Slaying fiscal dragon
As the Senate prepares to rubber stamp the 2013-14 Appropriations Bill which was passed by the Lower House last week, it is neither unreasonable nor premature to provide some analysis of Government’s financial position and its intended policy framework.
There were quite a few revelations during last week’s debate that were attention grabbing; chief of which was the touted $600 million stimulus.
Minister of Finance, Christopher Sinckler, outlined a number of exciting capital projects, many of which are desperately needed – replacement of Barbados Water Authority water mains, the West Coast Sewerage project, extensive road and bridge upgrades and so forth.
Other projects which will be pursued in order to build productive capacity or facilitate productivity enhancement include the construction of a new cruise pier and terminal, the vaunted pier head redevelopment and construction of the controversial molasses storage tanks.
The Stuart Administration’s determination to utilise the much decried Build-Operate-Lease-Transfer arrangements as well as other Public-Private Sector Partnerships was also intriguing.
Moreover, while informing the House that the government has [finally] settled on an arrangement to pay down its multimillion dollar debt to the University of the West Indies, the Minister of Education also hinted that government is likely to adopt the Hilary Commission’s recommendation of a new funding formula for university education – the implications are sufficiently emotive to evoke much chatter in the weeks ahead.
Planned construction of satellite campuses of the Barbados Community College and the Samuel Jackman Prescod Polytechnic, in addition to the erection of two new secondary schools will also be a boon to economic activity and the development of human capital.
Now that the general election is over it would seem that stimulus is now in vogue on Bay Street. For months, if not years, the Democratic Labour Party Government and its chief advisors were strident in their opposition to any form of expansionary policy as they preached demand dampening and foreign reserves protection.
There is no need to be alarmed by this apparent U-turn, notwithstanding the public reaction of some of my colleagues. Though this latest policy shift may be baffling to some, it shouldn’t be surprising, as the Government with an affinity for roundabouts (pun intended) was given a renewed mandate.
More seriously, a cursory examination of the Estimates of Revenue and Expenditure would reveal that much of the $600 million touted is unaccounted for over the period April 2013 to March 2014. There are good reasons for this. It is highly unlikely that all of the identified projects will be started during the next fiscal year.
Secondly, those which are initiated are likely to begin months from now, with completion times venturing into fiscal year 2014-15. Since many of those projects are likely to be financed by Barbados’ external development partners, project specific inflows of foreign exchange is likely to mitigate the foreign exchange outflows resulting from the boost in economic activity.
Of course, these finer details suggest that the impact of the stimulus package will not be as large as the minister portended. Implementation, project management and project scheduling will also be paramount.
As one of those advocating home-grown economic stimuli for some time now, I am pleased that the new DLP administration has awaken to an epiphany of the path towards fiscal sanity and economic prosperity.
In my estimation, that path is one paved with a cocktail of current expenditure cuts, an increase in capital expenditure, targeted marketing of tourism and international business, as well as selectively phased indirect tax reduction.
If the economy is stable, it is time to restructure and pivot towards growth. It’s the most efficacious approach if the Government is serious about slaying the fiscal dragon and returning to sustainable development. Expenditure cuts will require systematic restructuring of Government’s operations.
Reform of the drug formulary, the pending changes to how UWI is funded and value for money audits are examples of how the Government has sought to get the ball rolling. Still a lot more needs to be done.
What I did not hear enough of in the Estimates debate is a credible marketing initiative for tourism or international business. As a matter of fact, Invest Barbados’s budget has been notably cut.
Indirect tax reform is central in as much as it delivers relief to consumers and producers.
Barbados’ competitive disadvantages are not only rooted in its economic structure but also its cost of production, and low productivity. One of the main reasons I did not support the increase in VAT was its expected impact on the cost of living and indeed the cost of production, particularly tourism services and professional services. Those higher costs have had a dampening effect on growth.
Almost a year after its implementation, the government boasted about elevated VAT revenues. Fortuitously, in the months that followed, the Stuart Administration, upon realising that revenues were falling, propagated revisionist history by telling Barbados’ that the tax increases were intended to reduce demand in an effort to reduce imports and protect the foreign reserves – not to raise revenue.
A similar argument was also advanced when after 18 months; it became clear that the VAT increase would be indefinite rather than temporary. The latest figures indicate that VAT has fallen by about two per cent and income taxes are down.
It ought to be common knowledge that a rising tide of economic growth results in higher VAT revenues, higher income and corporate tax revenues, as well as more money flowing into Government’s coffers from excise taxes and customs duties.
Revenue is not only a function of the tax rate; it’s also a function of the tax base and the level of economic activity. As long as current expenditure is reduced or constrained, the fiscal deficit will fall as economic growth takes hold. Risk aversion or slavish devotion to austerity will not get the job done – one need look no further than Europe.
During the past year, Government’s financial matrix worsened, the economy stalled and unemployment continued to rise. Surely a policy change was warranted!
Two other encouraging developments from last week’s debate were the initiatives emanating from the Ministry of Agriculture and the swagger (confidence) of Cabinet ministers. Let’s hope that the renewed vigour and policy shift continue.
* Carlos R. Forte is a Commonwealth Scholar and Barbadian economist with local and international experience. C.R.Forte@gmail.com