Analyzing the Prime Minister’s Business Approach to the Budget

[dropcap]T[/dropcap]he following is the third and final part of an article by Francis Reynolds entitled ‘Prime Minister Silences Critics and Applies Business Approach to First Budget’. This article previously touched on areas addressed in the 2017 Budget presentation including governmental reform, agricultural-led strategy and diversification, domestic economic performance, and other areas. 

Improving Security and Justice:

The Courts will be temporarily relocated to the grounds of the National Cultural Centre. A temporary structure will be erected to house the Family court, First District Court, the High Court, Magistrates court and the Offices of the Director of Public Prosecutions while the National Cultural Centre will be relocated to an alternative location.

The Office of the Director of Public Prosecutions has been short of resources for some time. This has hindered the pace at which cases can be handled. We will strengthen the office of the Director of Public Prosecutions through adequate staffing and the provision of other enabling services such as proper equipment. This will further assist with the reduction of the backlog of cases. We can report that with the appointment of the new DPP, significant progress has already been made in reducing the backlog of cases and I would like to publicly congratulate him and his Department on their success thus far.

I am pleased to report the Forensic Science Laboratory reopened during this financial year. In addition, we will increase the resources of the Royal Saint Lucia Police Force by training 46 recruits and providing additional vehicles and other much needed equipment. 

Strengthening Border Control

At present four agencies perform border management functions in Saint Lucia. These are: Customs and Excise Department, Immigration Department, Marine Unit and the Quarantine Division of the Department of Agriculture. Collectively these agencies have responsibility for overseeing the movement of people, animals and plants, the import and export of goods and services, and the securing of Saint Lucia’s borders. To this end, we will develop a Border Control Services Agency.

This agency will be responsible for:

• Border Management and the processing of people, goods, plants and animals at all ports of entry

• Customs and immigration services

• Enforcement of relevant legislation

• Protection of Saint Lucia’s borders

FISCAL STRATEGY

Tax Reforms:

My government has made tax reforms a major priority over the medium term.  In this regard, work has already commenced in a number of areas geared toward improving competitiveness and stimulating growth.

Value Added Tax:

One of the promises made in our 2016 manifesto is to provide tax relief to Saint Lucians in the areas of personal and corporate income tax and VAT. In keeping with this promise, on 1st February 2017 we reduced the VAT rate from 15% to 12.5% as part of the initial VAT reform. It is the view of this government that the reduction in VAT will reduce prices to the consumer and/or boost profits for business, thereby stimulating confidence in the economy.

VAT Deferral for Manufacturers:

Our manufacturers have complained about the burden from VAT on imported raw materials used in their production processes.Given that VAT is a border adjusted tax, when goods are imported into Saint Lucia, the manufacturer is required to pay VAT upon clearance of these goods. This input VAT incurred is claimable and is offset against any VAT collected when a VAT return form is submitted by the 21st of the following month. If the manufacturing collects less output VAT than the amount paid on inputs, then the difference is refunded within four to six  weeks of processing the claim. This can create an unnecessary cash flow strain, thus adding to the financial burden on manufacturers in that they must source financing either from loan financing or overdraft, which can be expensive and render their businesses uncompetitive.

We have designed a VAT deferral system to minimize the impact of the VAT obligations faced by manufacturers. This system will eliminate the VAT payment on imports of raw materials and no such payment is required subsequently, to the extent that the manufacturer is allowed to claim the full input VAT.

A payment will be required to the extent that a portion of this input VAT is not claimable and the manufacturer has no VAT refundable. This gives manufactures immediate use of the imports to manufacture and sell the goods that they have produced.

The IRD has already produced the draft legislation to allow for the implementation of the deferral tax system on certain imports; this draft legislation will therefore be amended to incorporate raw materials imported by approved manufacturers.

Personal Income Tax:

The reforms proposed are extensive. In light of these issues the policy direction of the government with respective to PAYE is as follows:

i. Simplify the system such that filing is no longer required by the taxpayers

ii. Allow for more progressivity in the system

It is therefore proposed that both the personal allowance and the applicable deductions be reformed with a view to simplifying the system while simultaneously making it more progressive. It is also the intention of the government to place a cap on personal income tax. We will make an announcement of the changes to be made in the personal income tax prior to its implementation.

 Foreign Residency Programme: It is the intention of this government to introduce a foreign residency programme that will allow high net worth persons to take up residence in Saint Lucia. In order to qualify, the foreign resident will have to invest in real estate, open a company that hires more than 10 people or invest in our sovereign fund. Those persons, once they have acquired residence in Saint Lucia, will be treated like Saint Lucians except they will not have the right to vote or to own a Saint Lucian passport.

Sovereign Wealth Fund:

The government has commissioned a study to review mechanisms to enhance the competitiveness of the existing CIP programme and to amend the tax legislation to make it attractive for foreign persons to become tax residents of Saint Lucia. As a result of the studies government will be taking steps to establish a Sovereign Wealth Fund that will allow participants in the CIP programme the option of making an investment in the Fund alongside the Government of Saint Lucia.

The Fund will be designed to ensure that it meets appropriate governance standards and will be staffed by professional investment managers. It is expected that the majority of the Fund’s capital will be deployed in liquid foreign denominated securities with the balance being earmarked for suitable investments in the Saint Lucian economy. Profits derived from investments in the Fund are expected to be used for Central Government expenditure.

Citizenship by Investment Programme:

The government has taken steps to encourage greater participation in the CIP. Honourable members would be aware that the donation component was reduced from US$300,000 to US$100,000.

REVENUE MEASURES

Excise Tax on Fuel:

Over the years we have not been able to allocate enough money to maintain our road network which has come under tremendous pressure from the rapidly increasing number of vehicles on our roads. In 2016 the number of vehicles imported in Saint Lucia increased by 40.8% to 3,137. 

There has been increased traffic congestion and resulting deterioration of our roads. The high level of public debt and the current sources of tax revenue do not allow sufficient resources for road rehabilitation and expansion of the road network. Therefore, my government will dedicate a stream of revenue to go towards maintaining and upgrading the road network and associated infrastructure such as bridges. This stream of revenue will come from an increase in the excise tax on gasoline and diesel which will be increased from $2.50 a gallon to $4.00.

This will take effect from June, 2017.

EXPENDITURE MEASURES

Tackling the National Debt:

The time has come to tackle our national debt problem. For too long successive governments have been paying lip service to this situation and the problem gets worse each year. This government will not let another term go by with no decisive action. To do so would be to undermine our fiscal reform effort, and to jeopardise the potential that this country has to enter into a new era of sustained higher economic growth. We owe this to future generations and we must tackle it now.

And so we have developed a Medium Term Debt Management Strategy (MTDS) to address this situation, the objective of which is to analyze the costs and risks inherent within the debt portfolio, referencing the interest rate risk and refinancing risk. This strategy document comes against a background of adverse economic and financial developments within the ECCU including Saint Lucia. The management of the debt programme involves the design and implementation of debt strategies which will effectively align the debt level with fiscal sustainability.

Reduction in Transfers:

This budget is geared towards revenue reform, restructuring of the tax system and enhancing economic growth. However, we must exercise fiscal responsibility and discipline. We must look carefully at transfers and determine whether the performance of statutory bodies and affiliated agencies justifies continued support of these agencies. There may be instances where a merger of agencies, or an elimination or reduction of transfers is the most suitable option. In some cases the environment has evolved, and the purpose for the creation of these agencies no longer exists. In other instances agencies may be better placed to operate as private institutions and allow market forces to set rates and determine the true cost of operations. This is no easy task, but is a necessary part of the journey to exercising fiscal discipline and reducing our debt burden.

The first agency of government for which transfers have been reduced is the Saint Lucia Tourist Board. Upon assuming office my government took a decision to close the Saint Lucia Tourist Board and to establish the Saint Lucia Tourism Authority. This has resulted in the reduction of administrative expenses from $8.6 million in 2016/17 to $5.6 million programmed for the 2017/18 financial year.

We have also identified a number of other agencies whose operations and performances have been reviewed and a determination will be made on their continuation in their current form in the coming weeks and months; these include:

• The Saint Lucia Marketing Board

• The Saint Lucia Fish Marketing Corporation

• Radio Saint Lucia

• The Supply Warehouse:

• The Saint Lucia National Trust

• The Saint Lucia Postal Service

FINANCING THE 2017-2018 ESTIMATES OF EXPENDITURE

During the fiscal year 2017/2018 the government intends to spend a total of $1.513 billion representing a 6.1% increase over the 2016/17 approved estimates and a 14% increase over the preliminary outturn for the preceding year. Of the total amount budgeted for in the fiscal year 2017/18, recurrent expenditure accounts for 76.1% and an amount of $1.151 billion is allocated while the amount allocated for Capital expenditure is $362 million representing 23.9% of total expenditure. The budgeted amount for recurrent expenditure includes $124.5 million for Debt Principal Repayments.

The budget will be financed as follows:

1. Recurrent Revenue of $1.073 billion comprising:

    a. Tax Revenue of $958 million (89.3% of revenue)

    b. Non Tax Revenue of $115 million (10.7% of revenue)

2. Capital Revenue from the proceeds of the sale of assets amounting to $7.4 million

3. Grants amounting to $87.4 million from friendly governments and multilateral institutions including:

i. Republic of China (Taiwan) contributing $35.7 million

    ii. Caribbean Development Bank (CDB) contributing $9.9 million

    iii. European Development Fund (EDF) contributing $13.8 million

    iv. Government of Mexico contributing $9.1 million.

    v. World Bank (IDA/IBRD) – contributing a total of $9.8 million

    vi. United Nations Environmental Programme (UNEP) – $4.2 million

4. Government Instruments including Bonds of $208 million and Treasury Bills of $50 million.

5. Other Loans totaling $84.8m comprising

    a. $43.1 million from the Caribbean Development Bank

    b. $ 24.9 million from the World Bank

    c. $13.6 million from the Republic of China (Taiwan)

    d.  $1 million from the National Insurance Corporation (NIC)

    e. $2.2 million from the Kuwait Fund for Arab Economic Development

ALLOCATION OF EXPENDITURE

The Economic Sector Departments are poised to receive the largest share of total expenditure in the amount of $899.6 million or 60%. This represents an increase of $87.2 million, or 10%, over the last financial year 2016/2017. Of this amount a sum of $612.8 million, or 69%, is allocated to recurrent expenditure while $286.8 million or 31% represents the share allocated to capital expenditure.

The Ministry of Finance will receive the largest share of this amount totaling $499.2 million or 56% of the total expenditure for the economic sector. It is extremely important to note that approximately $376.1 million, or 76%, is budgeted for debt service payments and retiring benefits.

I propose to allocate to the Department of Economic Development, Transport and Civil Aviation the sum of $67.8 million for Capital Expenditure, of which $27.5 million is to be allocated to the Disaster Vulnerability Reduction Project (DVRP). The objective of this project is to reduce vulnerability to natural disasters and climate change. I am also proposing an allocation of $19.1 million for the St. Jude’s Hospital Reconstruction Project and $19.2 million for the Constituency Development Programme.

I have discussed the poor condition of our road network. In this regard, I propose to allocate to the Ministry of Infrastructure, Ports and Energy the sum of $60.8 million for Capital Expenditure out of which $14.9 million is for the Disaster Recovery Programme. This programme is intended to address the impact of Hurricane Tomas and reduce the risks associated with landslide and flood hazards. The balance of the capital investment in the amount of $42.8 million will go towards road improvement and rehabilitation works throughout the country.

Our government intends to resurrect, revitalize and reinvigorate the Agriculture Sector and I wish to propose a major capital injection of $ 49.3 million to help stimulate that sector. Of this amount, $13.8 million is proposed to go towards the Banana Productivity Improvement Project, $10.9 million to the Agricultural Transformation Programme and $3.9 million to the Rehabilitation of Farms following Tropical Storm Matthew.

In respect to our water supply system, I am extremely pleased to announce an allocation of $10.6 million and $5.9 million for the Dennery and Vieux Fort Water Supply Redevelopment projects, respectively.

I wish to propose a capital of $33.6 million to the Department of Tourism, Information and Broadcasting. Of this amount, $28.9 million will go towards Tourism Marketing Promotion to support Tourism Marketing and airlift into the country.

In respect to the Department of Housing, Urban Renewal and Telecommunications, I propose to allocate $25.5 million, the bulk of which will be directed to PROUD/Settlement Upgrade Project, PROUD III, the National Sites and Services Programme and the CDB funded Housing Construction Programme.

I now turn to the Social Services sector. An allocation of $406.7 million is proposed for this sector, of which $359.2 million is recurrent expenditure and $47.4 million is for capital expenditure. This represents an increase in allocation of $11 million over last year’s budget.

It is no surprise that the bulk of the recurrent expenditure, a sum of $289.9 million, is earmarked for the Ministries of Education and Health and the remainder of $69.3 million is to be distributed to the Ministries of Equity, Labour, Youth Development and Local Government.

As it relates to capital expenditure, a sum of $22.6 million is proposed for the Ministry of Equity, of which a provision of $10.7 million is for the Basic Needs Trust Fund 7th and 8th programmes. A further $5.3 million is for the Home Care Programme and $3.2 million for the Youth Empowerment for Life Project. Further, a capital provision of $18.7 million is allocated for the Ministry of Health and Wellness.

A sum of $6.6 million and $4.7 million is earmarked for commissioning the New National Hospital and New National Hospital works programme, respectively.

I now wish to focus on the Justice System, which has been badly neglected. We will address the issues plaguing it. An amount of $139.7 million is to be allocated to this sector of which $132.1 million is for recurrent expenditure and $7.6 million for capital expenditure.

In the area of capital expenditure, $3.8 million is to be allocated to the Fire Service Department particularly for firefighting equipment and to effect repairs to Fire Stations. I wish to announce that we will be commissioning the Babonneau Fire Station.

The police are in desperate need of vehicles, many of which are in poor condition. In this regard I am pleased to allocate an amount of $772,000 for purchasing vehicles.

With respect to the General Service Agencies I propose an allocation of $58.5 million. Of this amount $38.1 million is recurrent expenditure and $20.4 million is capital expenditure. The share of this amount is as follows: Ministry of Public Service – $27.5 million and the Office of the Prime Minister – $8.7 million.

I wish to make mention of a $10 million allocation for the National Apprenticeship Programme, which includes two components namely
a Call Centre and Hospitality Training.

A provision of $5.9 million is allocated for the Caribbean Regional Communication Infrastructure (CARCIP) for the roll-out of the Government-Wide Area Network (GWAN).

Finally I wish to propose an allocation of $8.9 million to the Agencies of Governance which include Legislature, the Service Commissions and the Electoral and Audit Departments.

I wish to reiterate that our government, through this budget, has demonstrated its unwavering commitment to grow this economy by investing more in its capital programme, which reflects an increase of $36.2 million, or 11.1%, from last year.

CONCLUSION

One of the challenges that I foresee in pursuing our policy agenda is implementation. It is no secret that we have suffered from a serious implementation deficit in the past and this has seriously affected our ability to implement projects in a timely and cost-efficient manner. My government’s mantra is “execute, execute, execute”.  We intend to put in place the institutional framework and strengthen capacity to enable us to accelerate the pace of implementation.

I have witnessed first-hand the depth of despair and hopelessness that many families are experiencing in Saint Lucia. It is for this reason our government felt that there was need to provide immediate relief to Saint Lucians by way of the reduction in the Value Added Tax from 15% to 12.5 %.

We wish to pursue with urgency the implementation of a social safety net system for the lower income group in our society. We are a caring and empathetic government that will address the plight of the less fortunate in our society.

This budget is part of a four-year plan that will reform, transform and modernize our Saint Lucia. This budget will therefore provide the foundation for the future growth and development of our economy.