A Budget wishlist
At 4:00 p.m. today, the 2016 edition of the Government’s Financial Statement and Budgetary Proposals will be delivered on the floor of Parliament. There are several concerns, raised within various quarters, that could have an impact on the proposals concealed within the ministerial “black box”.
Our economy, by virtue of its inherent small size, capacity and dependence on external economies for survival, continues to be exposed to a range of risks over which we have little or no control either as a Government or people.
Our foreign exchange earning and maintenance capacity remains challenged. The correspondent banking and Brexit issues have come to the fore in recent months. A rising cost of living remains a challenge for most Barbadians. A freeze on wages and salaries across the public sector and many private sector entities contributes to this challenge and also the dampening of activity within the economy.
It is no secret that all of our sectors continue to grapple with poor levels of productivity, higher labour, production and operational costs compared with our competitors, a lack of innovation driven by limited access to capital and financing and the threat of cheaper imports and substitutes.
Against this backdrop, what should we expect or demand not only from this year’s Budget but also from our Government in terms of our future economic and social development? I am not about to play games in terms of whether an economy determines society or if the society develops an economy. However, I am certain that our economic performance and our social development and well-being remain inextricably linked.
The recent commentary on the number of public holidays raised the ire of many, especially workers, as the focus appeared to be more on profitability than any other factor. However, for me, it raised the issue of productivity and efficiency on actual working days, as this is clearly a bigger issue for our attention at the moment.
While productivity and local output cannot be legislated or budgeted, it should form a major part of the foundation that drives the budgetary and financial measures of any government as it creates national policy. Productivity and innovation need to be encouraged and rewarded. Policy initiatives must support this.
On the revenue side, the only way Government can service its debt and meet its current expenditure without borrowing is through its ability to generate sufficient current revenue, and to control, but not necessarily cut, current expenditure. The Minister recently reminded the public that to settle tax refunds and provide public services, revenue had to be generated and collected.
With the consolidation tax on employment income removed a few months ago, and with adjustments made previously to the standard rated, exempt and zero rated baskets of goods, there is now the distinct possibility that the VAT rate could be increased, based on its reliability and how it has served Government’s economic agenda.
I had suggested such in this column before, albeit with a corresponding reduction or other adjustment to our income tax regime. I believe it is the fairer tax on consumers as their burden from VAT is aligned to purchasing power and personal preferences. This would be the only tax increase I would support.
The protection of our foreign reserves remains critical and continues to be the focus of fiscal and monetary strategies throughout the adjustment programme. We remain challenged by our ability to generate satisfactory levels of foreign reserves which adds to the burden of meeting commitments as comfortably as we would like. However, we have never defaulted on any of our commitments.
It is clear that this earning challenge is inherent to many of the key sectors in our economy. It can only be addressed through further targeted initiatives by sector, but ultimately has to be driven by the innovation, risk appetite and productivity within the same sectors. It also has to be driven by our ability to produce and consume more local goods and produce but scale, quality and costs of production remain issues for our sectors.
Can these be addressed? Yes! I reiterate my call for initiatives to be driven by the Barbados Investment and Development Corporation (BIDC) and Ministry of Commerce that would utilize dormant spaces in industrial estates across the island.
These would serve not just to house business operations but also to facilitate large scale production, floors to accommodate shared production and provision of services that would enhance our national ability to increase output for local consumption and eventually for increased exports.
These productive centres would assist in the provision of equipment, workflow efficiency, 24-hour production capacity in addition to a range of shared resources between the subscribers/partners to the space.
Our commercial banks continue to be very liquid. Dampened demand due to constricted wages and foreign exchange controls continue to leave these surpluses untouched and ineffective as the liberalization of the savings/deposit interest rate regime has seen one per cent or lower being paid on deposits.
Growth & Investment
Our economy has struggled with realizing growth in recent years. The effect of external factors on our ability to grow at a rate that would allow us to achieve development in other areas of our nation’s journey is well understood.
I believe that the Budget must consider ways of strengthening and building on the foundation for growth while seeking to protect the reserves. Our national growth is restricted by our productivity rates, ability of manufacturing and agriculture sectors to achieve the scale of output required and the threat of lower labour costs in Trinidad and other territories in the region.
Within the last two years, the Government committed to certain policies, committees and/or agencies to address the issues of business facilitation, rationalization of statutory entities and other areas identified as a hindrance. As key components in our overall conquest for growth, I would expect an update on progress and further indication on steps in the future.
Financing and innovation are critical and so is our small and medium sized sector to our development. The expansion and strengthening of credit guarantee schemes in support of traditional funding mechanisms, would be a suitable policy initiative at this time, even if targeted primarily at manufacturing and agriculture as a means of reducing of imports.
Incentives to further enhance alternative financing mechanisms such as venture capital and angel investment schemes, should be encouraged along with incentives for individuals to invest in local entities, regardless of size.
It is accepted that developing countries cannot achieve their objectives without significant levels of debt at various stages of the development spectrum. However, two significant factors – revenue sustainability and the purpose for borrowing — help to determine the effectiveness of debt management. Our debt, though driven by an increase in local borrowing recently, is still at a more than comfortable level, but naturally appears worse due to declining revenue.
A fundamental component of the solution, therefore, must be generation of revenue, not through extracting additional taxes or increasing tax rates, but by facilitating commercial and industrial activity that will yield a growth in tax revenues across sectors.
Our citizens and society thrive when our economy does, and I fully understand the management of economic fundamentals. However, in recent years, I believe some of the adjustments have placed the future wellbeing of society and our overall social development at undue risk.
The tax incentive for credit union savings, retirement savings plans, home improvements, among others, have led to a reduction in the level of savings. The liberalization of the interest rate regime on commercial bank deposits has further eliminated the attractiveness of savings.
As I see it, the potential effect on future generations of families of any reduction in the holding of savings, especially where the cost of living continues to place a pull on financial resources of families, is serious. I therefore believe that in this year’s Budget, the Minister should return either the credit union or the retirement savings incentive to encourage savings and investment in the future of our families and nation.