Last week I ended my column with the bold assertion that “Barbados’ fiscal position is a serious cause for concern”. This week I am downgrading the condition to a fiscal crisis, which if unchecked, would precipitate an economic crisis. To date, Barbados does not yet have an economic crisis, the economy is in recession.
Having compounded its fiscal problem by raising taxes during an economic recession only to realize lower collections of expenditure-based taxes, the government would have learnt the hard way that managing an economy is as much an art as it is a science. It is an art in the sense that an economy is influenced by things which are not necessarily measurable such as confidence; and a science because performance is ultimately measurable.
In essence, the imposition of heavy taxes during a recession is not only wrong scientifically as the evidence now suggests, it is also wrong because it sends the wrong message to those who make up the economy – it does not inspire confidence. So increasing the rates of taxation has the potential to contract the base of taxation and therefore yields less taxes rather than more for the government, especially during a recession.
In a position of relatively healthy foreign reserves, a major error was made in July 2008 and the government now has no choice but to address its fiscal crisis from the expenditure side; and this does not mean capital expenditure, the issue is much more fundamental.
There is nothing wrong with a government coming to office to offer free bus fares, to set up free camps and to establish constituency councils. These initiatives however constitute recurring costs which increase the current expenditure of government.
There is however something wrong with coming to office in a pending economic recession and choosing to ignore that current revenue is not adequately covering current expenditure; to the extent that in two years the current account deficit is moved from $23 million to $150 million, and by March 2010 is forecast to be in excess of $250 million. There has never been a period of two consecutive years of deficits on the government’s current account furthermore three, and huge deficits at that.
To address the fiscal crisis, the government has promised the IMF in its Article IV consultation September 2009, to seek external funding from multilateral institutions and “to implement a strong fiscal adjustment program in the period ahead”. The former has apparently been done.
The minister of finance now needs to explain early in the New Year, what is meant by a strong fiscal adjustment and what is the period ahead? The explanation becomes more urgent as the government’s finances have deteriorated more than expected in the post-budget period.
The importance of the current winter tourist season cannot be therefore overstated in terms of its contribution to our economic recovery and more so in terms of improving the base from which the government generates its taxes. The real test is in government’s ability to deal with its fiscal crisis.
It is cocky for anyone to suggest that other Caribbean countries have to go to the IMF because they did not have other sources of income to offset their revenue shortfall like Barbados, which has the capacity to borrow from domestic sources. It is a misrepresentation of Barbados’s fiscal reality and a false sense of security from very unlikely sources.
No Caribbean country, however strong its domestic finances, is capable of sustaining extraordinary deficits on its government’s accounts which literally means that the country is borrowing to meet its current expenditure obligations including the payment of its civil servants. This state is simply not sustainable and should not be encouraged, especially by economic advisers.
In the circumstances, a fiscal adjustment is a must; for some the only issue is when but for me the real issue is how. Ultimately the art and the science of fiscal policy-making must coincide for the sake of the country.
