PM Douglas in Budget Address: Government must deliver on education, health, safety and security as well as social assistance

St. Kitts and Nevis Prime Minister and Minister of Finance the Rt. Hon. Dr. Denzil Douglas presenting the 2012 Budget Address in the National Assembly on Tuesday (Photo by Erasmus Williams)

BASSETERRE, ST. KITTS, DECEMBER 13TH (CUOPM) – St. Kitts and Nevis Prime Minister the Rt. Hon. Dr. Denzil L. Douglas Tuesday presented an EC$400.9 million (US$148.4 million) budget to Parliament for the financial year 2012.

In a three-hour presentation Dr. Douglas, who is also Minister of Finance said that his administration has once again cut back substantially on recurrent and capital Expenditure for the new fiscal year in order to maintain fiscal stability.

But he told legislators “there are a number of critical services such as education, health, safety and security as well as social assistance that his government, which has a multi-million dollar Standby Agreement (SBA) with the International Monetary Fund (IMF), must deliver.

“Careful attention has therefore been taken to provide adequate resources to ensure that the quality and scope of these services are not in any way compromised,” he said.

According to Dr. Douglas, recurrent revenue for 2012 has been estimated at EC$401.3 million (US$ 148.6 million), which is EC$31.6 million (US$11.7 million) below the 2011 Estimate of EC$432.9 million (US$160.4 million).

Dr. Douglas said that the major portion of this decrease can be attributed to the loss of revenue from the Electricity Department.

He told Parliament that The St. Kitts Electricity Company is now fully operational and therefore revenue and expenditure in respect of the Electricity Department is no longer included in Government’s Budget for 2012.

On the other hand, recurrent expenditure for 2012, excluding loan principal payments, has been pegged EC$400.9 million, which Dr. Douglas said is EC$398.9 (US$147.7 million) or 0.1 per cent less than the 2011 Estimate of EC$401.3 million (US$148.6 million).

Dr. Douglas told legislators that the measures introduced in the fiscal package has taken into consideration the IMF’s loan agreement introduced in 2011 with “a debt restructuring strategy aimed at bringing public debt to sustainable levels so that by 2020 we will meet the ECCB (East Caribbean Central Bank) Monetary Council’s target for debt to gross domestic product (GDP) ratio of 60 percent.

“Our Debt Advisors have been working with the Ministry of Finance to implement the plan that was agreed upon to restructure the debt. This approach includes the launch of an exchange offer for external debt and the creation of a Special Purpose Vehicle for secured domestic debt. We have made substantial progress with the comprehensive debt restructuring process and we are on track to make the exchange during the first quarter of 2012.

“I am also pleased to announce that the Caribbean Development Bank (CDB) has agreed to support our restructuring efforts by providing a partial guarantee for the new bond,” Dr. Douglas said.

He said that the Treasury Bills were not part of the restructuring process.

“The Treasury Bills are our short term source of cash and since it is important for us to have that liquidity support during the restructuring period as well as after the restructuring, we made a strategic decision at the outset not to include the Treasury Bills in the restructuring process.”

Dr. Douglas said that the previously announced measures have yielded the expected level of revenue and quoted a report by the Caribbean Regional Technical Assistance Centre (CARTAC) on the island’s Revenue Enhancement Measures indicating that by the end of 2012 the Housing and Social Development Levy would only have achieved 50 per cent of the targeted revenue.

“My Government is aware of the reason for this shortfall. In the original proposal from the consultant, the recommendation was for the increase in the levy to apply to the lowest tier of employee income,” Dr. Douglas said, noting that his administration had not increased the tax measure because of its impact on the “masses of people in our country.”

“We made this strategic decision at a time when the state of the global economy was pointing to very difficult times for open economies like ours and therefore we decided not to put an additional burden on persons earning the minimum wage.

“We still stand by this decision as it was intended to relieve the tax burden on these fixed income earners and we feel that by leaving their income intact, we were able to bring some relief to them during these difficult times.”

But he said the fact remains that the twin island Federation must ensure that it generates sufficient revenue in support of the fiscal consolidation programme.

He said while his administration is reluctant to introduce new taxes, “we must take steps to secure sufficient revenues.

“We believe that there are administrative measures that can be implemented to ensure that the Government is collecting what is rightfully due. This is the case with respect to the Housing and Social Development Levy.

“Therefore, beginning in 2012, reconciliations of the Levy collections will be undertaken by the Inland Revenue Department in collaboration with the Social Security Board which is responsible for the administration and collection of the Levy on behalf of the Comptroller of Inland Revenue. Where it is found that businesses have not been complying with the law, they will be required to make restitution.”

Dr. Douglas told legislators that it is estimated that revenue foregone through concessions for 2011 will amount to EC$110 million (US$40.7 million).

“We believe that before we can introduce new taxes we should try to rationalize the current exemptions with a view to improving our revenue intake. To this end, in 2012 we intend to undertake a complete review of the exemptions which still exist on the Customs Service Charge to ensure that they are all in line with legislation and policy,” he said.

The Prime Minister said with respect to the Value Added Tax (VAT), there will be a review of the practices and procedures for administering the input credit system in the tourism sector “as we have received reports from the consultant who did an analysis on the VAT performance that there could be serious non-compliance.

“We will also begin to publish the names of those taxpayers who are non-compliant as provided in the law. In addition, when the current exemption on the supply of construction services on commercial construction expires, we will treat the construction sector similar to the way in which the banking sector is treated.

“That is, all services provided for a fee will be subject to VAT. However, amounts received by contractors to be disbursed as wages or to purchase materials will be exempt from VAT. We will also treat the insurance sector in a similar manner in the new year 2012.

“That is, services provided for a fee will be subject to VAT while amounts specifically collected as premiums will be exempted from VAT. We will also fine tune income tax filings for insurance companies to make them more transparent,” the Prime Minister said.
He said his administration intends to pass a new Corporation Tax Act next year as well as close “certain loopholes in the current Income Tax Act” as of January 1.

He said the threshold on personal income will only be deductable from one cost center in a Corporation or other business entity.

“In other words, a person who receives EC$180,000 (US$66,666) in annual income will not be able to claim three amounts of EC$60,000 (US$22,222) from three different branches, subsidiaries or other related entity of the Corporation and hence reduce taxable income by tax avoidance.”

The Prime Minister said there are also plans to improve the administration of the Excise Tax system and increase collection efforts in this area.

He said the government will re-examine the subsidy on Liquid Petroleum Gas (LPG) which costs the Government over four million (EC) dollars (US$1.48 million) annually.
Dr. Douglas said that the Sugar Industry Diversification Foundation (SIDF) has financed this subsidy so that no further financial burden would be brought to bear on the population.

“However, this subsidy cannot go on forever and we will begin to phase this out from 2012. We will also continue to examine the fee structures for the services which Government provides and ensure that these fees adequately cover the costs which we incur to provide these services.”

Dr. Douglas told legislators that there were other “actions” his administration has been taking during 2011 ” to ensure that we remain on course to achieve the fiscal targets that we have set.

“In particular we have discontinued all expenditure commitments for the rest of 2011. We will only make payments for salaries and other statutory expenditure,” he said, appealing to all ministries and Departments to cooperate with the Ministry of Finance in implementing the measure.

“We are also appealing to commercial houses to refrain from taking orders from anyone in Government by telephone or word of mouth as the only commitments that will be honoured are those that they receive on an official Government Purchase Order.
Otherwise they run the risk of not being paid. This does not only apply to this current season but to Government’s operations in general.”

Dr. Douglas said he is “very confident that this mix of administrative adjustments and procedures will achieve the revenue levels that we need to meet our needs and help to place our fiscal on a sustainable path as well as put our debt on a firm downward trajectory.”