The grouping of practising economists here believes today’s budgetary measures announced by Prime Minister Mia Mottley appear to be in line with its own objectives and those of the International Monetary Fund (IMF), with which the new administration hopes to enter a bailout agreement.
However, the Barbados Economic Society (BES) said the $1.2 billion package of taxes, levies and sweeteners could result in some contraction in spending, especially among those who will have to pay more in taxes.
BES President Shane Lowe said eliminating the deficit in one year would reduce Government’s need to ask both domestic and external creditors for additional financing in the short term, pending the completion of debt restructuring negotiations.
Mottley announced a range of revenue-earning and expenditure-cutting measures aimed at reducing the fiscal deficit to $140 million or 1.4 per cent of gross domestic product (GDP) in 2018/19, and driving down the debt from the estimated 175 per cent of GDP to about 115 per cent of GDP at the end of five years and under 85 per cent of GDP at the end of ten years.
The measures did not factor in potential annual savings from proposed debt restructuring plans.
“The Prime Minister’s Budget starts from a greater debt position, reported at 175 per cent of GDP, and appears to have a more aggressive percentage point reduction based on achieving a balanced budget faster than the IMF had initially proposed,” Lowe said in a statement this afternoon.
“The measures in the Budget generally appear to achieve the IMF’s and BES’ stated objectives, while simultaneously reducing (and potentially eliminating) the fiscal deficit in its first year,” he added.
The economist said the decision to default on external debt, restructure domestic debt, and no longer rely on future Central Bank financing “suggests that the Government had few options to finance a large recurring fiscal deficit going forward.
“Thus, potentially eliminating the deficit in one year reduces the need to ask both domestic and external creditors for additional financing over the next nine to ten months pending completion of debt restructuring negotiations.”
Lowe said the so-called mini Budget sought to widen the tax base and shift the burden of taxation from the most vulnerable.
“Direct taxes on higher-income earners such as the new 40 per cent tax rate on workers’ annual earnings over $75,000 and the health levy imposed on all workers seek to shift the relative burden of taxation from low-income earners who are more likely to disproportionately consume public health care services to higher-income earners who have greater access to private health care and medical insurance.
“Additionally, announced taxes on tourists help to replace some of the lost foreign-earned revenue from the International Business and Financial Services sector and reduces relative taxation on locals,” he explained.
However, Lowe said shifting the tax burden to higher-income earners, which would include some workers in the middle class, as well as to corporations via a higher corporate tax rate, would directly reduce their disposable income and may potentially reduce their level of spending.
“This could potentially have an adverse impact on economic growth. The increased economic activity from the proposed $131.5 million additional to be spent on capital expenditure and greater disposable income for likely budget-constrained lower-income earners will need to more than offset any negative impacts on the middle class to ensure economic growth does not decelerate further,” he said.
“Additionally, the announced taxes on tourists will likely reduce Barbados’ price competitiveness as a tourist destination. Therefore, the proposed upgrades to physical infrastructure and other enhancements to the quality of Barbados’ tourism product are necessary to ensure no shortfall in growth in visitor arrivals and expenditure,” he added.
Meantime, Chairman of the Barbados Private Sector Association (BPSA) Charles Herbert told Barbados TODAY “by and large” his organization was supportive of the budgetary measures.
He said he was especially encouraged by the level of consultation and input from the private sector through the several meetings of the Social Partnership – labour, the private sector and Government – over the past two weeks.
“We are encouraged by the level of consultation and input that we were allowed to have into the budget. We believe that it is only the first step in turning around the economy,” Herbert.
Insisting that the suite of measures was only a first phase toward fiscal adjustment, Herbert said it made for “a good start”.
However, he said, “if there is any concern that we have it is that the Budget transferred quite a bit of the burden for revenue on the tourists coming to Barbados. We don’t think this is going to reduce our arrivals but that is just the riskiest aspect of the Budget”.