Focus | The budget by the numbers
When all is said and done, a budget, even the government’s budget, consists of two parts: (1) a forecast of revenue; and (2) a proposal for spending that revenue.
Evaluating the government’s budget then is a matter of evaluating the credibility of its forecast of revenue and viability of its proposed expenditure. It ought to be said that both the preparation of a budget and the evaluation of it involve a great deal of judgment making.
The minister of finance cannot know the future, and, as a man, does not have perfect information; so by nature, his predictions about future outcomes and the spending that rely upon them must be seen more in the nature of probabilities than prophecies. The same is true for those who would critique the minister’s efforts. They, equally, cannot see the future and lack perfect insight.
This notwithstanding, it is possible to render fair assessment of the budget because one can evaluate past performance as a guide to future outcomes, as well as adjudicate the explanations given to justify proposed conduct. It is against this background that this first of a three-part series analysis on the 2018/2019 budget will be given.
The revenue forecast 2018/2019
It is possible to provide collective blame to the Cabinet of The Bahamas for all aspects of the government’s budget. No matter what you hear from a Cabinet minister privately, or publicly, he or she must own the government’s budget or resign his or her post.
The government’s budget must be supported by its executive members. This collective responsibility notwithstanding, there is one aspect of the budget that is the exclusive responsibility of the minister of finance, and that is the revenue forecast.
No minister, not even the prime minister, has any role to play in the forecast of the government’s revenue other than the minister of finance. In the 2018/2019 budget, the minister of finance forecasts revenue of approximately $2,650,927,483. This represents an increase of $498,339,209 or 23 percent over the forecast of the current period.
It is not possible to compare this increase to the provisional actual outturn for the current year, as the information available only provides revenue for eight months of that year, which stood at $1,470,260,166, according to the budget communication. It is not certain why there is only eight months of reporting on the current outturn. It is certainly something I have not seen before. Nevertheless, the 2018/2019 forecast is some $580,668,681 or about 30 percent higher than the actual outturn for 2016/2017.
I begin this analysis with revenue because everything turns on it. The government’s planned spending is based upon the revenue forecast. The forecasted revenue combined with planned spending impacts the level of deficit projected by the government and the borrowing it intends. All of this then influences the forecast of debt-to-GDP ratio and the national debt.
In other words, if the revenue forecast is wrong, then everything else goes wrong. Revenue can actually be higher than forecasted, which is positive; on the other hand, it can be less than forecasted, which is negative. On the basis of probability and given the accuracy of forecasts over the last 30 years, it is likely that the revenue forecast for 2018/2019 will not be spot on. It almost never is.
Actual revenue in the upcoming year will likely not be what is forecasted. The question is: How inaccurate will it be and will that inaccuracy be negative or positive?
Once again, judging from history, the ministers of finance, including this one, have tended to forecast revenue on the high side. There seems to be an upward bias on forecasting revenue. This is likely because pessimism in budget forecasting produces unpopular political results, so ministers look for positive outcomes.
Generally, the upward forecast bias is not more than three percent to five percent of what actually ends up being the case. It can on occasion be much more or much less, though. I believe that this bias will show up in the 2018/2019 forecast. There is little doubt that the government will collect additional revenue in the upcoming year if it follows through with the value-added tax (VAT) hike from 7.5 percent to 12 percent. Notwithstanding the protest, if the tax hike happens, we will have to pay it when we purchase goods and services at home. And we will – no, must, make purchases if we will live here; many purchases. What is not certain is whether the minister will receive the level of additional tax revenue in the upcoming year that is projected. Most of that increase is the more than $400 million in VAT revenue, some 80 percent of the forecasted increase.
It is highly probable that the government’s forecasted additional revenue will underperform. The economy of The Bahamas is soft, just emerging from an extended period of contraction. The tax increase proposed is likely to dampen both investor and consumer confidence. It will also shrink the disposable income of most players in the economy. Only some exceptional positive economic event can prevent reasonable fallout from these outcomes. Is it possible? It is possible, but highly unlikely over the next 12 months. The implications of this will be seen in the extent of spending in the upcoming fiscal period. It will also have implications for the deficit forecast. This we will discuss in our next instalment.
- Zhivargo Laing is a Bahamian economic consultant and former Cabinet minister who represented the Marco City constituency in the House of Assembly.