Strapped with sizeable, ongoing capital expenditure commitments and a slew of last minute contracts signed by the former administration, the new government is faced with a “dire fiscal” situation – one that is much worse than expected.
Presenting his first budget since winning the government earlier this month, Prime Minister and Minister of Finance Perry Christie said the bulk of this year’s fiscal deterioration was in large part due to the considerable increase in spending on the controversial New Providence Road Project.
It will reportedly take another $77 million to close the project’s funding gap, leading to a capital expenditure of some $400 million in 2012/2013, essentially unchanged from the $399 million estimated at the end of 2011/2012.
This represents an increase of $119 million or almost 43 per cent over target. Capital revenue in 2011/2012
Meanwhile, recurrent expenditure this fiscal year is projected at $1.7 billion while recurrent revenue has a projected outturn of some $1.4 billion, down $64 million from forecast.
The prime minister acknowledged that the fundamental challenge for fiscal policy is the very large negative imbalance that has been allowed to develop with respect to the government’s recurrent account.
In fact, he said the gap between recurrent expenditure and recurrent revenue has quadrupled in the last five years.
“In 2006/2007, the negative spread between the two stood at 0.8 per cent of GDP. This year, that imbalance has grown to 3.2 per cent of GDP. In the last five years, the ratio of recurrent expenditure to GDP has grown from 17.4 per cent to 21.3 per cent. However, the ratio of recurrent revenue to GDP has only risen from 16.6 per cent to 18.1 per cent,” Mr. Christie explained while presenting the 2012/2013 budget communication in the House of Assembly Wednesday.
“In essence then, rather than only borrowing to finance productive investments in our nation’s future prosperity, the previous administration was also increasingly borrowing to pay for an increase in everyday expenditures in the form of salaries, rent and utilities that was not matched by an increase in revenues.”
In light of such fiscal realities, the government has decided to hold the line on recurrent expenditure in 2012/2013 “to the maximum extent possible.”
In the coming fiscal year, recurrent expenditure is expected to come in at $1.8 billion, an increase of $114 million. Of that figure, $55 million will be allocated to the increased requirements for debt redemption in the coming period, according to the prime minister.
“We have also projected recurrent revenues in a prudent fashion, forecasting that they will come in at 18.3 per cent of GDP,” he said.
“This represents a slight improvement in performance from 2011/2012 and reflects the early results of some of the revenue reforms outlined, specifically in respect of excise tax and real property tax reform. As such, we expect recurrent revenues of $1.5 billion in 2012/2013, up from $1.4 billion last year.”
As for this year’s fiscal deficit, the government foresees it being significantly higher than had been forecast by the previous administration during last year’s budget.
The GFS deficit in 2011/2012 is now projected to come in at $504 million, up by $256 million from the $248 million predicted.
In 2012/2013, the deficit is expected to balloon to $550 million or 6.5 per cent of GDP.
“It goes without saying that such a dismal deficit result translates directly into a marked deterioration in the government’s debt position, both in absolute terms and relative to the size of the economy,” Mr. Christie explained.
The government however accepts the deficit must be constrained in the short term and significantly reduced thereafter.
“As such, in the very short period that has been available to commitments already on the books for the coming fiscal year, we have done what has been feasible to achieve the objective,” the prime minister said.
“As we move forward, we will implement the fiscal measures necessary to improve the government’s fiscal position and rein in the growth of government debt.”
The Christie administration is working on implementing a modern debt management strategy.
In fact, the prime minister said a committee – made up of representatives from the Ministry of Finance, the Public Treasury and the Central Bank – has already been established to develop and put a debt strategy in action that will lead to lower borrowing costs while minimising risks incurred.
This has been done with technical assistance from the International Monetary Fund (IMF), according to the nation’s chief.
The government is expected to report on the progress made in respect of the structural fiscal reforms during the mid-year budget statement in early 2013.
“…The restoration of fiscal discipline is absolutely necessary if the government is to fully implement its agenda for change and play its rightful role in promoting private sector development, new sustainable job opportunities and higher standards of living. We will as a priority restore our public finances to a healthier and more sustainable position,” Prime Minister Christie said.
