CATEGORY:BUDGET SPEECH
-------------------------


Presented in Parliament by Grenada's Finance Minister, Hon. Anthony Boatswain.



6. RESTORING FISCAL BALANCE:

(i) Revenue Enhancement

Mr. Speaker, earlier in my presentation, I made mention of a number of measures contemplated by Government to raise revenue to meet recurrent and capital expenditure requirements.

I will now elaborate on some of these measures.

(a) The Establishment of a Recoveries and Collection Unit in the Ministry of Finance.

Mr. Speaker, the reconstruction effort has placed greater burden on Government in meeting the needs of the country. This in itself required additional financial resources. Government is aware that there are many persons who can afford but have not been contributing their fair share to the consolidated fund. Some others have been delinquent in the payment of their taxes. A recent study reveals that the amount of outstanding arrears owed to Government by delinquent tax payers is in excess of EC$170m. This cannot be right at a time when everyone needs to play his/her part in nation building. Government has therefore taken the decision to restructure the existing collection unit in the Ministry of Finance to a Recoveries and Collection Unit and to increase the number of tax collectors. This Unit will be charged with the responsibility of collecting all arrears of Government taxes, in addition to registering new and potential tax payers. The unit will become fully operational in January 2007 and is expected to raise an additional EC$2.0m annually. The Ministry will be working closely with all persons owing Government money to decide on a payment schedule that is acceptable to Government and to the tax payer.

The Audit Division of the Inland revenue Department has also been strengthened with the recruitment of two accountants. Their role is to interface with corporate tax payers to ensure that they pay their fair share of taxes.

Mr. Speaker, the policy of this Government s not to impose any additional taxes on our people. Instead, Government will be relying heavily on higher levels of tax compliance and efficiency in collections rather than additional tax measures to meet its revenue needs. We therefore urge all registered and potential tax payers to comply fully with the Law.

(b) Implementation of Value Added Tax

In keeping with the Sir Alister McIntyre Report Government has taken the firm decision to reintroduce Value Added tax by October 2007, and not January 1st 2008 as previously announced. This new date coincides with most business' new financial year and would allow for a smoother transition to the new system.

For this purpose, a VAT Unit has been established in the Ministry of Finance with the sole responsibility for putting mechanisms in place for the coming into being of VAT by the stated date. A draft budget of EC$6.9m has been prepared for the period 2006-2007 and arrangements have been finalized with CIDA for a grant of Canadian $500,000. A preliminary list of VAT registrants is completed. A White paper on VAT has been approved by Cabinet, and will soon be circulated for public discussions.

Efforts are presently being concentrated on completing the VAT and Excise Bill for consultation with stakeholders, recruiting a VAT publicity Expert and on upgrading Customs and Inland Revenue departments. Our intention is to have the VAT and Excise Bill approved by Parliament by February 2007, have all training completed, and have all IT systems for compliance in place for implementation in October 2007.

Mr. Speaker, I want to make it abundantly clear, that while VAT is being reintroduced, it is not intended to place additional burden on the population. This is because VAT Mr. Speaker will replace three existing taxes. These are the General Consumption Tax (GCT), the Airline Ticket Tax, and Motor Vehicle Purchase Tax. To the extent that VAT will be revenue neutral, its broad base would allow for an increase in Government revenue as more items will be taxable but at a lower rate. In addition, our preliminary calculations suggest that the introduction of VAT would lead to a reduction in prices on a wide range of goods.

To give an example; a bed imported for Christmas with a CIF value of EC$1,000 will be sold for EC$2,092.50 when GCT is applied. However, when VAT is applied the same bed will be sold for EC$1,940.63. In other words, Mr. Speaker the price of the bed with VAT applied instead of GCT will be EC$151.87 cheaper.

We therefore expect that businesses would pass on the lower prices to consumers.

Mr. Speaker, I would like to thank the IMF, CARTAC and CIDA for their invaluable technical and financial assistance provided so far. I would also like to applaud the efforts and hard work of the members of the VAT Steering Committee and the implementation team for ensuring that we are on schedule for October 1st 2007.

The VAT is expected to raise approximately $44.5m in 2007.

(c) National Reconstruction Levy

Mr. Speaker, one of the major policy measures of the Governments three-year Economic Reform Programme, was the implementation of the National Reconstruction Levy. After months of debate, and amendments to the original Act, the NRL Act was finally passed in Parliament in May 2006.

I am now pleased to inform this Honourable House, that at the end of November EC$6.9m have been collected from the NRL of which EC$1.7m were used for Agriculture, EC$3.9m for Housing Reconstruction, and EC$0.8m for Youth Development.

It is therefore likely that the minimum target of EC$8m will be achieved by year end.

For 2007 we are projecting that the NRL will generate approximately EC$12m, resulting primarily from an increase in economic activity, higher wages, and from the self employed, whose contributions are made in arrears (that is, one year later).

(d) Property Tax and Property Transfer Tax

Mr. Speaker, Property Values in Grenada are highly understated, and therefore, if Government is to collect its fair share of taxes then property values should be taxed based on present market conditions and not those of 1994.

In this regard, Mr. Speaker, I am to inform this Honourable House, that the Valuation Division of the Inland Revenue Department is in the process of carrying out a comprehensive nation-wide revaluation of all properties land and buildings, so as to establish their true market values. It is expected that this exercise will be completed by January 2008.

Mr. Speaker, at present, lands designated for Agriculture use are not subject to Property Tax. However, it has been observed that some land owners are holding agricultural lands for purely speculative purposes. Government will be seeking an Amendment to the Property Tax Act to ensure that idle agricultural lands, held purely for speculative purposes, are subjected to Property Tax.

Mr. Speaker, several Property owners, particularly in the outer districts have complained of receiving demand notices with outstanding arrears, even in instances when they have produced evidence that they have paid their taxes on time.

We are aware of this problem, and I therefore wish to assure these property owners that steps are being taken to correct this problem, so that there will not be recurrence in 2007, or at the least such occurrences will be minimized.

Both the Property Tax and Property Transfer Tax are expected to yield in excess of EC$32m in 2007.

(e) The Petrol Tax

Mr. Speaker, the Petrol Tax Act was amended in July of this year to allow for a transparent automatic fuel pricing mechanism.

Under this mechanism a flat tax of $3.00 per gallon is charged on the C.I.F. values based on an eight (8) week average. In simple terms, the prices of fuel at the pump will change once in every eight (8) weeks. This tax is expected to generate EC$16.3m in revenue in 2007.

(ii) Expenditure Control

(a) Wages and Salaries

Mr. Speaker, Public Sector wages and salaries constitute the single largest element of Government's recurrent expenditure. The current Wage Bill is EC$134.3m per year, or 42% of total expenditure. In terms of revenue collected, it means that 35 cents out of every dollar collected as revenue goes towards the payment of salaries and wages.

Historically, salaries and wages have risen faster than inflation and productivity.

If this trend continues then there is a strong likelihood that by 2010 all of Government revenues will be just enough to cover civil service salaries and interest payments, with nothing left to meet other critical expenditures.

It is for this reason that Government has been actively engaging our trade unions on the issue of keeping salaries and wages increase in line with inflation and productivity.

Recently, Government solicited the assistance of the Eastern Caribbean Central Bank in holding dialogue with our Trade Unions on this very important issue.

Mr. Speaker, this Administration has always advocated for a smaller Government and greater efficiency in the public service. For this reason Government has moved towards the rationalization of the public service, and towards the introduction of a system that rewards performance, through a Performance Appraisal System.

In 2007, Government will be implementing a number of projects aimed at rationalizing the Public Service. One of these projects is the Pay and Grade System. The project involves conducting a review of all posts in the public service to address anomalies, and to bring compensation in the public service in line with that of the private sector. The intention is to recommend a Pay and Grade System which can allow Government to attract, retain and motivate qualified and competent public officers.

Mr. Speaker, we subscribe to the basic philosophy that those who work hard, should be paid well.

(b) Servicing the National Debt

Mr. Speaker, in addition to salaries and wages, interest payments on our debt obligations, constitute another major component of non-discretionary Recurrent Expenditure.

In 2005, Government was able to reduce its debt servicing obligations, as a result of a successful debt restructuring exercise with its commercial creditors. In 2006, Government received additional relief as a result of a successful rescheduling of its debt with its Paris Club Creditors.

The Ministry of Finance is continuing its dialogue with non-participating creditors to ensure that the best terms and conditions are obtained, in the interest of our country.

Mr. Speaker, it is instructive to note that during 2006 Government did not engage in any commercial borrowings, notwithstanding the tight fiscal situation.

Credit therefore must go to our Prime Minister for his instrumentality in raising significant grant funds and other forms of assistance from friendly countries to meet our financing needs.

Mr. Speaker, it is our intention not to engage in any commercial borrowing in 2007, as we work towards achieving the standard Benchmark of a debt to GDP Ratio of 60% by year 2015.


7. INSTITUTIONAL STRENGTHENING FOR PRIVATE SECTOR DEVELOPMENT

Mr. Speaker, you may recall that in last year's Budget Presentation, I also outlined a number of policy initiatives that Government would be putting in place to strengthen the business environment for private sector development, and to ensure sustained economic growth.

I am pleased to present a status update on these initiatives:

(i) With regards to improving the effectiveness of the GIDC in promoting new investments; Cabinet has given its approval for the implementation of a number of measures in order to achieve these objectives; some of these measures include:-

(a) Agency for Reconstruction and Development (ARD) to provide technical assistance to the GIDC to prepare an appropriate Investment Promotion Strategy and Marketing Plan to execute an effective campaign of promoting additional investment from foreign or domestic sources.

(b) The role of the Ministry of foreign Affairs to be redefined to support overseas investment promotion.

(c) The appointment of at least one Diplomat to work on foreign Direct Investment promotion.

(d) The establishment of an investment promotion/negotiation committee to strengthen capacity to negotiate investment deals, especially projects involving the use of Government lands.

(ii) The Grenada Industrial Development Corporation (GIDC) and the ARD have collaborated in the preparation of a National Investment Policy and a Draft Investment Bill, both of which have been approved by Cabinet.

(iii) The National Export Strategy was officially launched earlier this year, and is in the process of implementation, with external financial assistance.

(iv) The Land Registry is in the process of being upgraded.

(v) With regards to the New Executive Agency to manage issues relating to land use, we anticipate that this institution will come on stream in early 2007.

The Public Sector Modernization Project

Mr. Speaker, in March 2006 the Parliament of this country gave approval for the Minister for Finance to secure a credit of US$3.5m from the World Bank to finance the implementation of the Public Sector Modernization Project. The project's main objective is to modernize Grenada's public sector and to improve the efficiency and effectiveness of the public service by the creation of Executive Agencies; by enhancing performance management systems; by facilitating economic opportunities for small and micro business through the Grenada Industrial Development Corporation and by strengthening the public sector reform capacity of the Government of Grenada.

Specifically, the Lands and Surveys Department of the Ministry of Agriculture and that section of the Registry that deals with Deeds will all be converted into Executive Agencies.

Under the GIDC component, the small Business Development Centre of the GIDC will be strengthened to provide technical assistance and training to the micro-small segment of the business community, through the provision of advisory services; entrepreneurial skills development (in key areas like accounting and advertising); diagnostic services; and start-up, all of which aim to build the capacity of the labour force and increase local employment.

In 2007, Government has allocated just over EC$0.6m for this project. A legal expert has already been recruited and plans are well advanced for the recruitment of other senior positions.