On July 08, 2010, Moody’s warned that “[Barbados] rating downgrade could result if there is additional deterioration in Government debt indicators as a result of poor growth prospects or the inability to undertake substantive fiscal adjustment.”
These international organisations are more interested in fiscal adjustment than they are in growth; they are both important but local policymakers have a duty to focus on growth.
A week ago, Standard and Poor’s (S&P) downgraded Barbados’ credit rating, citing the continuous weakening of the Government’s fiscal profile. The nature of this profile indicates that it cannot be turned around in the short run and so Government’s emphasis has to be on growth.
This cannot be achieved by cutting capital expenditure as well as current expenditure; there has to be expenditure switching.
If the policy response to S&P is to increase taxation and cut all spending, then the economic recession has to be upgraded to an economic crisis.
The economy cannot cope with additional taxation unless the policymakers have succumbed to the view that it is in crisis and not in recession.
I am not a magician, but there is a fiscal crisis and the economy is not yet in crisis, given the level of foreign reserves, the rate of unemployment, the level of interest rates and the rate of inflation among other indicators.
To think otherwise is to prescribe the wrong policies that would surely create the crisis.
The comment by S&P that the problems were “most pronounced” in the area of Government revenue is not reflected in the numbers; if not the fiscal deficit would not have improved, according to the Central Bank.
In its recent Press release for September 2010, the Central Bank noted: “In spite of a fall-off in revenue, the fiscal deficit for the first eight months of this year was slightly below the comparable period of 2009 as a result of reductions in expenditures.”
The most significant single reduction came via capital expenditure. This compromises the growth prospects.
The S&P diagnosis, however, makes it easier to recommend increased taxation, without consideration for its negative implications for the economy’s growth prospects. There is need for balance between fiscal adjustment and economic growth. It must not be forgotten that nontradables – the things which we produce and sell among ourselves – account for 76 per cent of the economy.
The fiscal crisis is caused by the excessive spending of the Government on the current account over the last two and a half years. Increasing taxation cannot close a gap of $450 million that is expected to exceed $500 million at the end of 2010. There has to be reduced expenditure on the current account and everyone understands the politics involved. But it has to happen by studying the information head by head and doing the analysis step by step.
There is no magical way out of this fiscal crisis.
The backbone of the Government’s commitment to achieving the targets of the Medium Term Fiscal Strategy is to pursue cuts in expenditure, especially on the current account – wages and salaries and transfers and subsidies.
The key to generating Government revenue has to be via a return of sustained economic growth in which the Government has a critical role.
• Clyde Mascoll is a professional economist and former Government minister in the last Barbados Labour Party administration.
