Early in 2008, I suggested a one‐year fiscal stimulus package of 1% of GDP – S80 million; and given the public utterances, the government had no intention of stimulating the economy. Perhaps, the suggestion came from the wrong source. Maybe I am incapable of giving advice on fiscal matters, because the Economic and Financial Statistics document of the Central Bank of Barbados on which I rely is woefully behind time in publishing the accounts of the government; in fact now over two years behind and an explanation is in order.
Whatever the reason, I was extremely baffled when in July 2008 the government imposed $104 million in taxation on an economy obviously heading for recession. Given the tardiness of the published monthly data, I am now in a better position through other publications to explain the truth and ask questions of the government and in particular the minister of finance. In doing so, the current fiscal condition of the government must be put in context.
In its forty‐three years of independence, the government of Barbados has experienced a deficit on its current account – that is the difference between its revenue and current expenditure – on two occasions 1987/88 and 1990/91, when measured on a fiscal‐year basis. These were small deficits of $21.3 million and $7.7 million, respectively.
In 1987/88, the significant income tax relief was responsible for the deficit which soon gave way to burgeoning surpluses once again. In 1990/91, an election year, the small deficit followed a year of strong economic growth and the largest current account surplus recorded up to that point. What followed were increased taxation and the 8% wage cut which restored fiscal health with the attendant burden.
Given the recent information, the imposition of heavy taxation in July 2008 was a direct response to an unprecedented deficit of $63.5 million for the first six months of 2008. The misguided policy was a panic response to the state of the government finances compounded by equally misguided attempts to put election promises in place which required higher current expenditure.
Notwithstanding the heavy taxation, the fiscal position continued to deteriorate such that for the first six months of this year 2009, the current account deficit skyrocketed to $180.9 million. As expected, the unnecessary taxes in July 2008 assisted in contracting private sector spending which resulted in lower collections of VAT and other expenditure‐based taxes.
In the meantime, once the misguided taxation contributed to the downturn trend in government revenue, the government that rejected the idea of a stimulus package was in fact trying to stimulate economic activity by unfortunately raising current expenditure; another misguided policy.
There are two ways to effectively pursue a short‐term stimulus package in a small open economy: (1) by reducing taxation to encourage more spending; (2) by boosting capital expenditure, not current expenditure. The Thompson administration chose to boost current expenditure, thus compounding the structural issues in the public sector.
Having pursued the wrong path, it is useless and no longer possible to put an effective fiscal stimulus in place; something was attempted behind the scenes but it was botched. This gave rise to the downgrading of the country’s credit rating!
I invite the minister of finance to address the true state of government finances early in the New Year after some preparation, since it is no longer done in the Budget. In his preparation, he should address some of the following: Is the government borrowing substantially to meet its current expenditure obligations, including paying wages and salaries? Is the government going to reduce current expenditure? Is the government able to raise a foreign loan?
These are the real fiscal issues, not confusing deflation with contraction or asking whether a fiscal policy could cause an economy to contract and cause inflation at the same time; these peripheral issues are dealt with in first‐year macroeconomics using the ISLM framework.
Take note of Sir Lloyd’s advice!
Barbados’ current fiscal position is a serious cause for concern!
