In his ministerial statement on the fiscal consolidation programme in December 2013, the Minister of Finance boldly declared: “In the end though, Sir, as a country we cannot hope to cut or tax our way out of this economic decline.”
Less than a year later, the same minister is proposing to do precisely what he said should not be done in a recent Press conference. However, this behaviour is neither new nor surprising since the Barbados economy has become the guinea pig of the minister and his economic advisers.
As far back as 2009/2010, the Government put a fiscal strategy in place which failed. Since then, Barbadians have had to sacrifice through the payment of more and more taxes coupled with expenditure cuts that resulted in 3 000 job losses. In essence, it took the minister five years to recognise that the economic decline cannot be arrested by increasing taxation.
After years of trial and error, the dramatic decline in the foreign reserves in 2013 prompted the introduction of more vicious fiscal adjustment measures.
It was argued that the measures were designed to protect the reserves from ongoing free fall. However, in spite of the measures, the foreign exchange reserves showed further decline for the first nine months of 2014.
Unfortunately, there is an annual decline of the reserves in October as businesses prepare for the Christmas season; this has also happened so far for the month.
In the midst of it all, the Minister of Finance has promised that there will be no new foreign borrowing until the fiscal deficit is under control.
It is currently too expensive for the Government to secure foreign loans, especially given that it is currently spending 33 cents out of every dollar of Government revenue to service the national debt.
This is very high!
In the light of the frequent downgrading of the country’s international credit rating in recent years, perhaps the minister really wanted to say that the country had to prepare to borrow on the foreign market but at better interest rates.
This can only be done if the fiscal deficit is reduced such that the correct signals are sent to the international credit market.
Notwithstanding the words of the Minister of Finance, he requested the help of the International Monetary Fund (IMF) in finding ways to increase the level of taxation on Barbadians.
This request resulted from the underperformance of Government revenue that became even more evident in 2013.
The minister’s words in December 2013 were simply said as part of the political posturing that has characterised his tenure in the ministry.
It is clear that the underperformance of Government revenue persisted into the current fiscal year. So that in spite of the cuts in Government expenditure, the governor of the Central Bank recently reported that the fiscal adjustment measures had reduced the deficit by a mere 0.9 per cent of gross domestic product ($77 million) so far this fiscal year, that is, for the first six months.
In the June 2014 Press release, it was identified that fiscal adjustment measures yielded an estimated $51 million in savings for the first quarter of this fiscal year. This means that the gains from the measures have slowed in the second quarter, which ought to be of major concern for the policymakers.
It is further confirmation that the fiscal measures have failed miserably and, not surprisingly, because the only way out of the misery is the return of sustained real economic growth.
In the face of the persistent failure of additional taxation,
it is unbelievable that the Minister of Finance and his advisers have not come to grips with the situation.
Suffice it to say that the Barbados economy will hit rock-bottom by the end of the fiscal year. This assertion is the direct consequence of the Minister of Finance’s insistence that there will be new taxes from the broadening of the tax base. It does not matter how the new taxes are raised – any attempt at raising new taxes will prolong the period of economic decline.
Fortunately, there is only one way from the bottom.
• Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy.
