The problem of toxic debt levels in the Caribbean is neither new nor particularly surprising, given the established trends in government spending even amidst poor economic performance and dismal growth prospects. However, the recent and ongoing involvement of the International Monetary Fund (IMF) in the region’s economic affairs and the familiar championing of spending cuts and austerity are cause for concern, especially with the fund’s history of botched economic experiments in Latin America, Asia and now Greece.
While huge public spending cuts seem to be a band aid for the economic haemorrhaging, they are inadequate and short-sighted solutions to the much bigger problem of creating and supporting economic growth.
Simply put, deficits exist because governments spend more than they receive through taxation in a given budget year. This spending is often wasteful: used to maintain or increase core political support; lost through white elephant (often infrastructural) projects with no return on investment; or pumped into social spending with no positive social gain.
In a recessionary period, however, the effect of budget deficits is amplified by contractions in growth and employment and corresponding reductions in tax revenue. There is pressure to increase social spending, which cannot realistically be done in cash-strapped economies without significantly increasing public debt.
Given the current state of affairs and rising fears concerning economic sustainability, the IMF’s slash and burn techniques seem like a viable option to some countries. The crisis in the Caribbean is not one of debt insomuch as it is a crisis of growth. What austerity and structural adjustment have failed (and continue to fail) to do is to address the issue of economic growth and output, which is also the source of their failures as economic policies.
The traditional methods of reducing debt as a share of GDP have been to cut government spending, increase taxation, or find some balance between the two.
In a depressed economy, however, austerity measures worsen long-term budget sustainability and shrink the economy, effectively undermining the recovery effort. Since overspending is a function of poor financial management, spending cuts are usually not employed to the benefit of the economy or the citizens.
Increasing taxes and cutting spending to create a surplus is the current strategy being employed in Barbados, and there are fears that other heavily indebted Caribbean countries will follow suit. It is indisputable that the public service has ballooned into an employment haven, and unnecessary spending on wages must no doubt be cut. However, as should become evident shortly, job cuts in the public service will spur similar cuts in the private sector, which will only serve to further strain the economy and reduce the tax base.
Instead of cutting core social spending, there should be a focus on reducing instances of parasitic rent-seeking activities. By eliminating unnecessary (and very expensive) politically motivated spending, it is possible to drastically reduce the budget deficit without the negative economic effects of austerity.
• Daryl Dujon is executive director Caribbean Centre for Research on Trade and Development.