“Are we prepared to stand together as one in a concerted effort to stabilize our economy and protect and defend the strength of our currency, the standard and the quality of our lives and even our sovereignty as a nation?”– The Hon. Christopher Sinckler, Minister of Finance and Economic Affairs, 2017 Budget.
Following seven years of misdiagnosing Barbados’ economic challenges and prescribing either the wrong medication, or the right medication way too late, the Stuart administration finally got the diagnosis right in its 2017 Budget. However, I’m afraid that the government has gotten the prescription horribly wrong. The policies presented represent either the wrong dose of appropriate measures or worse, the wrong remedies.
Yes, Barbados is facing a public debt crisis resulting from a structural fiscal deficit that is now driven by debt servicing, and unaffordable transfers and subsidies to bloated inefficient statutory corporations. Notwithstanding Mr. Sinckler’s arguments to the contrary, the government no longer has a revenue problem. The primary problem is one of too much government spending and rising interest costs.
Though growth has resumed in Barbados’ economy, the acceleration and sustainability of that growth are being threatened by a lack of competitiveness, antiquated public services, and inadequate levels of foreign direct investment. The excessive taxation ushered in by the 2017 Budget will beckon more dark clouds over the economic landscape, punctuated by weak investor and consumer confidence and ineffectual leadership.
The government’s announcement of another wave of public expenditure cuts ($82 million in yet to be identified cuts), and privatization (this time, the sale of Hilton hotel to raise about $200 million), as well as “reprofiling” of government debt held by the Central Bank and the NIS (to save $70 million in interest expenses) are all appropriate in the circumstances but belated and insufficient in quantum and scope.
That is, the right remedies but the wrong dosage. Once again, just like his 2010 Budget and others that followed, the Hon. Minister of Finance is relying disproportionately more on raising revenue ($320 million) than on reducing expenditure ($152 million), which is the real driver of the fiscal imbalance.
The measures announced to reduce expenditure constitute too low a dosage. More taxation is definitely the wrong remedy. The Stuart administration seems to have a taxation predilection or maybe the Minister of Finance struggles with taxomania. The increase of the Social Responsibility Levy from 2% to 10% is an irresponsible assault on the people of Barbados that will increase the cost of living and undermine Barbados’ competitiveness.
The $218 million that the government expects to extract from households and businesses is unconscionable. It is an act of reckless endangerment and economic malpractice. The introduction of a 2% commission on foreign exchange transactions ($52 million) together with the increase of the excise tax on fuel ($50 million) are also needless impositions of distortionary costs on businesses and individuals, costs that will ultimately be borne by consumers who will be greeted with higher prices in the coming weeks and months.
It’s almost like the government doesn’t want the economy to grow. The objective of “saving” foreign exchange by dampening its demand in an import dependent economy is a contractionary economic policy. Reducing aggregate demand will lead to lower growth unless an increase in exports, FDI, private domestic investment and/or government capital spending sufficiently compensates.
As I have stated in previous articles advocating privatization, a strategic framework approach to privatization would be preferred to the hitherto piecemeal approach. A framework that clearly outlines the purpose of a privatization programme, the parameters for selection of state-owned assets/entities for privatization, as well as a schedule for concluding privatization transactions is required. Are the proceeds going to be used to pay down debt, offset planned capital expenditure or simply subsidize existing programmespending? Is the government only going to be selling the nation’s crown jewels or is it also contemplating the sale of statutory corporations that have a value proposition but are a burden to taxpayers?
A programme of restructuring, merging, divesting or dissolving some of government’s statutory corporations is essential if the government is to be successful in sustainably reducing its expenditure. Such a programme was announced in the 2013 Budget. Four years on, the government in its 2017 Budget failed to report any real progress. That fledgling programmecould become the poster child ofthegovernment’s failure to do what is necessary to put Barbados’ public finances on a firm footing. This policy failure is perhaps another case of political inertia.
Disappointedly, in some instances,the Budget was also an excursion in search of solutions. I speak of the announcement that in the coming weeks and months,there will be a series of wide-ranging discussions across the country to come up with a fiscal and economic plan.
Those discussions will be based on a pending National Fiscal, Economic and Social Development Restructuring and Enhancement Programme, and the recent recommendations of the Social Partnership working groups. What a mouthful! This charade will translate into further delayed action, at the 11th hour. The consequences of which are likely to be more economic pain for little gain.
The minister’s declaration that “the fiscal deficit is now public enemy number one” crystallizes all that is wrong with the present economic management of Barbados – too reactionary and tardy. I conclude with this quote from last week’s budget, “…as a country we have either not been earning enough to support the standard of living we enjoy and/or we are spending more than we can afford on the public goods and services we provide for all Barbadians.”
The government has finally recognized the magnitude of the fiscal crisis and the threats to both the growth and development of Barbados, and the livelihood and quality of life of Barbadians. Sadly the Stuart administration is yet to rise to the occasion.
Yes, there were some positive aspects to the Budget. For example, the proposed introduction of duty-free zones, expansion of special development areas, targeted concessions for low income housing projects, further efforts to expand tourism source markets, and continuous improvements of tax administration. These initiatives could bolster growth in the medium-term and should be welcomed.
However, overall the 2017 Budget was the wrong policy mix. It did not offer hope of a brighter future. I give the minister a grade of A for his description of the economic challenges confronting the country and the need for urgent action. However, a grade of C is all that I could muster for the solutions presented to remedy those challenges.
(Carlos R. Forte is a Commonwealth Scholar and a Barbadian economist with local and international experience. C.R.Forte@gmail.com)