When Minister of Finance and Economic Affairs Chris Sinckler delivered Government’s Financial Statement and Budgetary Proposals last November, he prefaced his proposals with a background to the global recession.
Noting that the downturn was triggered primarily by the collapse of the sub-prime mortgage market in the United States, Sinckler discussed the impact this had both in Barbados and throughout the region and beyond.
He noted that his submission was “coming against the backdrop of the continuation of a domestic economic recession, almost exclusively driven by the ravages of a global, financial and economic crisis characterised by most as the worst since the Great Depression of 1930, in terms of its global reach, duration, and severity of impact”.
Nine months later, the world is still in financial turmoil and while Government can take steps to stimulate growth locally, international events will no doubt have a significant impact.
Last year Sinckler noted that the majority of countries within the CARICOM Single Market and Economy had experienced moderate to severe declines in output leading to business closures, job losses and general economic instability.
“Jamaica was forced to return to the International Monetary Fund and the World Bank for another set of depressing structural adjustment programmes that portended painful job cuts, cuts in social spending and increases in user fees for social services.
“In The Bahamas widespread job retrenchments ensued as several hotel properties closed or significantly reduced operations, leading to declines in GDP output and consequential austerity measures from the government there,” he said.
Sinckler added that countries in the Organisation of Eastern Caribbean States had not fared any better and they too witnessed moderate job losses, business closures, declines in tax revenue and general contractions in GDP.
“What most, if not all of them, did not anticipate was the length, virulence, and sheer devastating impact of this recession. The anticipated return to moderate levels of economic growth behind the massive stimulus packages has not occurred and instead the economic recovery in some has been slow and tepid, and shallow at best and non-existent in others,” he said.
With this in mind, Sinckler proposed a series of measures aimed at raising revenue and reining in expenditure. Given that the proposals have returned somewhat mixed results to date, Sinckler recommended even more belt-tightening.
In its review of the first half of this year, the Central Bank reported that Government was having a hard time meeting its fiscal targets despite an increased VAT rate and restraint in discretional spending.
“Transfers and subsidies and interest payments declined by 13 per cent and ten per cent respectively. There was a 56 per cent reduction in grants to individuals but grants to public institutions rose eight per cent.
“Spending on capital projects and wages and salaries were also lower when compared to a similar period last year,” the Central Bank noted.
Overall spending was down seven per cent from April to May 2010.
Meanwhile, corporate tax receipts were less than half of collections received in April to May 2010 and VAT receipts fell by two per cent in spite of the increased VAT rate.
“On the other hand, personal tax receipts were up by ten per cent, partly reflective of the removal of the tax-free allowance on travel and entertainment,” the bank said.
However, the bank said the economy was still on course to achieve “modest growth” in the region of two per cent, provided there was no slowdown in tourism.
According to Central Bank statistics, growth of five per cent in tourism enabled Barbados to record an estimated 2.1 per cent increase in real gross domestic product during the first half of 2011.
However, the bank noted that tourists spent less while vacationing on the island and there was therefore no build-up in foreign exchange reserves for the first six months of the year.
The reduced spending power of tourists is a natural result of a depressed world economy.
In the July 11, 2011 BARBADOS BUSINESS AUTHORITY, Barbados Hotel & Tourism Association president Colin Jordan noted that economic uncertainty in the United States, United Kingdom and European Union along with several local developments would make the summer tourist season a challenging one.
Jordan said the “most disturbing” issue was “the spectre of possible contagion in the European Union”.
“Even though continental Europe is not in our Top 3 source markets, there will be challenges if there is default or economic collapse. Germany is our largest market in Europe and they are the main country providing bailout funding. France is No.2 and they are also being called on to provide funding. The weight of possible repeated bailouts will impact those two economies,” he said.
Meanwhile, the Jamaica Observer reported last week that the World Bank’s chief economist for the Caribbean and Latin America warned that a slide back to worldwide economic decline worldwide – a so-called double dip recession – could strain the region’s economies.
Augusto de la Torre said while the Caribbean and Latin American economies have developed strong immune systems against the global contagion, a worsening of the current market turmoil could put those defences to the test.
He said such “worsening” would occur if rich economies – the European Union, United States and other developed countries – dip into recession once again.
The World Bank analyst predicted a United States slowdown would have a larger impact on its close trade partners, including Mexico, the Caribbean and Central America.
But in recent months, as several countries see their sovereign credit ratings slide, the United States currency weaken, the eurozone economies struggle, stock markets tumble and job- presidentgrowth figures stagnate, the World Bank economist warned that a worsening of the current turbulence – “a global turmoil of immense magnitude” – could impact the region’s ability to grow.
Although Government can implement strategies to reduce the fiscal deficit, it is clear that external threats will continue to impact on its ability to increase revenue, especially from tourism.
