Government’s decision to “front-load” its more than $400 million fiscal adjustment over the next year and a half might end up threatening the island’s quest for economic growth.
While not specifically referring to the Barbados situation, a new paper released last week by the International Monetary Fund’s (IMF) European department said a fiscal consolidation implemented over an extended period was preferable.
The document dated November 2013 examined the topic Fiscal Consolidations And Growth: Does Speed Matter? and was prepared by Steven Pennings and Esther Perez Ruiz of the IMF’s European department.
“Although it is difficult to identify a precise optimal pace, our findings suggest that a steady course of adjustment over several years may reduce the adverse affect of fiscal consolidation on growth,” they concluded.
But they also acknowledged that the front-loaded method Minister of Finance and Economic Affairs Chris Sinckler announced in the August 2013 Financial Statement and Budgetary Proposals “may be preferable to signal a resolute commitment towards fiscal consolidation when a country is facing an imminent debt crisis”.
“Political economy considerations, such as reform fatigue or a reduced sense of urgency as the activity recovers may also make it difficult to sustain consolidation over time, calling for some front-loading of the adjustment,” the authors said.
Consolidations
“Constrained by a small sample size, we see our results as a first step towards disentangling the relationship between speed and the multiplier, rather than the final word on the subject. While our result that very fast consolidations have higher multipliers is fairly robust, the regression that considers the full range of speeds is less so.
“Multi-year consolidation episodes are difficult to define, and while we consider several approaches to show robustness, it would be interesting to use other information such as private sector forecasts to pin down expectations about the future path of consolidation,” they added.
The IMF duo said their “main empirical finding” was that “fast episodes have higher multipliers than gradual consolidations”, which they believed “provides some preliminary support for consolidating at a steady pace, market access and a credible adjustment plan permitting”.
They pointed out, though, that their research sample size was small, therefore “identifying mechanisms and testing robustness is difficult, and so our findings should not be interpreted causally”.
“These results fit into a growing literature which finds that there is no “one single multiplier”, though we are one of the first to consider how it varies with speed. Our results can be motivated by composition, anticipation effects and asymmetries, though unfortunately we are not able to test these mechanisms due to a small sample size,” the paper noted.
“Given the wide variety of consolidation paths in the data, and recognizing the importance of these factors in determining macroeconomic outcomes, it would be surprising if speed did not affect the multiplier.”
In their study the researchers used a sample of 63 “adjustment episodes” and they said the findings support their “core hypothesis that the speed of consolidation may, beyond size, have a bearing on fiscal multipliers”.
Pennings and Ruiz said their results “provide some preliminary support for consolidating at a steady pace, rather than upfront, because slower consolidations are often associated with lower multipliers”.
“Despite this, some front loading may be inevitable where market access is fragile or when medium-term adjustment plans lack the credibility to sustain gradual fiscal consolidations over time,” they said.
During his budget presentation Sinckler said that as was stated in the Growth and Development Strategy 2013-2020, a broad objective was to reduce the fiscal deficit to below two per cent by 2020/21.
But he said that given the need for an early, front loaded, adjustment, it was the aim of government over a 19-month period, to cut the deficit to a target that falls below three per cent of GDP by 2014/2015, and thereafter continue to keep the deficit on a sustainable path. He said the actions to do this would be carried out from both the expenditure and revenue side.
“While the fiscal adjustment programme will be done over a period of 19 months, most of the measures taken will continue to have some effect over the medium term (2013-2020). It should also be noted that some actions will be temporary, while others will extend beyond the 19 months’ time frame. The main intention is to rein in the deficit and gradually move it downwards towards more acceptable levels,” he said. (SC)
