Small island developing states (SIDS) such as Barbados have inherent characteristics that make them vulnerable. These include small economic and geographical size, limited resources (human, capital, technology etc.), openness to trade and proneness to natural disasters.
Barbados, like many of our island counterparts, has fashioned Government to be an influential actor in economic activity. This overreliance on Government by historical context and cultural norms, has placed a heavy responsibility on Government to shoulder many of the country’s economic and social needs. In doing so, especially in a small open economy with very little room for monetary flexibility like Barbados, the Government must perform a delicate balancing act of facilitating revenue earning activities while satisfactorily providing a number of services to the public.
During global economic downturns, financial inflows decline while Government’s obligation to provide social services continues or even increases (e.g. welfare payments). Government may accumulate large deficits if checks and balances are not in place and economic shrewdness, prudence and creativity are not injected into policy development.
This scenario was glaringly evident based on central Government current expenditure and revenue from 2000 to 2015.
Government revenue in 2000 was 17 per cent higher than that of expenditure and between 2000 to 2007, revenues exceeded expenditure on average by 11per cent. After the global recession in 2008, current expenditure exceeded revenues on average by twice the amount at 22 per cent. An attempt to tax an economy to service expenditure that is twice the size of the revenue generated in said economy may be considered as “turning top in mud”. The small market size mentioned earlier as an inherent vulnerability, becomes a clear disadvantage to this type of strategy.
The new administration rolled out a number of measures in its mini-budget to ease the burden of taxpayers, who have been calling for relief. The budget outlined the first phase of the Barbados Economic Recovery and Transformation Plan which sought to broaden the tax base, institute or raise domestic and international user fees and reduce expenditure by reforming some of the island’s statutory corporations.
Therefore, Government has sought to maintain the tax base which it currently receives. The real meat of the matter will be in phase two of the Plan which focuses on expenditure reduction. If expenditure reduction is at the core of our economic recovery, the question is, what is our expenditure made up of?
The three largest proportional line items since 2012 have been: (1) transfers and subsidies; (2) interest payments and (3) wages and salaries. Transfers and subsidies were BDS$1.2 billion, which accounted for 38 per cent of current expenditure (BDS$3.1billion) in 2017; it has maintained that proportion since 2012. Within transfers and subsidies, grants to public institutions (state-owned enterprises) constituted 64 per cent (BDS$787 million) of transfers and subsidies, a four per cent increase during 2012-2017. Interest on debt represented 22 per cent of current expenditure; this line item increased by six per cent in the period under review, driven by domestic interest, which increased by BDS$172 million, when compared to external interest, which increased by BDS$21 million. During the period under review, wages and salaries accounted for 27 per cent of total current expenditure. However, this represented a decrease of BDS$100.8 million to BDS$762.8 million in 2017 when compared to 2012.
Therefore, to tackle current expenditure, government must address interest payments and transfers and subsidies and by the same logical reasoning, a reduction in wages and salaries is not an immediate solution to reducing the debt since this line item is already on the decline.
The Government has ceased payments on external debt until an IMF agreement can be brokered, given the country’s low foreign reserves. This leaves the issue of transfers and subsides to state-owned enterprises (SOEs). The following excerpt of the mini-budget should be highlighted given the above profile of government expenditure.
“Many of the state-owned enterprises are not currently in a position to provide the quality of information that is needed for us as a Government to review their performance.”
This assessment of SOEs is not new. The Auditor General report for many years has consistently noted the lack of necessary documentation to provide an accurate audit of many of these entities. One suggestion could be the attachment of UWI undergraduate students in the Faculty of Social Sciences (which should be plentiful the near future given the reinstatement of free tertiary education) to these SOEs to help update financial recording in these organizations.
This could be seen as service learning and possibly attached to academic credit to enhance the learning experience of future graduates. However, this assumes that a lack of human resource capacity is a key factor in the inability of SOEs to produce timely documentation. If data and information regarding the financial status of SOEs are unavailable, how then does a government negotiate a recovery plan that satisfactorily addresses Barbados’ unmanageable expenditure, debt and overall economic recovery? Timely and accurate information are essential in both short and long term planning.
Given the looming IMF program to assist in the debt recovery programme to address key macroeconomic problems, it will be interesting to see how Government moves forward with reducing expenditure, given a lack of information regarding such expenses. What has been a clear lesson for our country, even when we can identify our major expenditure items is; we simply cannot tax our way out of debt.
Crystal Drakes is an Opposition Senator and an economist.