Thoughts on the budget: duty estimations

One of the things about the recent budget that raised an eyebrow are the very optimistic revenue targets.  The Customs Duties estimate is quite high and leaves me wondering how the number was devised and what contributed to it.  The concern being, if we cannot meet our revenue targets we won’t be able to match the deficit targets and would need to borrow more, so it is important that these estimations are accurate.

A few questions arise.  How accurately have we predicted revenues in the past?  How much of an impact did the duty hikes the OBA made have?  How much of an impact did America’s Cup have on customs revenues?  Will the OBA’s duty hikes have created a permanent increase that will sustain revenues?  Was the America’s Cup impact so small that revenues weren’t impacted?  Are we counting on substantial import growth?  How do we arrive at this higher number?

Let’s take a look at estimates. Customs duties for 2018/2019 are estimated to reach $235 million, surpassing 2017/2018’s revised numbers of $231 million.

This is quite a high estimate and it raises the question of how accurate we’ve been in the past at estimating customs duty receipts.

Here’s a view past customs duty estimations for review (note, the left axis is adjusted to start at 150k to provide a focused comparison, also note the chart is in 000s).

What we can see looking historically (2005-2006 was the earliest data I could find) is that we initially tend to over estimate our customs duty receipts.  The revised numbers have usually come in lower than expected and the actual numbers even lower.  So even though it looks like last year’s revised numbers exceeded the estimate, there is the possibility that the actual number could come in lower as happened in 2013-2014.

2017-2018’s number seems to have been chosen as a benchmark.  One of the big questions that arises is why the Customs Receipts number for this year is much higher and is it a reasonable approximation for 2018-2019.

One of the big changes in the 2017-2018 budget was a hike in rates for a variety of categories.

Justifiably this would have raised revenues.  It is difficult to know by how much based upon publicly available numbers that I could find.  It would be great to know if the Customs Department provides more detailed breakdown of imports within these bands to be able to understand how these tax hikes translated into increased revenue.

Another questions that arises is how much of an impact did America’s Cup have?  As this writer has argued many times, America’s Cup represented mostly a temporary stimulus of the one off event as well as an increase in population for a few years.  While certainly many imports were brought in duty free, the additional purchases of the teams that resided here and the ACBDA staff likely weren’t.  This likely contributed to increased customs receipts, however the removal of the AC stimulus does not appear to be a concern for the 2018-2019 estimation.

Let’s take a look at Imports By Commodity Groups data provided by the Statistics Department’s Quarterly Bulletin of Statistics to get an idea.  Here’s a chart looking at year over year imports by quarter.

Considering currently available data for 2017, our Q1 imports were slightly higher and our Q2 imports were substantially higher.  According to the currently available numbers, in Q3 we saw a drop back to 2016 levels.

It is hard to say for certain that these increases were driven by America’s Cup and whether they were dutiable, but they do stand out as a substantial outlier.  A bigger question would be whether these were sustainable increases or if they were one offs.  Thus we can take a look at the commodity group breakdowns to see where the increases occurred.

Looking at the Q1 data we can note that the bulk of the increases came in the form of Machinery, Transport Equipment and Finished Equipment.  Can it be presumed that each of these categories represent one-off purchases rather than ongoing purchases?  It could certainly be argued that machinery and equipment are something you purchase once and use for an extended period vs. something like food or fuels which are purchased on an ongoing basis.

Taking a look at the Q2 breakdown we can see that again, the bulk of the imports came in Machinery, Transport Equipment and Finished Equipment.  Now certainly, some of the imports may have duty free or temporary and related to America’s Cup, however it is hard to know how much.

So how much of the revenue growth can we count on as sustainable?  We don’t have the best track record when it comes to estimations.  The tax increases are a wildcard as they certainly could have caused a hike but they just as easily could cause a drop in demand, especially if people bought things before the hikes.  These estimates will be something to keep an eye on because if we cannot meet our revenue targets we won’t be able to match the deficit targets and would need to borrow more.