Bound to fail
The credibility of Government’s plan to turn its financial problems around was doubtful before its implementation started.
Now, based on the latest Central Bank of Barbados review, it is clear that the Medium Term Fiscal Strategy “could never make sense”, said Barbados Economics Society President Ryan Straughn.
“Businesses are closing and Government is trying to depress demand to maintain the level of foreign reserves in the economy and in my view that is not really the best approach that we should be pursuing,” he told Barbados TODAY.
“The Medium Term Fiscal Strategy was never a credible strategy when you want to add debt as part of your fiscal consolidation plan — that could never make sense. He (Central Bank Governor Dr. DeLisle Worrell) suggested making an adjustment in the policy but seemed to suggest today that they (Government) are on the right track (but) release yesterday (Tuesday) was I think frank and to the point,” he noted.
The Central Bank revealed in its third quarter review that after reduced the difference between its spending and revenue to 4.6 per cent in the 2011-2012 financial year the fiscal deficit worsened to 7.3 per cent in the 2012-2013 financial year ended last month.
The dangerous jump was attributed to “a combination of lower tax receipts given the economic slowdown and increased outlays in current expenditure”, factors which together “resulted in the current account deficit deteriorating to the level recorded back in financial year 2009/10.
“Government expenditure rose by 3.3 per cent, principally on account of higher current spending. This growth in recurrent expenditure was propelled by higher domestic interest payments primarily on securities (10.8 per cent), grants to individuals (5.9 per cent) and grants to public institutions (5.8 per cent),” the Central Bank explained.
Straughn said this worsening was occurring because of a counterproductive policies by Government, where it was seeking to dampen domestic spending to preserve foreign exchange used to import items, but yet the state was increasing its own spending while businesses were closing because consumers had less money to spend.
“Even though the banks have lots of liquidity, the Government by its appetite to finance the spending is creating a situation whereby they are forced to maintain the reserves by keeping domestic demand down and business require domestic demand. So therefore businesses will have to close if domestic demand is down,” the economist noted.
“Yes, the tourist arrivals are down, but in the absence of tourists we still need a certain level of domestic demand. So there is no getting around that and when you try to depress that by taking money out of the economy through taxation then you are not creating conditions for businesses really to thrive.” Straughn said the unfortunate thing for Barbados was that “if and when” the economy improved there would be significantly less businesses left to take advantage of the situation and that “you can’t get growth in the economy when businesses are closing”.
“The actions right now on the part of Government don’t seem to suggest any interest in seeing growth in the private sector because that is at odds with what the Medium Term Fiscal Strategy articulated as far as the maintenance of the reserves are concerned,” he stated. (SC)