WHAT MATTERS MOST – It’s more of a fiscal crisis

I have argued that Barbados has a fiscal crisis and not an economic crisis of the type experienced in the early 1990s. The need to differentiate between the two is essential in determining the policy mix necessary to create much needed growth in the Barbados economy.
It is convenient for some to downplay the fiscal crisis and play up an economic crisis in order to lay blame on the international economic conditions.
Here are the facts in support of my argument: (1) real economic growth declined by 12.9 per cent for the period 1990 to 1992 as compared to a decline of only 3.5 per cent for the period 2008 to 2010; (2) unemployment averaged 18.4 per cent for 1990 to 1991 compared to 9.3 per cent for 2008 to 2010 and (3) foreign exchange reserve cover was 5.9 weeks when compared with 20 weeks for 1990 to 1992 and 2008 to 2010, respectively. These are three fundamental economic indicators and the facts tell the story. In each case, the numbers for the early 1990s are much worse!
On the other hand, in the case of the fiscal condition, the period 2008 to 2010 is much worse because for the first time in this country’s history, the Government has had to borrow over $40 million per month to pay civil servants.
Prior to 2008, the previous time a Government borrowed to pay civil servants was in 1991 and it was a mere $15 million for the entire fiscal year. Barbados therefore has a fiscal crisis of a kind never before seen and of a size never before measured.
There is one other very unusual thing that has characterized this period of fiscal crisis; it is the first decline in the total spending in the economy in any given year since independence.
This unusual outcome is a result of the negative effects on the spending of Barbadians caused by the excessive taxation since 2008 and to a lesser extent, the effects of the international economic recession which ended in 2009.  
Imagine the average Barbadian household living on a fixed income is forced to pay more road taxes, fees and VAT. Further imagine that the Government decides to tax allowances, which reduces the household’s disposable income. In essence, the Government has cut the spending power of all households on fixed incomes.
In the meantime, Government spending increased dramatically. In the absence of spending by households, total spending in the economy declined. This means that notwithstanding the increased tax rates and fees by the Government which cut the spending of households, the Government did not collect the revenue expected from the higher tax rates.
The temptation of a Minister of Finance not on top of the issues may be to impose more taxation. It is amazing how an attorney at law has to hold the post of Attorney General but a Minister of Finance does not have to possess a basic understanding of economics or finance. The country has paid and will continue to pay for the mismanagement!
Barbadians, you have been told about a Medium-Term Fiscal Strategy, but you have not been told that the actual fiscal deficit for the year 2010/2011, which ended in March, was $125 million more than the target in the strategy document.
In an attempt to narrow the gap, the Minister of Finance has failed to adequately allocate realistic amounts of transfers and/or subsidies to such statutory bodies as the University of the West Indies (UWI), the Transport Board, the Queen Elizabeth Hospital and the Barbados Tourism Authority (BTA), among others.
In not allocating realistic amounts on a quarterly basis, the Minister of Finance is able to make the fiscal deficit look smaller than it actually is for the first quarter of 2011/2012.
Furthermore, the Government recently borrowed $110 million from the National Insurance Board for the UWI, BTA and the Transport Board. This makes the allocation for transfers and subsidies look smaller. The impression is therefore created that the Government – Minister Sinckler in particular – is doing something about the excessive spending. In actual fact, it is simply bogus accounting! 
Please, whatever is done, no new taxes; and if there are expenditure cuts, they have to be genuine, not the result of further abuse of the funds of the National Insurance Board.
 
Clyde Mascoll is an economist and Opposition Barbados Labour Party spokesman on the economy. Email [email protected]