Virtually a year ago, the Government of Barbados announced an economic adjustment strategy over a 19-month period that was supposed to bring some degree of balance between Government’s revenue and expenditure as well as put the country in a position that it can begin to generate some level of real economic growth, particularly in the medium to long term.
Based on the most recent economic review done by the Central Bank of Barbados and the issues highlighted in last week’s Press conference by Minister of Finance and Economic Affairs Chris Sinckler, it is reasonably safe to conclude that the local economy is not responding as anticipated to the package of measures put forward.
With only a few months left of the initial 19 months adjustment period, no real economic growth is expected in 2014 and there is still well over $150 million in fiscal deficit to be tackled.
What is interesting in this context is that the Central Bank in its report has noted that the fiscal deficit has been financed through reductions in Government’s deposits at commercial banks as well as continued use of facilities at both the National Insurance Scheme and the Central Bank. Further, the Central Bank is suggesting that more policy initiatives are required in order to bring the fiscal deficit down to about 6.6 per cent of GDP in the next five to six months.
Based on the information provided by Sinckler during his Press conference, it seems that there is indeed some consensus between the Government and the Central Bank in relation to the necessity to further reduce the fiscal deficit. In that regard, Sinckler has hinted that the approach to reducing the fiscal deficit will include a combination of revenue raising measures (more specifically a broadening of the tax base where feasible), cuts in public expenditure (through attrition, for example, as a result of the merging of some state owned enterprises) and further borrowings.
Clearly, Barbados has found itself in a rather difficult situation – a situation that confirms the continued economic challenges facing the country and the need to find the right mix of policies and strategies to restore economic order, both internally and externally. Â
You see, the present economic environment calls not only for measures that will stabilise the fiscal deficit but also for remedies that can grow the economy. In macroeconomic terms, these goals seem contradictory. If the Government decides to broaden the tax base and simultaneously reduce public expenditure, both of these measures will have negative implications for the country’s growth potential. Therefore, to grow the economy, the better strategy would be to reduce taxes and increase public expenditure particularly on the capital side. But with the fiscal deficit being as high as it already stands as a result of weak performances on both the revenue and expenditure sides, a growth strategy that is based on fiscal stimulus is hardly likely at this time.
And for this reason, mostly, the upcoming budgetary proposals have to be seen as one of the most important in recent times. The critical question that remains is: How far is the Government willing to go based on the minister of finance’s suggestions in relation to broadening the tax base and cutting expenditure?
The answer to that crucial question will determine whether the country will finally begin to emerge out of its current economic challenges or whether those challenges will intensify in the months ahead.