Government is being warned against sacrificing quality investments for the sake of spending cuts.
The latest warning, from an official of the Inter-American Development Bank, comes as economists here voice fears that a sharp drop in public spending caused by the IMF-sanctioned austerity programme, dubbed BERT, could stifle economic growth.
Alejandro Izquierdo, Principal Technical Leader in the IDB’s Research Department, gave the advice on Tuesday, after presenting the IDB’s flagship publication – Development in the Americas, Better Spending for Better Lives at the Courtyard by Marriott. Its subtitle is How Latin America and the Caribbean can do More With Less.
Izquierdo, one of the three editors of the ten-chapter publication, acknowledged that Barbados was currently under an IMF austerity programme, and said it was even more critical that the island carefully manages spending.
But he urged there was still a need for “smart investments” in areas that would promote growth.
Izquierdo said: “It is not about just cutting across the board; it is about being smart in what you want to sustain, keep or event expand and what you want to contract.
“It is about smart investment. Investment has been quite low in Barbados at the public level.
“There is a lot of spending in the public enterprises, but the quality of that investment is not necessarily the best.
“We have found in the report if you have good quality investment each dollar you spend on good investment can multiply the size of gross domestic product substantially.
“So it is important that investment be kept and that it be done smartly.”
He said the IDB was currently encouraging Barbados and other regional states to establish a “quality-of-expenditure agency” that would focus on the quality of Government spending and determine which areas needed more investment so shifts in budgets could be accommodated.
“Sometimes Governments have a body but they don’t have a head. So it is important that this quality of expenditure agency be set up,” said Izquierdo.
Insisting that fiscal rule was important, the IDB official said it was also critical that debt levels are kept low, and that Government save in good times and invest in critical areas in bad times “so that you don’t have to consolidate or adjust”.
Izquierdo said: “Many times most countries will adjust public investment.
“So in good times, you increase wages and salaries and in bad times you cut capital expenditures.
“If you do that you have a problem because eventually, you need a good public investment level so that the private sector will step in and also make their private investment.
“So how do we protect that public investment is key.
“We have that tendency that is pushing against capital expenditures and we believe that a fiscal rule should include what we call a second condition, for example, putting limit on the growth of current expenditure so you leave room for capital expenditure.”
But addressing the forum, Minister of Economic Affairs and Investment Marsha Caddle sought to push back gently on Izquierdo’s claims. She insisted that the spending cuts were “not for the sake of just cutting expenditure, they were about building efficiency” in statutory corporations, whose transfers have been cut under the BERT programme.
She said that immediately after coming to office at the end of May last year, the Mia Mottley administration had to make some “smart revenue expenditure and public financial management decisions” in order to tackle a number of fiscal problems that were facing the economy.
She also insisted that work was ongoing to ensure good governance of public finances and transparency, pointing to last week’s passage of a new financial administration and auditing law.
“We thought it was very important to send the message that we were getting responsible about our fiscal affairs again,” Caddle said.
Admitting that Barbados was not yet out the woods, Caddle said Latin America and the Caribbean needed to “get smarter about a lot of how we do business”.
She explained that despite tight fiscal space, regional Governments still had to find ways to ensure important capital investments were made.
Barbados knew it had to invest in education, social protection service and healthcare despite being in an austerity programme, Caddle declared, adding that state-owned entities were also being reformed to ensure a cut in spending.
The Minister for Investment said that so far, Government has been able to slash transfers to state-owned enterprises to $235.5 million last year from $313.3 million a year prior.
“Our grants to public institutions also fell by about $79 million as SOEs became current and no new arrears were being paid. These reductions in expenditure were not for the sake of just cutting expenditure, they were about building efficiency in state-owned enterprises,” said Caddle.