COLUMN-A rules-focused Budget

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The Minister of Finance is expected within the next three weeks to deliver the annual Financial Statement And Budgetary Proposals (Budget) in Parliament, and is expected to provide a comprehensive update of our 19-month structural adjustment programme, followed by the suite of new fiscal and other measures or policies to be implemented in an effort to continue the stabilization of our economy.

It is greatly anticipated, as many are concerned about the likelihood of additional or higher taxes being levied. While this is the fastest method of addressing declining revenues, my personal wish is for a delivery focused on the introduction of fiscal rules as a mechanism to improve and ensure better financial and economic governance in the future.

In December, 2009, the International Monetary Fund (IMF) issued a paper entitled Fiscal Rules Can Help Achieve Sustainable Public Finances in which it used the concept of fiscal rules as a useful support mechanism for countries going through periods of fiscal consolidation. Interestingly, at that time some 80 countries had already implemented such rules, but more importantly, they were seen as Step 2 in an ongoing consolidation programme that would have been initiated with a time-bound adjustment programme similar to our 19-month programme.

The IMF suggested that the purpose for the implementation of the fiscal rules at such a secondary point was to ensure that the gains of the adjustment programme were realized and could be locked in for future success.

Defining fiscal rules. IMF definitions indicate that fiscal rules refer to the imposition of a long-lasting constraint on fiscal policy through numerical limits on budgetary aggregates. Fiscal rules aim to correct distorted incentives and contain pressures to overspend, especially in good times, with the expected outcome of ensuring better, more improved and more focused fiscal responsibility and debt sustainability.

In other words fiscal rules are simply aimed at improving the governance structures for governments to avoid the need for the frequency of adjustment, consolidation or other fiscal programmes so many developing countries find themselves requiring.

The following types of rule sets typically exist and their usefulness to our situation is evident:

1. Budget balance rules.

2. Debt rules.

3. Expenditure rules.

4. Revenue rules.

The IMF and its directors, based on the evidence, further suggested that fiscal rules in order to be effective needed to strike a balance between providing confidence that targets will be met and allowing adequate flexibility to respond appropriately to output and other shocks. They further stated that these rules needed to be transparent and credible, with a clear link to the ultimate goal of debt sustainability; and additionally it was preferred that the rules be embodied in high-level legislation –– the constitution of a country –– as these would be harder to abandon or reverse when new political parties took office, with the credibility thus being preserved.

The creation of such rules, however, should not be seen in themselves to be a saviour, as strict implementation and subsequent monitoring are required to stay the course.

The IMF recommends an independent fiscal agency or council to support the technical requirements of the rules and also to monitor implementation and results.

Our continuing problem has been a combination of a need to restrict and better control our Government expenditure due to declining revenues and also as a direct result to control our national debt and fiscal deficit levels. I therefore believe that in the upcoming Budget we could start with simple rules relating to our fiscal management in relation to:

1. Size of fiscal deficit in any financial year.

2. Level of national debt as a percentage of GDP in any given year.

3. Stricter rules governing transfer, subsidies and supplementaries.

The level of the rules enforced this year should bear direct relation to the successes of the 19-month programme to date, in order to avoid any additional undue pressure; but the step must be taken.

Governments may be concerned about their ability to respond to unexpected shocks and crises; however, this can no longer be an excuse for not improving our public sector governance. The legislation governing such rules should adequately consider the steps required for a temporary suspension of the rules to facilitate response to a crisis, but any such move should require Cabinet approval, parliamentary approval, and the advice and approval of the independent agency suggested at a minimum.

The recent comments of the chairman of Republic Bank provide a summary of our current situation as a Caribbean economy –– where he suggests that it is our fiscal management, the need to satisfy needs and wants of the public, promises made to the electorate and financiers that have placed us in a precarious position. The global economic crisis, in his view, has brought to the fore our poor governance and fiscal practices over the years, which were manageable in times of plenty and when global demand for the Caribbean, its products and services was high.

Barbados can recover from its economic woes, but it is hardly worth it if steps are not taken as the IMF suggests in its paper to lock in the benefits of any fiscal consolidation programme that precedes the introduction of such rules.

I encourage the Minister of Finance and the Government to add another feather to their cap as they try to bring sustainability back to the financial management and fiscal rule of our economy.

(David Simpson is immediate past president of ICAB and a director of the Barbados Entrepreneurship Foundation, and serves as co-champion of its finance pillar.)

One Response to COLUMN-A rules-focused Budget

  1. Frederick Alleyne
    Frederick Alleyne November 25, 2014 at 11:05 am

    Good article but what about the suffering of people today?


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