Belize Prime Minister Dean Barrow today went to the House of Representatives to present his government’s budget for 2012 which at almost one billion Belize dollars ($.935 million – 2 Belize Dollars equal 1 U.S. Dollar) is the largest ever for any Belize government. The budget brought little surprises, as the P.M. had been signalling for some time that the country is facing declining oil revenues, and increasing difficulty in servicing its external debt.
The Prime Minister stated that his government will be tapping into the revenues from the electricity and telephone companies it expropriated from private investors, in a bid to shore up shortfalls in the government’s income. It has also moved to strip the government-controlled Belize Tourism Board of its lucrative Hotel and Accommodations Tax. The tax will be removed but will be replaced with by Gross Sales Tax which directly flows into the government coffers.
Chart shows Belize government expenditure 2012 breakdown.
Mr. Barrow devoted a good portion of his budget speech to recite the myriad reasons why his government cannot and will not meet its obligations on the Superbond debt held by foreign creditors:
“It is against this backdrop that I can say now that this government will stand up for new terms that, at a minimum, re-orient this crushing debt burden on a downward track. One that is fiscally sustainable in Belize’s particular circumstances. Mr. Speaker, nothing I have said today will come as a surprise to the bond markets. The super bond — notwithstanding its extraordinarily high interest coupon — is trading at about 50 cents on the dollar. And the markets surely recognize that additional debt relief for Belize is unavoidable.”
The Prime Minister then presented his Summary Of Draft Estimates For Fiscal Year 2012 2013
The draft estimates have been prepared on the assumption that nominal GDP will grow, in real terms, by about 2.0%% over the fiscal year, reflecting projected increases in the primary and services sectors and continued strong public sector investment especially in road and bridge infrastructure.
We are also assuming a moderate 2% in inflation, although this may be tempered by the sharp decline in world oil prices. Mr. Speaker, for the proposed Budget for Fiscal Year 2012-2012, we have set a preliminary target for the Primary Surplus of 2.0% of GDP and a target for the Overall Deficit of 2.47% of GDP.
Total Revenue and Grants are estimated at $862.6 million. This is an increase of $26.9 million over the expected outturn for last fiscal year.
Total Expenditure is estimated at $937.9 million. Taken together, the result is an overall deficit, before Amortization, of $75.2 million, equal to the 2.4% of GDP. The provision for amortization payments has increased slightly to $64.6 million which, when added to the Overall Deficit, results in an Overall Financing Requirement of $139.8 million. This financing requirement will be met from the following already secured sources of financing:
Draw-downs from our multi-lateral development partners of approximately BZ$62.5 million in project-related, external loans committed to fund the Capital III Program;
A Drawdown of BZ$20 million from a multi-year, Republic of China (ROC) – Budget Support Loan first approved in 2009; and
Domestic financing of approximately $31.2 million together with a modest drawdown of about $11.0 million from deposits in the domestic banking system.
Mr. Speaker, as in past years, we continue to finance our capital program largely through borrowings from bilateral and multilateral sources on concessionary terms, which have below- market interest rates and extended repayment periods. It bears repeating that since taking office at the beginning of 2008, we have not resorted to any commercial borrowing.
Chart shows Belize government projected revenue sources for 2012 2013
TAX AMENDMENTS
Mr. Speaker, as recently as two weeks ago, I repeated a pledge made in the run-up to elections last March that there will be no new or additional taxes. And this budget delivers on that pledge.
One of the reasons we have constructed our budget with such discipline and expenditure restraint, is precisely to avoid the need for any new taxes. We have made clear our conviction that such would be anti-growth.
So there will be no new taxes. However, Mr. Speaker, we will introduce a couple of administrative amendments that are aimed at improving the overall efficiency and equity of the tax system; to remove distortions; and to provide for wider sector-inclusion.
Reverting to GST on Petroleum Products
Last year in the face of spiraling oil prices on the world market and the impact this was having on the prices of imported petroleum products here in Belize, we took measures to fix the level of taxes applied on these items. This was done so that there would be no unintended tax increases, however marginal, arising from the ad valorem nature of the tax regime in place at the time.
We did this by removing the GST and applying instead a specific rate of import duty on the three major fuel products. At the same time, we made provisions so that GST credits would continue to be granted to qualifying businesses and individuals who used fuel in the course of their operations.
One year has passed and we have had the opportunity to review the effect of these measures. While it has achieved the objective of completely stabilizing all taxes on fuel, we have seen unanticipated distortions in the GST refund system; and we have now received a number of requests from businesses to revert to the former regime that consisted of a combination of GST and Import Taxes. This is also made desirable by the precipitous drop in imported oil prices.
We are therefore receptive to the requests and have taken the decision to reintroduce the GST on Fuel, lower Import Duty in a commensurate amount, and remove the GST Special Credit (as this would no longer be relevant). Mr. Speaker, we plan to introduce these measures by SI at the time of the next shipment of fuel due sometime early next month.
The technicians in the Ministry of Finance and the Revenue Departments advise that there should be no negative impact on pump prices from this move.
Income and Business Tax
Mr. Speaker, in other business of the House today, we will be introducing a bill to amend the Income and Business Tax Act to lower the rate of business tax on entities licensed to provide electricity, from 6.5% to 1.75%. Through this amendment, we propose to revert to the rate that was in effect prior to April 2010.
This is deemed appropriate as Belize Electricity Limited, now under national ownership and management, is no longer extracting excessive profits from its operations. Rather, the people-owned BEL has instead managed to lower rates across the board to Belizeans and still generate a small surplus. All this while “keeping the lights on” and saving us from the rolling blackouts that under Fortis seemed not so much a threat as a promise. The impact to revenue of this decrease is estimated to be in the region of $6.0 million on an annual basis. On the other side of the coin, we anticipate this would increase the net income of the company which would therefore pass through as an increase in dividends to shareholders, including the Government of Belize. It is noteworthy that BEL has already started paying SSB the dividends that Fortis owed, and will also settle with the small individual shareholders by year’s end. Bravo for Belize and BEL!
Consolidation of Public Financial Flows
Mr. Speaker, we are reviewing the funding and operational modalities of several funding agencies, with the view of consolidating public financial flows under one roof (through the enhanced use of a Single Treasury Account). This is expected to improve the capacity of the Government to manage public sector finances at an aggregate level.
As a first step, we will institute processes whereby taxes and fees collected by these agencies will be paid into the Central Government Consolidated Fund in the first instance and a percentage of such collections will be transferred back to these Agencies for their operations.
Two agencies, BELTRAIDE and the Belize Tourism Board (BTB), will be the first to be included in this new methodology during this fiscal year.
Reform of Taxation on the Tourism Sector
Mr. Speaker, following an in-depth study of the taxation of tourism sector in Belize undertaken with IDB support earlier this year, which included consultations with a wide cross section of the industry, recommendations have been made to Government to reform the taxation regime. The idea is to increase the equity and efficiency of the taxes currently applied to this sector, and to provide incentives for further investment and growth.
One key recommendation that the Government has accepted in principle and expects to adopt in the coming months, is to bring the hotel and accommodation sector wholly into the GST net while at the same time repealing the Hotel and Tourist Accommodation Taxes.
This will have the effect of making hotel accommodation services fully taxable at the standard GST rate (currently 12.5%) while removing the hotel tax currently charged to the industry. As the proceeds from these latter taxes are currently collected and retained by the Belize Tourism Board for product promotion and marketing and other services, the GOB will concurrently put in place a mechanism to transfer a portion of the revenue collected from the GST to the BTB. This will fully offset the “loss” of net income that the Board is currently receiving from the hotel tax.
This measure will address a long-standing complaint from the hotel and tourist accommodation providers that they are unable to claim refunds for GST paid on their inputs as currently such services are “Exempt” for the purposes of the GST. This action is also expected to contribute to improve the buoyancy of the tax system.
Mr. Speaker, we will be introducing legislation at the next practicable opportunity to provide for this reform, which we intend to make effective on 1st January 2013. This commencement date should give us sufficient time to ratify the support from the tourism sector, and put in place the necessary structures and mechanisms to ensure the success of the change.
Trade Liberalization
Mr. Speaker, as we steadily move toward greater economic integration with our regional partners, we must again examine our current system of trade restrictions in order to become more compliant with WTO rules and with the commitments made under the EU Economic Partnership Agreement (EPA).
In particular, we need to look again at our system of import licensing and quantitative restrictions (QRs).
While the arguments for protection are well understood, we do need to strike a balance. And the fact is that, unless very carefully calibrated, QRs can easily result in widespread economic distortions, bestow special privileges to those who obtain licenses, and generally result in higher costs to consumers.
We have examined the list of over 121items currently subject to import licenses. And after careful analysis and consultation, we have taken the decision to remove some 62 items from that list and impose instead a temporary tariff surcharge of 20% on those items. This will be for a period of 24 months to afford a continuing degree of protection while providing time for these items to become more competitive. Mr. Speaker, the Hon Minister of Trade will, before the next session of this House, sign an Order reducing the number of items covered by QRs .
Budget Transparency
We have introduced lines in the budget, under the Heading of Capital Transfers & Net Lending, to show explicitly the fiscal flows between the Central Government and the recently nationalized public utilities. Apart from a relatively small transfer of $3.3 million to the Belize Water Services Limited (BWSL) to meet the debt services on two old water services expansion loans from the CDB, there are no transfers programmed from the GOB to either Belize Electricity Limited (BEL) or to BTL for the new budget year.
To the contrary, GOB expects to receive some $10.0 million from BTL by way of dividends and loan repayments, and we also anticipate a much smaller inward transfer from Belize Electricity Ltd. as this company returns to profitability.
The point I would like to emphasize, Mr. Speaker, is that since Government and people assumed control of these three companies, there has been NO NEED for GOB support or bailouts. Rather, in the case of BEL the lights remain brightly lit to better illumine the path of Belizean nationalism and progress; in the case of BTL the phones and the Internet are cheaper and more plentiful and will soon be working at 4g speeds; and in the case of BWSL the reduced-cost potable water continues to flow.
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