Ernst and Young’s analysis of the 2013 budget
In his first budget presentation since the Democratic Labour Party returned to power in February 2013, the Honourable Minister of Finance, Christopher Sinckler, delivered his address in the face of declining economic indicators for the Barbados economy.
The Minister was at pains to provide a history of the global economic downturn and its impact on the local economy since 2008 but he sped through the details of island’s economic indicators, including our worsening position for the first quarter of fiscal year 2014, seemingly anxious to get to the aspects of his speech designed to stimulate the economy.
The Central Bank of Barbados, in its review of Barbados’ Economic Performance for the first six months of 2013, noted that there were contractions in each of the major foreign exchange sectors, namely tourism and international business and financial services.
In tourism, declines were registered in long-stay arrivals and associated earnings but total cruise passengers and calls increased by 5% and 3%, respectively. Arrivals from our three largest source markets also declined. Barbados international business sector showed a modest increase of 8% in the number of new licenses issued during the first half of the year; however, renewals declined by 14%.
These contractions have placed Barbados’ levels of international reserves under pressure. Not since the financial crisis of 2008 have estimates been as low as the 16.4 weeks of imports seen at the end of June 2013. If this downward trend continues, additional pressures will be placed on Government to reconsider its position on Barbados’ long standing fixed exchange rate regime as the island may not be able to maintain exchange controls indefinitely. With devaluation considered an untouchable topic, there has not been a proper national debate on the pros and cons of an open exchange rate.
Gross public sector debt stood at 98.2% of GDP at the end of 2012 and estimated at 102% at the end of June 2013. Rating agencies and economic reviewers, such as Moody’s Investor Services and Business Monitor International, are increasingly wary of Barbados level of debt and its imperative reduction.
At June 2013, 59% of public sector debt was financed domestically. NIS portion increased from 26.7% in 2009 to 32.4% as at June 2013. The NIS coffers will continue to be tested since it has now been tasked with assisting the financing of the Industrial Credit Fund.
Minister Sinckler identified a number of capital projects to be initiated during the next two fiscal periods. Whereas, we welcome the investment injection into the economy, it is difficult to ignore that funding by Private/Public Partnerships (PPP) and loans will serve to increase both the island’s debt ratios and fiscal deficit.
Moody’s Investor Services advised that to combat further downgrading Barbados should focus on improving economic performance and managing the deterioration in the debt metrics. While these capital projects will kick start the economy, they have the potential to be detrimental to the debt ratios.
The size, volume and concurrence of the capital projects is prone to mismanagement, and we are pleased that Government has recognized this through the creation of a Specialised Major Project Coordination Team.
Government readily acknowledges that only small gains in international reserves will result from the budget’s fiscal measures. It is worrisome that the Minister again intends to approach international capital markets for a further bond issuance and also to conclude negotiations with lending agencies in order to bolster reserves by at least $700 million. It is uncertain whether this is in addition to the $1.8 billion noted above. Furthermore, there was no mention of CLICO within the Minister’s presentation, the settlement of which requires the issuance of Government-guaranteed bonds.
Major pronouncements within the Minister’s budget focused on fiscal consolidation and the tourism and energy sectors, much as they did in the previous budget.
Recognised as a key driver for economic growth, the Minister has proposed several welcomed tourism support measures aimed at creating a stronger demand for the product including: intensified destination marketing within traditional and new source markets with funding received from IADB; reduction of taxes in the sector notably VAT on direct tourism services from 17.5% to 7.5%; utilisation of the Hotel Refurbishment Fund announced in the 2012 Budget; and the refurbishment of the Almond Beach Resort and Silver Sands Hotel in an effort to add 1,000 rooms to existing stock by the latter half of 2014.
The Minister announced a number of measures aimed at reducing the administrative and technical impediments currently existing in the international business sector. We welcome the measures introduced by the Minister, especially the use of legal and tax experts to assist the resource constrained Inland Revenue Department in tackling complex transactions undertaken by the international business community. Those measures also included the introduction of two new classes of Special Entry Permits granted to investors and specially-skilled professionals as a means of increasing the island’s attractiveness as an international business domicile and generate increased revenues.
However, with global tax authorities curbing tax planning and introducing anti tax avoidance rules e.g. FATCA, and the change in the Canadian rules, is Barbados responding quickly enough to these changes and investing sufficiently in alternative jurisdictions such as Latin America? Barbados also needs to increase the speed with which innovative international business vehicles are introduced to the market.
Moving on to the agricultural sector, a most significant budgetary proposal revolved around sugar cane revitalization and ethanol production which utilizes a US$250 million Japanese loan. But does Barbados have the inventory of arable land to grow the crops required to sustain this project? We are also uncertain as to the magnitude of the foreign currency saved by producing our own ethanol.
In keeping with Protocol VI of the Social Partnership, the Minister highlighted a green initiative that will see the use of ethanol as a gasoline additive and the sale of excess solar power generated at various Government sites by private sector entities back to the Barbados Light and Power Co. Ltd.
A public sector hiring freeze was also announced. This is designed to stymie Government’s increasing labour costs; however, this may not bring about a much needed reduction in expenditure.
In an effort to reduce transfers to UWI the Minister took the unpopular step of asking Barbadian students to pay tuition fees for the first time since the implementation of free education. It was unrealistic for Government to maintain this level of expenditure but this action may limit access to higher education.
For the average Barbadian, the most anticipated pronouncements by the Minister are usually those pertaining to personal taxation. In Budget 2012, the rate on the lower band of taxable income was reduced to 17.5%. While rates were untouched this year, taxpayers were hit with multiple blows in the form of the introduction of a consolidation tax until March 2015 for persons earning gross income of Bds$50,000 and over, a tax on lottery winnings and the removal of the reverse tax credit.
Last year’s proposed Greening Levy proved difficult to implement and so the Minister introduced a 0.7% municipal solid waste tax which is computed on the unimproved value of land which we anticipate will be administered by the Land Tax Department.
Continued declines in excise tax revenue made it necessary for the Minister to seek redress through a 25% increase in the excise tax on tobacco products which is expected to boost revenue by Bds$9.9 million.
The proposed temporary measure of a 0.2% tax on commercial bank assets is one of the most significant measures aimed at reducing the fiscal deficit. This measure appears to be a resurrection of the Banks (Tax on Assets) Act which was repealed in 2008.
The motor vehicle industry is likely to be significantly affected by the proposed roll-back of the excise tax rebate on cars.
Given the necessity to stimulate growth across all economic sectors particularly tourism, international business and financial services and construction, it is quite surprising that the Minister has taken the approach to limit the discretionary waivers on import duties and excise taxes.
Within the last few years, Barbados has seen its investment grade credit ratings slip down to junk bond status (Moody’s Ba1 and S&P’s BB+/B ratings). With this in mind, there is no doubt that the Minister’s presentation was framed within the context of the many wants and desires of the social partners whilst considering the factors affecting the country’s ratings downgrades, namely anaemic economic growth, unsustainable levels of debt, and the need for fiscal consolidation. It may not be a far reach to surmise that last year’s budget measures had little effect on economic growth which contracted by 0.6% in 2013’s first half. Consider the lessons to be learnt from our Caricom neighbours of Dominica and Antigua & Barbuda who, with fiscal deficits of 9% and 11% of GDP and debt-to-GDP ratios of 104% and 117% respectively, engaged in IMF programmes.
Barbados’ strength has potentially become our greatest weakness. We are sure and steady but seemingly afraid of change. The world may have changed permanently after 2008, and perhaps we are not prepared to take aggressive action on the assumption that “this too shall pass!”