ECONOMIST Dr Winston Moore says the lack of focus on climate change and its implications is “a glaring omission” of the 2010-2011 Budget.
But he thinks it could be justified, given the current fiscal situation.
In a statement released yesterday, the president of the Barbados Economics Society and University of the West Indies lecturer, said Government had to be careful that its aid policies for tourism-related businesses provided an incentive for them to diversify ownership in these entities by issuing shares.
Following is Moore’s statement on the budget: “The Government’s recent Statement of Economic Policies provides a good guide of what will be the main focus for the fiscal authorities in the short- to medium-term.
More important
“This year’s presentation is perhaps ever more important, given the relative weakness in the domestic economy and the recent downgrade of Barbados’ external debt rating by Standard & Poor’s.
“Moreover, the fiscal crises experienced by other regional economies also would have sent a strong signal to local authorities that fiscal adjustment was necessary at this point in time.
“It is against this backdrop that the fiscal authorities therefore proposed a $159 million net increase in tax revenues (primarily the VAT), which translates into a reduction in the fiscal deficit by around two per cent of projected gross domestic product – the spending of private individuals and business on all (final) goods and services.
“A simplistic analysis of this change would suggest that the proposed rise in taxes would take about $600 million out of the economy, assuming a tax multiplier of three (the tax multiplier is the amount by which national income falls as a result of a $1 increase in taxes; a value of 3 therefore implies that a $1 increase in taxes reduces national income by $3).
“Such a simplistic analysis, however, ignores the positive implications that the restoration of fiscal equilibrium would bring to both foreign and local investors.
“A deeper analysis of the budget would also look at the planned capital works programme of Government. The proposals outlined include capital expenditure of about $172 million.
“Taking a conservative estimate of the expenditure multiplier – the amount by which a $1 increase in Government spending translates into higher gross domestic product – of about four, this would imply a gross injection of about $688 million over the life of these projects.
“This injection therefore dwarfs the amount of the negative impact of the tax hikes on gross domestic product. It should be noted that these injections were not included in the addendum to the Budget and it is therefore quite likely that if Government follows through on these capital expenditure plans that very little change in the fiscal deficit might materialise.
“As it relates to policies aimed at stimulating the underlying productive capabilities of the island, some of the key initiatives include a small hotels refurbishment programme, a tourism loan guarantee facility, a flat commercial rate for agriculture and a productivity and innovation tax credit programme.
“While more details on the tourism loan guarantee facility are needed, it could lower the cost of investment for tourism-related businesses.
“However, there are moral hazard issues that need to be considered.
If tourism establishments know that Government is guaranteeing their loans, hotels therefore have an incentive to accumulate as much debt as possible, since if they cannot pay, Government will simply step in to cover these loans.
Little incentive
“Such a policy also provides little incentive for tourism-related businesses to diversify ownership in these entities by issuing shares.
“One glaring omission from this year’s presentation, which could be justified given the current fiscal situation, is the lack of focus on climate change and its likely implications for small states.
“Recent research done by regional economists suggests that climate change could have deleterious effects on regional economies, particularly tourism-dependent territories.
“It is necessary to reposition the local economy to adapt to the likely effects of climate change and exploit the likely opportunities it might present.”
