By NEIL HARTNELL
Tribune Business Editor
Hurricane Dorian’s financial fall-out has placed the government’s plan to return $100m to the Bahamian people through “significant tax cuts” in doubt, the deputy prime minister has revealed.
K Peter Turnquest told Tribune Business that the magnitude of the category five storm’s fiscal blow meant the Minnis administration had no choice but to “reassess” the pledge it made when unveiling the 60 percent VAT rate hike during the 2018-2019 budget.
In explaining that the increased 12 percent VAT rate was necessary to pay-off a $360m backlog of unfunded government bills over a three-year period, Mr Turnquest at that time voiced optimism that the government would be able to return some of this tax hike to the Bahamian people through $100m worth of Customs duties reductions from 2021-2022 onwards.
However, he conceded last week that the unforeseen multi-billion dollar hole created by Dorian meant the government has to look at its short to medium-term fiscal strategy anew. While such tax cuts, which were to take effect one year from now, are “not necessarily off the table”, the deputy prime minister signalled they may have to be delayed until there is sufficient “room” to accommodate them.
With the government set to seek House of Assembly approval to borrow $508m when Parliament resumes on Wednesday, Mr Turnquest said Dorian had likely “set us back three to four years” on its fiscal turnaround plan and blown the consolidation strategy off-course by five.
“We set out a plan for the Bahamian people that would have seen some significant tax reductions over the next few years,” he told this newspaper. “A year from now they would have started to see some significant tax reductions, but we have to reassess that now in the face of what we experienced and trying to get back on the path of fiscal consolidation as quickly as possible as required by the Fiscal Responsibility legislation.
“As we said in our strategy we were looking at Customs duty reductions and giving back $100m roughly in those taxes. That has to be reassessed. It doesn’t necessarily mean it’s off the table, but we have to reassess that we’re being responsible and ensure other factors are holding to give us the opportunity and room to do these kinds of things.”
Acknowledging that delayed implementation of the planned tax cuts beyond 2021 is “possible”, Mr Turnquest said the Government remained on target with its three-year strategy to eliminate the arrears backlog despite Dorian’s impact.
His disclosure indicates that the Government is conscious it needs every cent of revenue it can get in the storm’s aftermath, and will come as little surprise to many given projections of a $677.5m deficit for the current Budget year along with a $1.3bn blow-out in the national debt that will take it to an all-time high of $9.5bn by the 2024-2025 fiscal period.
However, it is likely to dismay many Bahamians who are likely desperate for some relief - however small - from a regressive tax system that sees lower income persons bear a disproportionate share of the burden in a system that taxes the cost of living.
“I think we’re actually projecting five years to get back to fiscal consolidation. It’s obviously set us back three to four years,” Mr Turnquest added of Dorian. The Government, prior to the storm, had been projecting a $137m deficit, equivalent to the 1 percent of GDP target set out in the Fiscal Responsibility Act, that would have kept it on the glide path towards achieving a balanced budget within the next two years.
Still, Mr Turnquest revealed that the post-Dorian fiscal numbers were “tracking favourably” with the 2019-2020 deficit slightly lower than projected to-date. However, he acknowledged that this would soon come under pressure as the reconstruction pace increases and spending commitments have to be met by the Government.
“We are tracking favourably compared to where we anticipated to be,” the deputy prime minister told Tribune Business. “Whereas expenditure is up pretty much in line with what we were thinking, we’re tracking a bit ahead of where we anticipated to be, slightly better than projected” on the deficit.
“We’re getting into the guts of the reconstruction effort, so that will require some spending,” Mr Turnquest added. “Between here and the end of the year there’s a long way to go, and a lot of commitments to meet.
“We are in the people’s business. We have to ensure we maintain the basic level of service to people in terms of health, safety and security, and do those things that ensure their comfort, shelter and education as best we can. Notwithstanding those basic commitments, we’re doing our level best to control other variables.”
The extra $508m borrowing authority the Government will seek on Wednesday is designed to help plug the 2019-2020 deficit hole created by Dorian. Mr Turnquest, though, said the Government “will evaluate” what was raised by this month’s Dorian “pledging conference” to “see what it may offset in terms of drawing down on the borrowing resolution”.
He added that “the pace of reconstruction will dictate a lot” as to whether the Government will need the full $508m, with the outcome of the pledging conference still to be determined and the Disaster Reconstruction Authority still assessing the needs.
Mr Turnquest added that no decision had been made on whether the Government would accept all or any part of the $975m offer from the US-based P3 Group, saying its proposal and associated terms needed to be better understood.
The deputy prime minister explained that The P3 Group’s offer would have to “fit into those parameters” of the PPP policy unveiled by the Minnis administration last year, which set out the types of public-private partnership (PPP) projects it would entertain and the associated terms.
The cost of financing, overall terms and types of projects involved, and “whether we want to utilise foreign money” were all considerations, Mr Turnquest said.
“There’s a lot of work to be done to understand their offer, “ he said. “What their money is for, whether it’s debt financing, if guarantees are needed, and whether the funding is the best option for what we’re trying to do in terms of building back.”
Some 68.7 percent of The P3 Group’s $975m proposal is devoted to entirely covering the Government’s $670m post-Dorian healthcare ‘wish list’, which is broken down into $500m for a new hospital to replace PMH; $120m for the Rand Memorial Hospital’s successor; and $50m to reconfigure Abaco’s health clinics and care system.
The remaining $305m of The P3 Group’s proposal is broken down into $155m for “other essential government facilities”, such as housing schools and airports; $100m for renewable and solar energy; and a final $50m for community-based projects.
The P3 Group, a US-based commercial real estate and PPP specialist, has made it clear from the outset that its $975m “pledge” is not a donation but a loan that will have to be repaid by the Government, Bahamian taxpayers and users of the new hospitals and other facilities it would construct over time.
It is really offering a traditional PPP structure whereby it would seek a return on its investment, albeit at concessionary interest rates that it says could be as low as 3-4 percent, although these terms would have to be negotiated should the Government accept its offer.
The P3 Group says the benefit of its proposal, where it would design, build, own/operate what it constructs for a 20-30 year period, recouping its investment through rent and user fees, is that it lessens the financial burden on the Government to find such capital up-front. However, some observers believe it would have too much ownership/control of key Bahamian infrastructure should the Government accept its proposal in full.