses as well as improving their business skills.  These objectives are largely in line with the functions of the SBDC and, as such, the SBDC will stand as the executing agency for the project, if approved.

The project would include two major components.  The first component would include a Credit Enhancement Facility (CEF) which will be administered by the SBDC to facilitate the financing of MSMEs. The second component would include the support and strengthening of the SBDC’s program for advisory and technical assistance, and the SBDC itself.       

Mr. Speaker,

It goes without saying that the health of the global economy, and that of the U.S. in particular, are vital to the buoyancy of future prospects for our domestic economy.  As a small and very open economy, the external environment is determinative in respect of both the strength of Bahamian exports, and of tourism activity specifically, as well as inflows of foreign direct investment that underpin the expansion of the productive capacity of our economy.

Accordingly, I now turn to a brief discussion of recent developments in, and prospects for, the world and U.S. economies.  This will set a proper context for the subsequent review of recent domestic economic developments and prospects for the near term and beyond.

The stark reality is that the external economic environment has deteriorated appreciably since the last Budget Communication.  Moreover, uncertainty in respect of future developments has also increased.  These realities presented particularly daunting challenges for the Government as we set about developing the economic and fiscal policy framework for the 2019/20 Budget.

At the time of the last Budget, prospects for the world economy were relatively bullish and the forecast for the growth of the world economy was the most buoyant that it had been since the start of the decade.  Indeed, in the IMF World Economic Outlook of twelve months ago, world growth was pegged at just under 4 percent in both 2018 and 2019.  These developments reflected expansionary fiscal policies in the U.S., supportive global financial conditions and an ongoing upswing in global investment and trade.

Unfortunately, developments over the past year have now cast a definite cloud on the forecast for world economic growth. Indeed, tighter financial conditions, a softening in business confidence, increased policy uncertainty and the ongoing trade war between the world’s two largest economies, have supported a significant slowdown in the pace of the global recovery in the second half of 2018, with prospects for the near term signaling a further weakening in the first half of 2019.  However, global growth is expected to rebound in the latter half of this year and into 2020, due mostly to improved momentum in emerging markets and developing economies, as some economies currently experiencing macroeconomic distress are poised to recover.  Still, the gradual slowdown in advanced economies is anticipated to counteract this development, supporting a plateau in global growth for the medium term.  

According to the IMF’s latest World Economic Outlook of April 2019, the growth of world output narrowed by 20 basis points in 2018 to 3.6 percent, registering 30 basis points lower than its projected outcome. Underpinning this development, real GDP growth in advanced economies tapered by 20 basis points to 2.2 percent, as a weakening in external demand triggered a sizeable decrease in output growth in Japan.  Similarly, real growth in the euro area contracted by 60 basis points to 1.8 percent, while output in the United Kingdom declined by 40 basis points to 1.4 percent—marking the lowest pace of growth in six years.

In contrast, real growth in the United States firmed by 70 basis points to 2.9 percent over the year, supported by positive contributions from Personal Consumption Expenditure (PCE), exports, nonresidential fixed investment, and higher federal government spending.  Output in emerging markets and developing economies fell by 30 basis points to 4.5 percent, as growth in China weakened by 20 basis points to 6.6 percent in 2018—the slowest its economy has expanded in 28 years—amid trade tensions with the U.S.    

When compared to the global outlook presented in the 2018/19 Budget Communication, global growth for 2019 has been revised downward by 60 basis points to 3.3 percent, with projections for 2020 now 30 basis points lower at 3.6 percent.  Following a strong performance in 2017 and the first half of 2018, a myriad of factors, including a decline in investment in Italy, slowing car production in Germany and natural disasters in Japan, all underscored the weakening sentiment for growth forecasts. The pace of economic growth in advanced economies is also now projected to slow by 30 basis points to 1.8 percent in 2019, and by 50 basis points to 1.7 percent in 2020; while emerging economies are now anticipated to strengthen by 4.4 percent and 4.8 percent in 2019 and 2020, respectively, as compared to 4.9 percent and 5.1 percent one year ago.  

In the United States, the growth of real output is projected at 2.3 percent for 2019, but expected to taper to 1.9 percent in the following year, partly reflecting a waning in the impact of the sizeable fiscal stimulus into 2020, the effects of the Government shutdown, and lower fiscal spending.  Similarly, economic growth in the euro area is anticipated to come in at 1.3 percent in 2019 before edging up marginally to 1.5 percent in 2020, as some of the weakening factors in Germany, Italy, and France begin to dissipate.  As for the U.K., output is projected to grow by 1.2 percent in 2019 and 1.4 percent in the subsequent year, as the prolonged uncertainty surrounding Brexit continues to exert a drag on economic potential.  In Japan, real GDP growth is forecasted at 1.0 percent in 2019, before decreasing to 0.5 percent in 2020, while growth in China is projected to slow to 6.3 percent in 2019 and 2020, reflecting weaker underlying growth in 2018 and lingering trade tensions with the U.S. 

Over the medium term, growth trends are estimated to remain benign, with world output rising marginally to 3.7 percent.  Economic activity in emerging and developing markets is forecasted to grow by 4.9 percent, backed by strong investment growth, which is anticipated to trigger higher capital spending and broader policy actions geared toward easing uncertainty.  However, growth in advanced economies is expected to decline slightly to 1.6 percent over the medium term, due to continued weak productivity growth and lethargic labor force expansion.

All told, a myriad of political and economic factors have underpinned a slowdown in global expansion, particularly in the advanced economies.  Prospects for the near term point to some strengthening between 2019 and 2020; however, there is likely to be some stabilizing over the medium horizon, notwithstanding any adverse occurrences.  While these developments present some opportunities for growth in The Bahamas, the slowing pace of the U.S. economy—our largest trading partner—offers definite challenges, particularly as it relates to tourism performance.

Thus, it is imperative that we create and incubate avenues for stronger economic activity by encouraging higher productivity within the domestic economy, so as to ensure it can withstand periods of lethargic global growth.  This will be especially important to meeting the objectives of fiscal reform, and essential to securing a more buoyant economy and enhanced job creation.

In light of the magnitude of the primary fiscal imbalance that we faced upon coming to office, we have, as I mentioned earlier, adopted a judicious and balanced approach to fiscal consolidation that comprises actions to both restrain expenditure and enhance revenues.    

Mr. Speaker,

As for recent developments in the domestic economy, preliminary National Accounts data released this month by the Department of Statistics reveal that real GDP growth improved significantly to 1.6 percent in 2018, from the revised 0.1 percent real growth recorded in 2017.  This outcome was supported primarily by more buoyant economic activity in several sectors, including real estate, wholesale and retail trade, accommodation and food services and financial and insurance services.

More buoyant activity in the tourism sector was also a major contributor to stronger real growth last year and into this year.  The number of total visitor arrivals grew by 7.9 percent to 6.6 million in 2018, a reversal from the 2.1 percent decline in 2017, and the strongest growth since 2010. Corresponding with increased demand following an expansion in room capacity in New Providence and a surge in the Family Islands, the high value-added air component increased by 16.7 percent to 1.6 million, vis-a-vis a 4.0 percent decline in 2017—representing the largest expansion in over a decade.  In addition, the larger volume sea segment grew by 5.5 percent to 5.1 million, a turnaround from the prior year’s 1.5 percent contraction. 

 Activity in the construction sector in 2018 was underpinned by several foreign investment-related projects, as well as an improvement in domestic construction activity.

In line with the rebound in economic activity, labour market conditions continued to improve in 2018.  More specifically, the number of employed persons increased by 3.4 percent over the twelve months to November 2018.  However, the growth of the labour force remained relatively buoyant, given the entrance of new job seekers and the return of previously discouraged workers.  As a result, the national unemployment rate rose by 0.6 percent to 10.7 percent in November of last year.

Domestic prices rose modestly throughout 2018, largely reflecting the one-time effects of the increase in the VAT rate and higher global oil prices.  According to the All Bahamas Retail Price Index, inflation rose by 75 basis points to 2.3 percent over the year, as broad-based gains were recorded for almost all the major categories of the Index.  However, the average costs for communication, clothing & footwear and education contrasted by registering declines during the year.  Nevertheless, the increase in the overall price level did not appear to have an adverse impact on domestic consumption, as this component of GDP grew over the year, especially for households.

Data from the Central Bank reveal that domestic energy prices rose in 2018, in line with the rise in international oil prices.  Specifically, the average cost of both gasoline and diesel rose by 11.1 percent and 15.6 percent, to $4.74 and $4.45 per gallon, respectively.

Mr. Speaker,

Tourism performance held its robust momentum into 2019, with total arrivals to the Bahamas strengthening by 19.3 percent in January to 0.6 million, outpacing the 4.8 percent growth registered in the same period one year ago.  The high value-added air segment rose by 28.8 percent to 0.1 million, quadrupling the year earlier 7.0 percent gain, while sea arrivals firmed by 17.1 percent to 0.5 million, registering a near four-fold increase over the 4.3 percent hike last year.

Recently approved Foreign Direct Investment (FDI) projects continue to boost employment levels and foreign currency inflows.  In fact, as of this month, approximately $8 billion has been approved in FDI projects across our archipelago of islands since May 2017.

Among these projects is the $1.5 million expansion to Rainbow Inn Boutique Resort in Eleuthera.  The project, which is anticipated to be completed in three to five years, will create approximately 25 jobs in the construction phases and six operational jobs upon completion.  The expansion includes the addition of 20 luxury suites and the complete rebranding of the resort as “Sunset Cove”. In addition, HAL Properties Ltd. was approved for an $80 million cruise pier to be constructed on Half Moon Cay, as well as land side facilities.   

There is also the $100 million Carnival Cruise Port for East Grand Bahama which is expected to create 1,000 jobs for locals, as it helps to restore the nation’s second largest city.  The Shore Project that is to accompany the construction of the new port will include a 20-bed hotel, an 18-hole miniature golf course, restaurants, nightclubs, shops, among many other amenities.  This project is anticipated to run over 24 months.

Mr. Speaker,

According to the Central Bank of The Bahamas, monetary conditions in 2018 were dominated by a decline in banking sector liquidity, as the growth of domestic credit contrasted with a reduction in the deposit base.  As well, banks’ credit quality indicators continued to improve, supported by the modest growth of the economy, combined with ongoing debt restructuring activities and loan write-offs.

External reserves declined by 15.6 percent to a level of $1,196 million in 2018, amid an increase in private sector foreign currency demand in the latter half of the year and sustained outflows for public sector-related transactions.  Reserves at year-end still represented some 17.5 weeks of total merchandise imports, well above the international benchmark of 12 weeks. 

In the first quarter of 2019, both bank liquidity and external reserves expanded, attributed to the buoyant seasonal foreign currency inflows from tourism activities.  At end-March 2019, external reserves stood at $1,392 million, a gain of $194.9 million over the three-month period, and exceeding the $189.1 million growth experienced in the same period of the previous year.

Credit quality indicators improved throughout the quarter, as total private sector loan arrears contracted by $67.4 million and the corresponding arrears ratio declined by 1.1 percentage points to 13.2 percent.  

During the quarter, banks also increased their total provisions for bad debts by 0.5 percent to $440.6 million. As a result, the ratio of total provisions for both arrears and nonperforming loans firmed to 59.3 percent and 86.4 percent, respectively.

Government Digital Transformation to Strengthen Competitiveness

The Government has been in discussions with the IDB on a project that we refer to as the "Digital Bahamas Initiative".

The main objective of this project is to foster the country’s competitiveness by reducing the costs of conducting business with the Government. This general objective will be accomplished by achieving the following specific objectives: (i) streamlining government procedures and making them available online to reduce the cost of government bureaucracy; (ii) increasing the use of ICTs in the public sector; and (iii) increasing transparency of Government activities and strengthening auditing and control mechanisms.  The three principal components of the project will focus on:

• Simplifying and digitizing government procedures;
• Strengthening institutional capacity for a digital government; and
• Enhancing transparency and integrity in government.

As for results, the project is expected to lead to:

• a reduction in the time and cost of Government procedures;
• an increase in the data shared and used across Government offices for policy design and Government management; 
• an improvement in the quality and quantity of Government information published, and its use by citizens; and 
• the establishment of a single national identity number and identity card – presumptively using the current NIB ID number – that will allow for ease in transacting business in the public and private spheres of the country. 

We expect to finalize the details of this new project early in the new fiscal year.   The net result of this will be a reduction in processes and paperwork and the means to conduct government business more efficiently.  Simply put, as the private sector and the rest of the world is doing, we will make use of technology to deliver public services cheaper, faster and better.

The government will also provide support to the Central Bank's current move toward a digital form of Bahamian currency, as well as support to the efforts of the Central Bank and the commercial banking sector to move toward a cashless society.  Our ambition is no less than to make the Bahamas a regional leader and then a world leader in the utilization of digital technology for the benefits of its citizens.  In so doing, we shall catapult the Bahamas ahead of many of its contemporaries and create opportunities and efficiencies for all Bahamians. 

Transformation of the State Owned Enterprises

In addition, the Government is striving to transform its State Owned Enterprises (or SOEs) into self-sufficient entities. As was laid out in the Budget Communication last year, funding in the amount of $429 million was provided for 25 SOEs in the 2017/18 fiscal year, representing an increase of $79 million from the previous fiscal year.  In light of the critical priority being attached to fiscal consolidation, such a drain on the public finances must clearly be rationalized.

To that end, the Government has directed each SOE to begin looking at a move toward a cost-recovery operating model, which might include a mix of revenue enhancement initiatives, as well as measures to reduce expenditures in-line with industry benchmarks.  The SOEs are now formulating articulated strategies that we expect will take them to this optimized point within 3 to 5 years.

As a supplement to this exercise and to provide guidance, the Government is currently pursuing the engagement of a consulting firm to provide an analysis of selected SOEs and Authorities and to create a roadmap with respect to best options for those SOEs and Authorities becoming self-sustaining entities.  

Specifically, the work will entail the creation of a detailed strategic approach to cost rationalization and cost recovery for select SOEs consistent with global best practices for similar agencies in similar jurisdictions.  As well, the contract will call for the development of the modalities to permit suitable Government in-house professionals to be able to undertake similar strategic reviews of the remaining SOEs and the requisite training and support of the identified professionals.

Enhanced Accountability and Transparencyat the Ministry of Finance

We are, as well, pursuing measures to strengthen the accountability and transparency of the Ministry of Finance, including the recent creation of two new senior positions within the Ministry in the form of a Deputy Financial Secretary with responsibility for strengthening the operational capacity of the Ministry and a Deputy Financial Secretary in charge of economic and fiscal policy matters.  The latter position is under recruitment and expected to be filled shortly.  The Ministry will also undertake an internal restructuring and will recruit additional Bahamian professionals so as to ensure that the agency is equipped to provide its optimal level of fiscal, economic and budgetary management and support. 

The Ministry of Finance is also pursuing the implementation and successful completion of the $33 million IDB-financed Public Financial Management and Performance Monitoring Reform project that had been floundering up until last year and producing meager tangible results.

The objective of this exercise is to enhance the capacity of the Ministry to produce high quality information for evidence-based policymaking, as well as improve the ability to better allocate and track public funds.  In this regard, the Ministry will also work to strengthen its analytical capacity in the area of fiscal policy development and implementation.

As well, the Ministry is moving to the adoption of new budgeting and accounting software and standards and the introduction of accrual accounting and the systems that support it.  Also in development is the implementation of a new, modern Chart of Accounts that is fully compatible with international standards.  As an initial step to avoid the buildup of future arrears, the Government is enabling accrual accounting with the planned introduction of International Public Sector Accounting Standards (or IPSAS) for government bookkeeping and reporting that will provide increased visibility into outstanding cash requirements and facilitate cash planning. Here again, we are committed to bringing the Bahamian government up to modern and international standards.

Revenue Enhancement

The Ministry of Finance has also been mandated to renew its emphasis on enhanced revenue collection.  To that end, the Revenue Enhancement Unit, another example of an initiative simply floundering under the previous administration, is being recast to ensure that revenue is properly and fully collected across the major tax segments .  To facilitate these efforts, an amendment is being proposed to the Financial Administration and Audit Act to provide the authority to the Ministry of Finance to form an inter-departmental unit that will be assigned the task of revenue enhancement across the major areas of taxation.

In addition, the Ministry’s revenue policy structure will be reorganized in such a way that officers will be assigned responsibility for the monitoring and analysis of a specific major area of revenue, on the basis of which recommendations are to be formulated for remedial measures that will ensure that revenue objectives are met.

We will also re-energize the reform and modernization exercises that have been launched in respect of the major tax areas, such as Customs and Real Property Tax.  A full management audit of Customs procedures and processes will be undertaken to determine the extent to which they deviate from international best practice and the best way forward to close the gaps that are identified.  The reformed procedures that result are expected to lead to both better service to the private sector and citizens as well as enhanced revenue collection.

The Real Property Tax system has long been acknowledged to be antiquated and inadequate to its mandate and mission.  The desirable reforms identified in recent years must be reassessed and, where appropriate, re-initiated and pursued with purpose and determination.  We will do so as a matter of priority and ensure that the necessary resources are dedicated to this important challenge.  Developing a modern and equitable system of property taxation will better serve our citizens and secure the revenues that are anticipated from the system.  Previous estimates suggest that a properly functioning system could readily yield significant improvements in revenues.

While the efforts to strengthen the Customs Department and the Real Property Tax administration will take some time to come to fruition, we realize that given the state of the nation’s finances, we cannot wait an indeterminate time to see results.  Accordingly, this budget targets upwards of $80 million in increased customs, excise and real property tax revenues in 2018/19, over the anticipated run rate so as to ensure that the revamped revenue collection unit – and the revenue agencies individually – are mandated to improve their collection of the taxes that are on the books presently.  Further, they will have to demonstrate to my satisfaction – and that of the Bahamian people – that their efforts are producing tangible benefits in bringing in uncollected and under-collected taxes.         

Structural Reform of the Tax System

It is undeniable that our current system of taxation must be reformed and modernized in order to ease the compliance burden on citizens and the private sector as well as generate the revenues that are rightfully due to Government.  As has been demonstrated with the introduction of the Value Added Tax, it is possible to implement international best practices and modern processes and procedures based on state of the art technologies such that tax administration is client friendly, efficient and effective.  As I have said, we are striving to do just that for all of the major taxes.     

However, having said that, it is also evident that our very structure of taxation itself is antiquated and inadequate to the needs of modern governance in the 21st century.  A tax system with traditionally heavy reliance on Customs duties and, more recently Excise duties, that apply solely to goods is clearly deficient in a world in which services have come to dominate goods in terms of relative economic importance.    Indeed it is estimated that services account for fully 78 per cent of Gross Domestic Product.  This distortionary situation was rectified to some extent with the introduction of the broad-based VAT in 2015 but it is still the case that Customs and Excise duties account for upwards of 30 per cent of total Recurrent Revenue.

With planned accession to the World Trade Organization, there will be a requirement to implement significant reductions in Customs duties in this country in return for membership in a group that will secure access to foreign markets and the protections afforded by a structured, rules-based system of trade, which is vitally important to a small trading nation such as ours.

But outside of the WTO requirements, it is the view of the Government that adjusting the relative burden of taxation from goods and toward a more equitable balance of goods and services is critical to reduce the distortions in our economy which have disadvantaged those involved in the trade of goods – as well as our poorer citizens who tend to spend a disproportionately higher share of their incomes on goods over services.   

The Business License regime in our country, with a fee structure based on turnover, has long been cause for concern within the business community and with policymakers.  The system is generally seen as inefficient, inequitable and distortionary.  Previous recommendations for a radical reform and even complete elimination of the fee structure, as currently configured, have inevitably floundered in the face of fiscal pressures to maintain revenue levels.

In total, our tax system generates revenues that are projected to amount to some 16.1 per cent of GDP in 2017/18.  That ratio stands in stark contrast to an average ratio in the mid 20 per cent range in the Caribbean region.  As well, it has been estimated that our system as structured produces far less revenue than potentially could be raised given the economic structure of the country.  In its latest Article IV Staff Report, the IMF went so far as to suggest that, with the recently revised national accounts—revealing an economy much larger than previously thought—there exists significant scope to accelerate the pace of tax reform.    

In light of the evolving pressures outlined above, our Government is of the view that it would be desirable and appropriate to look at a further restructuring of our system of taxation away from narrow-based and distortionary taxes.  Accordingly, we have commissioned Deloitte to undertake a detailed assessment of the appropriateness of, and options for, alternative forms of Business Tax in The Bahamas, the revenues from which could, as an option, serve to replace the fees now collected in respect of Business License.  At this stage, this is simply exploratory work geared to obtain an empirically based assessment of tax options and to canvass the views of a full range of Bahamian stakeholders. This study is just underway and I emphasize that no policy commitment has been made to the introduction of any alternate form of tax at this juncture.

As well, it needs to be borne in mind, at least for the purposes of prudent fiscal planning, that the introduction of such a new tax instrument would require an appropriate development and implementation period that would extend beyond the time horizon of this Budget.   

Debt Management Legislation

As well, we are proceeding with the preparation of new Debt Management legislation that is also targeted for tabling in the period ahead.

To that end, the Central Bank has approached the Commonwealth Secretariat to provide technical assistance for drafting appropriate legislation to modernize our public debt management infrastructure.  Work to date suggests the establishment of a new framework, consistent with international best practices, that is designed to support a properly functioning debt management regime.  That framework would include, for further consideration and possible implementation:

• the establishment of a Public Debt Management Unit responsible for debt management activities;
• the establishment of a Public Debt Management Advisory Committee to guide the Government’s borrowing policies and debt management operations;
• the establishment of a public debt management strategy, in line with the Government’s fiscal policy and Budget framework, with which all borrowing and other debt management activities would need to comply;
• the establishment of mandatory requirements for reporting to Parliament by the Minister of Finance, including on the performance of debt management relative to the strategy as well as on all guarantees issued by the Government; and
• the provision for external audit requirements of all debt management activities.

As an additional measure to manage debt more responsibly, the Government has established a sinking fund to accommodate the repayment of the recent $750 million international bond issue and will contribute some $39 million to that fund in the 2018/19 fiscal year. 

Mr. Speaker,

I now turn to fiscal developments in the 2018/19 fiscal year.

Performance in the first ten months of the fiscal year—the latest available data—mirrored a healthy, growing economy throughout 2018.  Aggregate revenue increased by $272.6 million or 16.2 percent to $1.9 billion, which outpaced the $160.5 million or 8.4 percent accretion in total expenditure to $2.1 billion.  As a result, the fiscal deficit improved by $112.1 million or 47.8 percent to $122.5 million in the ten months to April, as compared to the same period of the previous fiscal year.  That is correct, Mr. Speaker, the fiscal deficit was nearly halved in the first ten months of the fiscal year.

A breakdown by component revealed that the spike in total revenue was buoyed by a $245.0 million, or 16.1 percent, improvement in tax revenue to $1.8 billion, as receipts from stamp taxes on financial and realty transactions more than doubled to $181.3 million, reflecting the conversion of taxation from VAT to stamp tax. Revenue from VAT grew by $123.5 million, or 21.5 percent to $699.3 million, reflecting the rate increase, from 7.5 percent to 12 percent.  

Likewise, earnings from the use of goods grew by $51.5 million or 34.8 percent to $199.3 million, while more muted gains were posted for departure taxes and taxes on property, at $6.8 million and $2.8 million, respectively.  In contrast, the total intake from excise taxes declined by $25.5 million or 11.6 percent to $193.7 million over the period, with revenue from customs and other import duties falling by $9.2 million or 3.9 percent to $228.7 million.  Non-tax revenue firmed by $27.6 million or 17.6 percent to $184.7 million. 

As for expenditure, recurrent spending rose by $216.0 million or 12.6 percent to $1.9 billion, due to a $111.2 million increase in spending on the use of goods and services, which includes arrears payments.  To date, we have paid a total of $126.9 million in arrears, representing approximately 73.8 percent of the $172 million that we budgeted to settle during the 2018/19 Budget year.  In addition, spending on subsidies advanced by $54.7 million to $312.7 million, while other transfers—inclusive of social assistance benefits, grants and other payments—grew by $41.5 million to $235.5 million.

For its part, spending on the compensation of employees tapered by $28.9 million or 4.8 percent to $576.9 million, reflecting more precise budgeting, as opposed to a decrease in the total headcount.  To elaborate, in fiscal year 2017/2018, $790.4 million was budgeted for employee compensation, though only $737.5 million was spent, representing 93.3 percent of the budgeted amount.  At the ten-month mark last year, only 76.6 percent of the budgeted amount had been spent. 

Thus, in an effort to apply more prudent and accurate budgeting, in fiscal year 2018/19 expenditure in this area was constrained to meet its historical trends, as it usually comes in lower than budgeted.  Capital expenditure, at $147.6 million, was $55.5 million or 27.3 percent lower over the ten months to April 2018 when compared to the comparable period of the previous year.

All told, we project that the remaining two months of the fiscal year will perform positively. For the fiscal year as a whole, revenue is estimated to come in at about $2.4 billion, some $238 million or 9.0 percent lower than what was budgeted at the start of the fiscal year, largely on account of the new agreement with the gaming operators, the delayed implementation of the Revenue Enhancement Unit (REU), and the concessions granted to hotels and contractors in respect of the introduction of the higher rate of VAT.  

On the expenditure front, total outlays are projected to equal approximately $2.6 billion, which is also some 9.0 percent or $259.1 million below the amount initially budgeted for the year.  Of this total, approximately $172.3 million is anticipated to be settled in respect of arrears, in line with the Budget projection.

Based on these developments, we therefore anticipate the fiscal deficit to total some $229 million in 2018/19, representing 1.8 percent of GDP; that will be broadly in line with the $237.6 million deficit projected in the last Budget.

These developments clearly signal that this Government is focused on more than merely talking about our plan to govern this country in the right manner, but also on action.  Bringing our plans to fruition and realizing the goals that we set forth for fiscal reform are critical priorities for us, as they underpin and, in time, will incubate our broader economic objectives of inclusive growth, a sustainable and resilient economy, and increased productivity. The outcome is a sustainable improvement in the well-being of all Bahamian citizens. 

Tax Relief Measures

We have proposed a number of tax relief measures to provide some reprieve to all citizens and to encourage economic activity by making the import of certain items relatively cheaper, thereby making it comparatively easier for persons to enter existing markets and in some cases, create new ones. The tax relief measures included in this Budget include:

Duty reductions worth $28 million in revenue.  In an effort to rebalance the tax burden between the provision of goods and services and reduce the attendant distortionary impacts, we are beginning to make good on our commitment to reduce duty and excise rates over the next three years.  To that end, we will, at this time, adjust the duty on selected frequently imported items.  Generally, the focus of these reductions is around educational supplies and equipment, and household implements and goods. These items  include:

• Home Refrigerators of 18 cubic feet or smaller (to become duty free)
• Home Stoves that are 30 inches wide or smaller (to become duty free) 
• Garbage Can Liners (from 45 percent to 25 percent)
• Fire Extinguishers (from 45 percent to free)
• Flashlights (from 45 percent to 25 percent)
• Pens (from 10 percent to free)
• Pencils (from 10 percent to free)
• Crayons (from 10 percent to free)
• Sharpeners (from 45 percent to free)
• School Rulers (from 10 percent to free)
• Chart Paper (from 20 percent to free)
• Projectors (from 45 percent to 35 percent)
• Projector Screens (from 45 percent to 35 percent)
• Radios (from 45 percent to 35 percent)
• Pots/Pans (from 45 percent to 25 percent)
• And all Household Furniture (from 45 percent to 25 percent)

Other tax relief initiatives: 

• Removing the duty from musical instruments.
• Allowing trailers for commercial fishing boats to be eligible for duty exemption.
• Amending the Spirits and Beer Manufacture Act (Ch. 373) to reduce the minimum bushel requirement for production, to now make microbreweries eligible for import duty concessions.

You would recall that the government earlier in the fiscal year increased the VAT zero-rating on Light Bills from those under $200 to those under $300.  It was approved as a temporary measure that was to expire at the end of June.  I am pleased to advise that this higher ceiling has been made permanent, and customers will continue to enjoy VAT zero-rating on electricity bills under $300.  Water Bills under $50 per billing cycle will also continue to enjoy VAT zero-rating. I can also announce today Mr. Speaker that as of March of this year over 23,500 households have benefitted from this elimination of VAT from these utilities.

Environmental Protection and Advancement

To advance our commitment to environmental sustainability, we have tailored several measures in the 2019/20 Budget with an aim to not only protect the environment, but also to increase environmental awareness across all islands. In addition, the measures aimed at environmental purposes are in line with the Government’s planned ban on plastic by January 2020.  These measures include:

• Reducing the duty on new vehicles between 1.5 liters (1500cc) and 2.0 liters (2000cc) valued at $50,000 or less from 65 percent to 45 percent.  In this context, only cars with less than 200 miles on the odometer will be considered ‘new’.  This makes smaller, more fuel efficient vehicles more affordable.
• Harmonizing the rates on all new electric and hybrid vehicles valued up to $50,000 to 10 percent. It should be noted here that this measure will have a sunset clause of 5 years, after which this special revision will revert closer to the rates for other small size vehicles. 
• Increasing the duty on biodegradable and compostable plastic shopping bags, from 5 percent to 45 percent; but at the same time, reducing the duty on reusable cloth shopping bags from 30 percent to 5 percent.
• Banning the use of selected single-use plastic bags, plastic food utensils, and Styrofoam food containers by January 1, 2020.

Strengthening Tax Compliance and Administration

Mr. Speaker,

A large part of ensuring tax compliance is making certain that tax-related legislation is sound, clear, and comprehensive as a framework for tax administration.  

In the Real Property Tax Act, we have increased the current cap on Real Property Tax payments of those classified under “owner occupied” residences from $50,000 to $60,000 per annum so as to augment revenue capture for higher end properties.

In addition, we will amend the Stamp Tax Act, and VAT Act accordingly, to reflect that realty transactions will now attract VAT as opposed to Stamp Tax, albeit at the same 2.5 percent and 10 percent rates currently attracted for real estate transactions.  Further, to facilitate appropriate estate planning, gifts of real property to immediate family for purposes of legitimate estate planning will not attract the realty VAT tax, with the proviso that the tax will become payable if the recipient seeks to sell the property within seven years of receipt.

In line with our efforts to modernize a number of Government systems and procedures, we have found value in making legal provisions for the new Electronic Single Window, commonly called Click2Clear, as referenced earlier.  As such, we will amend the Customs Management Act to legally require registration on the Click2Clear website, using the Single Window Application.

Moreover, a new single Tax Commission will be created under the Tax Appeal Commission Bill, 2019, which will oversee all taxation appeals in an effort to promote tax fairness.   Such a move is in keeping with the Government’s objective of improving the ease of doing business and enhancing the administration of taxes.

In the past, we have had several separate review boards for appeals made to each of the types of tax in our current regime. However, only a few of them were commissioned or functional.   The changes in this legislation will now set up a single Tax Commission that will act as an umbrella for the appeals for a number of different tax types, including appeals for Customs, Business Licence, Real Property Tax, and Value Added Tax. The Commission will be appropriately staffed and hear tax appeals promptly. The current members of the VAT appeals commission will become the Tax Commissioners for this new entity.

The final measure that will require administrative changes in the legislation, includes amendments to the Family Island Development Encouragement Act, and the City of Nassau Revitalization Act.  We will extend these Acts, which are set to expire on June 30, 2019, for a two-year period to allow for more effective planning.

I will now turn to a summary of some of the measures we have taken that are administrative in nature, and will also help to increase the Government’s revenue intake in due course.

The recent growth in the vacation home rental market has attracted the Government’s attention for several reasons.  Understandably, the preferred type of accommodation for tourists globally has taken a turn from hotels, to short-term rentals. For the most part, these rentals are facilitated using a marketplace such as Airbnb, HomeAway, and VRBO, among others.  We are pleased to see the market growing in this way, as it presents opportunities for many Bahamians to create a new stream of income, while adding capacity to our number one industry.

We are, however, mindful of the uneven playing field that this has created concerning hotels and have moved to level the playing field.  As such, all online marketplaces that advertise and facilitate vacation rentals in The Bahamas will now be required to pay VAT on their rental and related sales in The Bahamas.  

Thus, companies such as Airbnb, HomeAway, and all such marketplaces with short-term rentals in The Bahamas will be required to pay VAT.   I can advise today that some of these online marketplaces have already become VAT registrants and have been paying VAT, and we are in the process of ensuring that the outstanding e-commerce service providers are made compliant.  

Currently, the VAT Act, 2014 states that all e-commerce services provided for the use, benefit, or advantage of persons within The Bahamas are a taxable supply, even if the providing company is domiciled outside of The Bahamas.   This therefore captures all electronic service providers domiciled outside of The Bahamas that provide services to persons within The Bahamas, such as but not limited to Airbnb, HomeAway, VRBO, etc.

In another revenue raising measure, we will increase cruising permit fees from $150 on boats up to 34’ and $300 on boats 35’ and over, to a set of rates based on size and length of stay ranging from $150 per 3 months to $4,000 per year. These rates will become effective January 1st 2020, so as to allow a transition period for the boating industry.

I wish to note also that we will be introducing the online portal for electronic payments for both cruising permits and eventually for the charter fee.  This will not only make boating in our waters more convenient, but also help to secure more revenue via increased compliance as a result of the enhanced efficiency the online portal will bring.  

Enhancing the Ease of Doing Business

Mr. Speaker,

A number of the tax measures contained in the 2019/20 Budget will help to facilitate the ease of doing business in The Bahamas.  These are specifically associated with amendments to the Business Licence Act, which will allow for flexible dates for the submission and issuance of Business Licences.  Thus, as opposed to being restricted to an application deadline of January 31, and a payment deadline of March 31 for renewals and new applications, there will now be four periods in the calendar year, when businesses can now select a time designation as their payment date so as to better correspond to their respective fiscal years.  They can choose either March 31, June 30, September 30, or December 31.

This revision is something that the business community has been requesting for some time, given that their fiscal years do not always coincide with the calendar year. The amended legislation also makes provision for a transitional phase to allow for the necessary adjustments to be made by the business community.

The Bahamas has several structural impediments that make it difficult for us to compete globally in the export of goods: We all know the barriers caused by the high cost of electricity and labour, as examples. We have several competitive niche areas as a country and we are capitalizing on those, but there is another export market that is under explored, where we can more effectively compete on an even footing. That is the export of services: accounting services, legal services, information technology services, management consulting services, and of course, financial services, just to name a few.

Consistent with the recent legislative change to equalize the playing field for Bahamians in removing preferential exemptions for non-residents, we are implementing a broader policy of incentivizing the export of services across the board for all Bahamians. Revenue derived from these services will not be taxed for Business Licence purposes or VAT, which makes it easier for Bahamians to compete on a global scale.

In this digital economy, export services are growing rapidly and we do not want Bahamians to be constrained within our territorial borders.  In fact, we want to incentivize them to build clientele on the international market, taking advantage of all the business opportunities that can be delivered through a mobile device or on a computer.  As Bahamians increase their skill sets and expand their reach, there will be increasing opportunities to participate in the export economy.

For the past 50 years we have approached regulation from the standpoint of whether an individual or entity was resident or non-resident. This legal framework of privileges and benefits to non-residents we inherited served its purpose to encourage the inflow of foreign exchange.  However, today, it doesn’t work.

We are adopting a new approach that brings fairness to the system. We are adopting a new way that positively shifts the overall value proposition of The Bahamas.  Moving forward, it does not matter who you are or where you reside: taxes are due on all business activity where the benefits are derived inside The Bahamas.  And, in order to encourage the export of services, the Government is excluding revenue derived from export services from Businesses Licence, consistent with the existing rules for Value Added Tax.  This will apply equally, whether an individual or entity is resident or non-resident.

These amendments to the existing Business Licence Act are exemplary of our commitment to fostering opportunities for Bahamians.  In particular, the fact that businesses or individuals who provide services abroad will not be taxed for Business Licence or VAT purposes acts as an incentive for persons to create businesses centered on those services, as well as removes some barriers associated with our current export industry.  In an age where technology is constantly advancing and new markets are steadily emerging, it is more important now than ever to ensure that our legislative and tax environment are accommodative yet robust and aligned with best practices in the regulatory space.

As mentioned earlier, the amendments serve to create a new approach to how government revenues are derived from the financial sector.  We are confident that we have shaped an enabling regime that permits the country to remain competitive in the provision of financial services, even while removing the preferential exemptions that were previously given to nonresident IBCs.  In an effort to alleviate the notion of ring fencing, all banks—including both domestic and what used to be offshore banks—will no longer be subject to Business Licence fees. Instead, moving forward, all banks will be subject to supervisory fees and charges; those  with Bahamian dollar liabilities of over $100 million will incur a Domestic Systemically Important Institution (DSII) levy of 0.3 percent per annum on the leviable amount, which will be payable to the Central Bank of The Bahamas.

I want to note here, however, that this new arrangement will not mean that domestic and international banks are now paying less in taxes because they are no longer subject to Business Licence.  In fact, the opposite is true. The new structure will actually result in a marginal increase in the amount raised from these fees. What is changing is the administrative process in the collection of these fees, in that the Central Bank will collect and then deduct its cost of regulation as well as those on behalf of the Securities Commission, the Compliance Commission, the Insurance Commission, and the Financial Intelligence Unit, and remit the excess to the Government.  This will obviate the need for the Government to provide direct subventions to these entities. It is important for me to repeat so as to be absolutely clear: this regime will not in any way mean a reduction in the government revenue derived from the financial sector of the Bahamian economy.

The Government is also reforming the calculation for annual supervision levies and other fees. This will allow for the better matching of costs to levies without significantly changing the charges to the individual banks subject to the levies.  Thus, with these changes, both domestic and offshore banks will be treated the same, with no preferential treatment given to the latter, while adhering to international best practices.

Mr. Speaker,

So far, we have made great progress toward the attainment of the economic and fiscal objectives that we set for this mandate.  The 2019/20 Budget contains a number of additional new policy initiatives and programme that I am sure will bear fruit for years to come.

Enhanced Education and Training

In the area of education and training, we made a commitment in 2017 to implement a tuition grant initiative at the University of The Bahamas, so as to provide more educational tertiary learning opportunities for Bahamians. In deepening our commitment to this end, we made provision for the Be Your Own Boss program at BTVI that incentivizes young students to become entrepreneurs.  This year, the Budget provides funding to substantially expand the Government’s commitment both to pre-school and tertiary education. Collectively, an additional $20 million has been allocated in this budget to these related initiatives.

In addition to the $20 million we have allocated to education and training in the Budget, we are commencing the first phase of a $9.3 million dollar project to enhance BTVI, with an emphasis on upgrading infrastructure.  We made a commitment to not only creating more educational opportunities to our citizens, but also to dedicate resources to the upkeep and development of both new and existing institutions. Starting with the $2.7 million allocated for this budget year the BTVI Enhancement Project will be centered on the upgrade of the current BTVI campus, with a particular focus on developments related to Information Technology.  Investing in our youth is critical to the advancement of this nation, and we will see to it that we continue to pour into them accordingly.

Renewable Energy and Solar Power Initiatives

In the area of energy conservation, one of the initiatives, adopted from our 2017 Manifesto, is a move toward renewable energy, particularly in the Family Islands.  To this end, the government is seeking, with the funding support of the multilateral community, to provide for over $170 million over the next 8 to 10 years to introduce commercial scale solar energy opportunities throughout The Bahamas, with particular emphasis on the Family Islands.  The full outline of this plan and how it fits into our broader energy strategy will be elaborated on during the budget debate.

Our efforts around green technology this fiscal year will mark the commencement of the Street Light Retrofitting Project, which is also being funded primarily through financing from the Caribbean Development Bank.  This project will facilitate the conversion of street lights to LED lights and the installation of a smart street light grid system with central controls.

Currently, street lighting accounts for more than 30 percent of our electricity consumption, and roughly 3 percent of the country’s overall energy consumption.  This project is intended to reduce the cost of street lighting by 20 percent. In dollars, that translates into savings in the Government’s electricity bill of approximately $3 million per year over the next two decades. It also obviously represents a corresponding reduction in the demand for fuel and the foreign exchange outflows that accompany same.  In addition, the establishment of a smart street light grid with central controls will allow us to monitor conditions along the entire grid, including the ability to adjust lighting depending on overall system demands.

Mr. Speaker, among the Bills being presented today for the consideration of this Honorable House is the resolution to approve the $14.6 million loan with the Caribbean Development Bank to fund this project.   The Government will provide direct counterpart funding in the amount of $2.4 million for the full project value of $17 million. BPL will serve as the executing agency for this project.

Mr. Speaker,

The House will note that this Budget also makes provision for the newly expanded Department of Transformation and Digitization under Head 73 from what was formerly the Department of Information Technology. Together with its allocation in the Capital Budget, this department will receive additional allocations of some $15 million. Some of this incremental increase is due to the fact that IT related support services are being consolidated under this agency.  However, a substantial portion of this sum is being allocated for the roll out of the government's digital transformation strategy.

Within the coming fiscal year, the initial roll out of this strategy promises substantial improvements for things like passport renewals, driver’s license renewals and verification of personal and company information from the Registrar General's Department.  These initial small steps will have a profoundly positive impact on the lives of citizens. It will remove so much of the unnecessary stress and aggravation that citizens have suffered for years, but for which no solutions were ever implemented. But it falls to this Administration to do something about it.  And that we shall. Much more will be said about the plans for the Digitization project during the Budget Debate.

Accession to the World Trade Organization

Negotiations for our accession to the WTO continued throughout the fiscal year, generating—as it should—quite a bit of interest on how it will impact our economy.  In short, I will reiterate here that this Government is committed first to Bahamian citizens, and ensuring that in every decision that we make, their best interests are considered in a way that is economically consistent with our objectives.  The Bahamas’ initial Goods and Services Offer was presented earlier this year, which included all the proposed reductions in duty rates for imports. By the end of the accession period, we anticipate some $50 million in foregone revenue over time, against the backdrop of the proposed 15 percent decline in the average tariff rate.  

Since then, the WTO working party has met again to discuss the offers The Bahamas is willing to make on duty rate reductions, and these discussions will continue until both sides are satisfied with the offer.  The protection of small businesses and the production of local farms and manufacturers remain key priorities for the WTO negotiating team, which I am confident will be reflected in the final Goods and Services Offer.    

With regard to the impact of WTO accession on the Bahamian economy, I wish to draw on the findings of the recent Oxford Economics study, which estimates that the potential economic impact will be positive over the medium term, with the near term impact crucially dependent on the government’s efforts to put in place structural reforms.  These reforms were noted as:

• Improved transparency and consistent application of rules and regulations governing businesses;
• Reduced bureaucratic time delays with the introduction of modernized and streamlined processes;
• Rationalization of the regulatory requirements for starting a business and strengthening of the intellectual property regime;
• Policy initiatives to improve access to finance for SMEs;
• Energy sector reforms to lower electricity costs and improve reliability; and
• Expansion of training and improvement of job placement services to increase employment opportunities.

Addressing Critical Public Infrastructure Needs

Investment in public infrastructure acts not only as a vehicle for job creation, but also as a catalyst for economic growth.  In this vein, we have made capital spending a key priority. Essential to the future for infrastructure projects in The Bahamas is the use of Public Private Partnerships (or PPPs), for which a policy was drafted in the latter part of last year to set the framework in which these ventures should be set.  These investments are likely to include airports, particularly in the Family Islands, schools, Government buildings, among other projects, that underpin increased productivity and stronger growth.

The only way that we will effectively address the infrastructure deficit in the country will be to mobilize private sector resources and expertise in the provision of public infrastructure, as many other jurisdictions are now doing with great success.  

This embrace of the PPP approach will require us to think about old challenges in new ways, and to foster a different kind of thinking about how public goods should be delivered.   We must obviously ensure that we create scenarios where the private partner and the Bahamian public both benefit, but at the same time we cannot have a knee jerk negative reaction to anything that represents a departure from the old ways of doing things.  We must ask: How can we create PPPs for constructing new roads and highways? Can there be a PPP for a school or hospital? Can private operators do car licensing or vehicle inspections? Can we use Bahamian entrepreneurs to deliver social services? Until we challenge our conventional thinking, we will not be able to unleash our full communal energies and talents to overcome our most daunting administrative and infrastructural challenges.   

Reviewing and Assessing the Adequacy of Current Tax Concessionary Regime

In assessing revenue compliance and strengthening tax administration, it is particularly pertinent to evaluate the role that concessions play, and their impact on the tax gap.  Under its Trade Sector facility with the IDB, the Ministry of Finance has contracted a consultant to review the current concessionary regime in The Bahamas to provide input on how these concessions impact economic growth, and how this translates into our fiscal policy needs, given the requirements of our fiscal responsibility legislation.  This engagement began in January of this year, and is still in the information gathering stage. However, when contemplating policy action, it is imperative to consider the impact foreign direct investment has on the domestic economy—not just for tourism but in the monetary sector as well—and how changes to our current concessionary regime may affect that.   

Nonetheless, while this Administration is not opposed to the concept of concessions to drive and foster positive investment in The Bahamas, we must undertake the proper study and analysis to ensure that the concessionary regime is fit for purpose—and that it actually drives the right kinds of investment.  We must measure the tenure and scope of these concessions—their investment impact, so that we are not simply giving away freebies that add no value to The Bahamas and its citizens.

Mr. Speaker,

I will now highlight the key fiscal prospects for the coming budget year, and future prospects for the medium term horizon.

Our estimates for the 2019/20 Budget are framed within the projected outcomes of the 2018/19 fiscal year and the current and projected economic climate.  Although the economy is expanding, the reality is that recovery is not occurring at the pace previously projected, against the backdrop of a number of global factors. 

We are fully sensitive to the fact that a further improvement in our fiscal outcomes, and the attainment of the legally binding fiscal objectives, is contingent on both ongoing expenditure discipline and the further enhancement of revenues. 

On the revenue front, we note that the revenue yield of our taxation system amounted to some 18.8 percent of GDP in 2018/19.  A number of factors are expected to contribute to a further enhancement of that yield in 2019/20 and beyond.

In 2019/20, the Revenue Enhancement Unit will be fully established, thus securing a significant increase in annual revenue and thereby underpinning a further boost in the revenue yield.  Additionally, VAT will be reported at the 12 percent rate for a full year for the first time since the rate increase, and the new tax agreement with the gaming houses will be fully implemented.  

As such, we expect to secure higher receipts for the Government accordingly.  Moreover, the new Electronic Single Window at the Customs Department, with its enhanced features, is intended to secure more revenue via the Click2Clear platform, some of which will be realized in the upcoming fiscal year.  All told, this should translate into an increase in the revenue yield of the tax system to the area of 19.8 percent of GDP in 2019/20 and beyond.

As such, we have budgeted for total revenue of $2.628 billion in 2019/20, which represents a $215 million increase over the projected outturn in 2018/19.     

Recurrent expenditure is budgeted at $2.530 billion, equating to some 19.0 percent of GDP. That represents an increase of $95 million over this year’s projected expenditure.  With regard to the payment of arrears, we currently project that we will pay an additional $100.4 million toward the $360 million buildup we met when we came to Office two years ago.  

While the Government continues to make good progress in settling the outstanding arrears, the level remains a significant percentage of outlays in the upcoming fiscal year. One important obligation yet to be factored into future arrears payments is the requirement for the Government to meet obligations relative to the BTC legacy Defined Benefit Pension Plan, based on the terms of the Shareholders' Agreement between the Government and Cable & Wireless Communications. 

It has been determined that the Government never provided the $39 million to the Feeder Trust that was created to assist in meeting its obligations to the Plan, when the corporation was sold to Cable and Wireless for $210 million in April 2011. To commence meeting these obligations, the Government has provisioned $3.0 million in the FY2019/20 budget and over the course of the year will seek to devise a multi-year comprehensive strategy for settling the balance, once the full obligation has been determined.  The Government will seek to provide an update on this matter in the upcoming Fiscal Strategy Report.

As for Capital Expenditure, the Budget provides for a modest increase in 2019/20 over the current projected outturn.  This category of spending represented some 1.6 percent of GDP in 2018/19 and we project an increase to 1.8 per cent in the coming fiscal year.  That amounts to a $28 million increase, from $207 million projected for this year to $235 million next year.  Going forward, we remain firmly committed to making infrastructure investment a key priority as financial resources permit. 

That being said, several major infrastructure projects are already underway, and will continue. These projects are specifically geared towards building a new foundation for growth based on 21st century infrastructure. Bahamians are already feeling the positive impact from some of these projects, like the road improvement, where everyone can benefit from getting to and from work easier, and going about their business. During the Budget Debate, Ministers will elaborate more one some of these projects, including those related to renewable energy, medical facilities, national security infrastructure and digital infrastructure. 

That said, the GFS deficit in 2019/20 is estimated at $137 million, which translates to a deficit to GDP ratio of 1.0 percent.  Such an outcome is fully compliant with the requirements of the Fiscal Responsibility Act.

I pause to note here, Mr. Speaker, that this will be the lowest annual fiscal deficit recorded in The Bahamas in 10 years.  Also, our 1.0 percent deficit to GDP ratio target will mean the lowest fiscal deficit ratio in this country in over 17 years.  That is right, this will mark the lowest deficit ratio this land has seen in nearly two decades!    

For the fiscal years beyond 2019/20, the Budget projection postulates that the revenue yield will be maintained at its 2019/20 level.  As well, the projection reflects our commitment to keeping a tight rein on the growth of primary recurrent expenditure.  Capital spending is projected to grow in line with the economy.

With these planning assumptions, the deficit is projected at a level of 0.5 per cent of GDP in 2020/21 and 0.1 per cent of GDP in 2021/22.  These estimates are fully in line with the requirements of the Fiscal Responsibility Act.

Three-year fiscal strategy

In assessing options to secure the attainment of the deficit targets, the choices available to us are limited.  In developing the Budget framework, we have only approved new funding allocations in respect of Recurrent and Capital Expenditure that are of the highest priority to the Government’s policy agenda.  Indeed, it will be noted that, close to one-half of the Budget Heads have been allocated either virtually the same or even smaller amounts for 2018/19 than they were allocated in 2017/18.

Similarly, the tax reductions that we are announcing are selective and in line with our social and policy commitments to Bahamians.

The various increases in fees, service charges and taxes that are being implemented have been selected to advance environmental and energy efficiency objectives and/or judiciously enhance revenues.

The bottom line is that we must pay off the massive backlog of arrears, judiciously finance our policy agenda, meet our deficit targets and set the stage for the pending reductions in Customs duties.  That is a most daunting fiscal policy challenge indeed that requires decisive, though difficult, policy action.

To address that challenge, we are proposing a three-year fiscal strategy that will allow us to both deal with the assorted fiscal pressures that we face in 2018/19 and beyond and meet the deficit targets each year.  As a core component of that strategy are – as mentioned earlier – a number of enhanced revenue measures in the form of an increase in taxes and fees – and enhanced revenue collection efforts - targeting critically needed new revenue. The incremental revenue gains will permit execution of the government’s three-year fiscal plan as follows: 

• In year one: we will pay off over $170 million in old bills and finally budget properly for current known commitments;
• In year two: we will pay off over $100 million in additional arrears and begin to implement reductions in Customs and excise duties to rebalance the tax burden between the provision of goods and services and reduce the attendant distortionary impacts; and
• In year three: we will substantially complete the payment of arrears and make further significant reductions in Customs and excise duties.

New Revenue Measures

To facilitate this, we are proposing a number of measures that are designed to generate additional revenue to the Government.  Specifically, we are increasing:

• the taxation of gaming house activities through the introduction of a sliding scale of rates applied to taxable revenue, namely: up to $20 million, a rate of 20 per cent; between $20 million and $40 million, a rate of 25 per cent; between $40 million and $60 million, a rate of 30 per cent; between $60 million and $80 million, a rate of 35 per cent; between $80 million and $100 million, a rate of 40 per cent; and over $100 million, a rate of 50 per cent;  
•  also, the taxation of gaming patrons through a 5 per cent stamp tax to be levied on both deposits made by patrons at the gaming houses and any non-online games/digital sales;
• An increase in the various Immigration fees;
• Introduction of new Port fees;
• the Real Property Tax on foreign-owned vacant land to 2 per cent of value, up from 1.5 percent;
• licensing fees on large commercial vehicles by $50 for Class B and Class C vehicles; and
• increases to police record fees, fingerprinting fees for casino employees and Labour Certificate fees.

Mr. Speaker,

This is a landmark Budget. Indeed, it is arguably the most transformative Budget in the history of our nation. It is a Budget about finally putting an end to past practices of fiscal mismanagement and, instead, adopting an approach to the management of the fiscal affairs of the nation in the manner that they should be managed, that is, in a responsible, transparent and accountable way. To those ends, this Budget:

•  First, ends the past practice of artificially underbudgeting for known commitments and properly accounts for Government expenditure such that it truly reflects the costs of current commitments and thereby prevents the buildup of significant expenditure arrears;
• Second, fully provides for the clearing up of the mountain of arrears and unbudgeted commitments left behind by previous governments that currently total some $360 million;
• Third, provides through proposed Fiscal Responsibility legislation, a legally-binding 
• Fourth, establishes a sound and credible fiscal plan for the 2018/19 fiscal period and beyond that:
  • addresses the fiscal pressures that we confront and provides for the implementation of the Government’s socio-economic growth agenda in a fiscally responsible way;
  • secures the achievement of the proposed legally mandated annual deficit reduction objectives; and
  • sets the course toward the legislated, longer term goal of reducing the burden of Government debt to no more than 50 per cent of GDP.

In our first Budget last year, I stated that Bahamians had given our Government a decisive mandate to bring about 4 the much-needed transformation of both public financial management and our economy in order to secure a better life and future for all Bahamians. Our citizens desperately need and desire strong and decisive leadership that is fully transparent and accountable to the people; that exercises prudent management of their tax dollars; and that encourages and facilitates a growing economy that supports new job growth and a higher standard of living. The Bahamian people gave us an overwhelming mandate to fulfill their aspirations in these areas and we owe it to them to deliver nothing less. The transformational socioeconomic growth agenda that we presented in the 2017 Manifesto and the Speech from th 5 the plan of action that we promised. That is the plan of action that we are pursuing.

In this Budget, at the one-year mark of our mandate, I will speak frankly to:

• what our Government said it would do at this time last year and what has so far been achieved;
• what further actions we are implementing in core priority areas in the new Budget year; and
• our fiscal action plan to address the pressures that we face and to ensure that we meet the mandated fiscal objectives of the proposed Fiscal Responsibility law.

Mr. Speaker,

Our Government’s approach to managing the economic and fiscal affairs of the nation is governance in the truest sense of the word.   We know what needs to be done during the course of our mandate. We have a sensible plan to do it; and we remain steadfast in our resolve to implement that plan. Throughout our initiatives, we are mindful of, and firmly committed to, the need to be fully transparent, accountable and responsible to the people. For it is the hard-earned dollars of the people that we collect, and it is those very same dollars that we then spend on programmes, services and infrastructure to serve their critical needs.  As such, we must never lose sight of the fact that this is indeed the People’s Budget.       

Last year we introduced and enacted fiscal legislation that will shape the fiscal boundaries of this nation for this year and years to come.  We have put an end to fiscal mismanagement, and we have placed a legally binding sense of accountability on the Government of The Bahamas.  We have set rules, Mr. Speaker; rules that are prudent, responsible, and forward-looking.  

The Budget exercise is no longer a guessing game of how much we “think” we need to raise in revenue, and how much we “think” we will need to spend.  Now, our revenue intake and aggregate expenditure are set within the confines of what has been legally mandated as well as against the three-year fiscal plan that we introduced last year to bring our fiscal house in order and put our debt level on a sustainable trajectory for the betterment of our people. 

In doing this, we have set a new precedent for proper budgeting, in that we have now implemented monthly meetings with each government agency to go over their expenditure plans, and ensure that they remain in line with the ceilings set forth for the budget year, and that funds are utilized appropriately to advance the key policy initiatives and priorities of this Government.  Our in-year reporting also ensures that we remain transparent in the way in which we both acquire and use public funds, making us accountable to our citizens, as we should be.

Our Government has ushered in a new era of sound, transparent and responsible fiscal management, supplemented by a broad spectrum of critical and transformational structural reforms that will set a proper and stable foundation for sustained private sector-led economic growth and job creation.  I firmly believe that our revamped model of governance will indeed give rise to a better future for all Bahamians.   

Mr. Speaker, 

As I move to close this presentation, I want to summarize what this Budget is really about. This Budget stands for a Government that is a better partner to the Bahamian people. We are transforming our execution and service delivery so we can provide Bahamians with better results. We are refocusing our spending so we can provide Bahamians with better benefits. Not the type of benefits in the past that have increased the dependence of citizens on the government, but the type of benefits that allow Bahamians to be empowered and independent.  

For too long, the Government has used taxpayers' money to feed a culture of political largess and Government inefficiency; to put Band-Aids over structural problems that undermine the Government’s ability to play its true role. Structural reform certainly does not sound very relatable, but just think about what it is like to live in a house that needs to be renovated; to work in an environment that is falling apart. It blocks your hustle; it cramps your style; it saps your creativity; it makes you physically sick. 

The reality is, the Bahamian Government is like a house that needs repairs. In some areas, the walls need to be gutted and the roof needs to be completely rebuilt. In other parts, new electrical wires need to be installed, along with new pipes and fixtures. 

The Government is not supposed to be a barrier to progress. Citizens are not supposed to feel constrained in the pursuit of their dreams by a government that does not have its house in order. The Bahamas has reached adulthood, and it is time the Government acts like it. 

The true role of government is to facilitate the personal pursuit and self-expansion of Bahamians, whether socially, culturally, spiritually or in business. It is the Government’s role to set effective policies that facilitate economic development; that facilitate social mobility, and a flow of opportunity, quality jobs and self-employment. It is our role to make it easy for Bahamians to operate in their own country; to pursue opportunity, and to thrive.

Mr. Speaker, 

This Budget is a break from the Past.  This Budget invests in comprehensive structural reforms that are going to make the Government work better and be better. From ease of doing business, to the digital transformation; from the focus on tax fairness and the overhaul of revenue administration and collection; from the adoption of transparent and accountable fiscal practices to the overhaul ofState Owned Enterprises. The work this Budget will enable us to do is meaningful and substantive, although gritty and often unrewarding, but it will make the Bahamian Government a better partner to Bahamian people. 

This Budget invests in strategic projects and programs that are going to build 21st century infrastructure and set a new foundation for growth; that will make education more inclusive and help Bahamians to break the cycle of poverty. With this budget, we are:

• making a sizeable leap in the funding for education and training as an investment in our  most important national asset—our young people; 
• we are about to embark upon a  $100 million plus strategic investment in renewable energy to spark the green revolution, so as to power The Bahamas of tomorrow where we make optimal use of the abundant sunshine that God has so favorably bestowed upon us; and,
• we are expanding in a substantial way the resources available to Bahamian entrepreneurs and small businesses so  that Bahamians are given the opportunity to drive economic growth and job creation.

And finally Mr. Speaker, the core priorities of this budget are aligned with the core of this Minnis-led Administration.  We are an administration that believes in Bahamian empowerment and in true and meaningful investments for the long term benefit of Bahamians. We are not in the game of political dependency where we provide so called opportunities by doling out taxpayer funded contracts to partisan supporters so as to keep them loyal. That is not a formula for success.

Instead, our focus—and correspondingly the focus of the people’s money—lay squarely on expanding investment and training. Our focus is on providing them with the funds—independent of political persuasion—to become their own employers and chart their own courses. We are providing the core infrastructure for today and tomorrow that allows them to create their own social, civic and commercial opportunities.  In short, we are about creating the empowered and independent Bahamian who will not ever again have to beg favors from a politician to get their rightful opportunity to better themselves.   

So it is our happy task and welcomed obligation to fulfill our role; and not with empty rhetoric and populist appeals that had been leading us down a ruinous path.  Instead, we shall continue unfazed and unbowed recognizing that we must be guided by what is best and not necessarily always what is popular.  We are comforted in that we know the vast majority of Bahamians understand where we were as a country and they can already see that they have a Government that is delivering on its promises and implementing the initiatives that will secure a safe and prosperous tomorrow for all Bahamians.

Mr. Speaker, I thank you for this opportunity to present the people’s budget for the fiscal year 2019/2020.