2010/11 forecast outturn $m 2011/12 budget $m 2012/13 budget $m Revenue 120 163 170 Expenditure 180 171 150 Recurrent surplus/(deficit) -60 -8 20 Net capital expenditure 4 1 5 Total surplus/(deficit) -64 -9 15 This strategy will enable us not only to achieve a surplus in 2012/13, but also to build reserves that will allow us to start to pay down debt, establish a contingency for unexpected events, and invest in infrastructure. Until this is achieved TCIG始s finances will continue to be fragile, and we will be unable to invest to help TCI prosper in future. The 2011/12 budgetReducing the deficit from $60 million in 2010/11 to $8 million in 2011/12 will require action to both raise revenues and reduce expenditure.
The need to reform TCIGʼs revenue system has been recognised for many years. Government revenues fell from a peak of $220 million in 2008/09 to around $120 million in 2010/11, reflecting the instability of the existing revenue system and its vulnerability to external shocks - in this case the global economic downturn and its impact on the construction and real estate industries which have been the main sources of Government revenue in TCI. The measures agreed in this yearʼs budget will set us well on the way to a modern system that will provide value for money and fund essential government services in future. The cornerstone of the new system is the introduction of Value Added Tax, a broadly based consumption tax which has been successfully introduced in countries world-wide including many smaller economies with a heavy reliance on tourism. In the Caribbean, it has been successfully implemented in Barbados, Jamaica, Trinidad and Tobago, the Dominican Republic, Haiti, Belize, Dominica, Grenada, Guyana, Antigua and Barbuda, and St Kitts and Nevis, and it is in the process of being implemented in St Lucia, and St Vincent and the Grenadines. In many instances the revenues raised by VAT have been well ahead of projections. VAT will provide a stable source of revenue for TCIG, and will stimulate economic growth by removing the distortions of the existing system. It will, however, require a significant amount of preparation, and we have therefore agreed a number of temporary measures to pave the way to VAT, close the budget gap, and avoid a default. We expect that most of these temporary measures will fall away, together with a number of existing taxes, when VAT is introduced in 2013. The temporary measures include:• A Customs Processing Fee of 4% on all imported goods• Changes to the system of work permits to raise revenue and make it fairer and more effective• Increases to business licensing and other fees and charges to keep up with inflation, together with simplification and improved administrative efficiency• A carbon tax on electricity, to raise revenues and provide incentives for greater environmental sustainability by the generating companies• A water sales tax on commercial customers and the largest residential customers, which will also encourage water conservation• A sales tax on financial services and insurance premiums We will also review the wide-ranging concessions and exemptions that were granted in the past, with the aim of ensuring that they are being properly exercised. Where possible we will remove them unless they produce social and economic benefits that would not otherwise occur. Together with forecast increases in existing revenues, these measures will raise TCIGʼs income to around $160 million in 2011/12, rising to around $190 million by 2013/14. At the same time we need to cut expenditure to reverse the rapid and unsustainable growth of recent years and bring it back into line with income. Staff costs are by far the biggest element of TCIGʼs expenditure. The public service has grown much more quickly than the economy as a whole. It now needs reform to be affordable, able to deliver the services expected by residents and visitors, and offer rewarding jobs for public servants. Some jobs will have to go in line with the widely
accepted target to reduce the cost of the public service by 25%, but we will work to find alternative jobs and provide assistance for the people affected by these changes. In the meantime the budget for 2011/12 contains measures which will reduce costs by around 10%, an important step toward achieving the 25% target. Most of this will be achieved by applying existing rules properly, and implementing proper controls over the TCIG payroll. These measures are essential to increase fairness and to release money for use in other areas of government such as education and primary healthcare. We fully understand that these are difficult times and so we are making transitional arrangements in a number of areas to ensure that the people affected are treated as fairly as possible. And we are not seeking to recover past overpayments, unless there is clear evidence that the individuals receiving such payments acted improperly or were clearly aware that they were in receipt of payments to which they were not entitled. We are also committed to making savings in other areas of Government spending, including statutory bodies, scholarships, rents, utilities, communications, travel and procurement, in order to balance the budget, ensure value for money and safeguard the interests of the people of TCI. Capital spending can provide much needed stimulus to the economy of the Turks and Caicos Islands. The state of TCIG始s finances means that the scope for capital expenditure will be extremely limited for the next two years. Existing commitments for 2011/12 already total $6.4 million, and some high priority projects do not yet have funding, including the rebuilding of Ona Glinton Primary School, the repair of the causeway between North and Middle Caicos, and improvements to the airport at South Caicos. It is likely that some further capital expenditure will be needed in order to continue to provide essential services. We hope to be able to approve new capital projects during the year, depending on revenues, and we will continue to seek additional funding from partners such as the EU for essential capital expenditure. Improving financial management, reporting and accountabilitySetting and achieving a balanced budget is only the first step in restoring financial stability to TCIG. We also need to exercise proper financial management in order to control revenue and expenditure, monitor performance against the budget, and report the results clearly, openly and regularly. We have already made progress with this, and we intend to publish quarterly reports setting out actual income and expenditure against the budget and explaining any significant differences together with the action we are taking to correct them. The first report, covering April to June 2011, will be published in August. We are also preparing to bring the backlog of financial accounts since 2006/07 up to date, so that we can produce audited financial statements and fulfil our obligations to be accountable to the people of the Turks and Caicos Islands. Building a better futureTCIG has a large structural deficit which will continue to grow unless there are significant reforms. Expanding the TCI economy is vital, but this alone will not close the deficit fast enough to avoid defaulting on our debts. We will continue to invest in affordable economic stimulus measures and in administrative and legal reforms to encourage growth and diversification, but this needs
to be accompanied by wide-ranging reform to improve the openness and competitiveness of the economic environment. And any TCI Government faces tough choices - we need to modernize the tax system, cut wasteful public expenditure and implement public sector reforms to improve value for money. The same is true of many other countries, both regionally and globally, that are taking similar action to control their public finances and reduce their debts. Our aim is to restore and firmly embed the principles of sound financial management, sustainable development and good governance. This will help rebuild confidence in TCI and its ability to manage its public finances. Restoring financial stability to TCIG is essential to help make TCI what we all want it to be - an outstanding place to live and work with equal opportunities for all, and an attractive, welcoming destination for tourism, the central pillar of our economy.