“Since our foreign exchange earning prospects were being so severely challenged . . . we concluded that the best way to tackle Government’s deficit was through a mix of expenditure reductions and increases in tax rates, both resulting in a smaller deficit to be financed and reduced aggregate spending in the economy.
“Today I am happy to report to this House and to the country that not only is the programming working, but it has largely brought stability to an economy operating in a highly unstable international environment.” – Minister of Finance Chris Sinckler, Budget Speech, June 26, 2012, Page 18.
With such a positive outlook on the Government’s efforts to change the minus sign preceding the fiscal-deficit-to-Gross Domestic Product (GDP) ratio to a plus over the “medium term”, it seems strange that within a very “short term” – just eight months – the plan would be deemed dead on arrival.
Not by just anyone, but by the Central Bank of Barbados, which has declared that “the fiscal consolidation strategy must be brought back on track, and a new medium term adjustment strategy must be implemented, using the current deficit as a point of departure” (Central Bank Press release, March 2013).
In his budget speech last year, in the paragraph following on directly from the passage quoted above, the Minister of Finance said as follows:
“We have been able to make significant gains this past year in reducing our deficit; liquidity in the banking system remains strong; and our stock of foreign reserves have remained on average at around $1.4 billion for the duration of this tough economic period.”
And while it is true that the fiscal-deficit-to-GDP ratio was wrestled down to 4.6 per cent (Central Bank, March, Page 14), less than half a per cent below its Medium Term Fiscal Strategy (MTFS) target of 4.9 per cent, (Revised MTFS document, November 2011, Page 18), it may have been due to the delaying of construction projects, which may have been put off until the next fiscal year.
The fiscal-deficit-to-GDP ratio for the fiscal year just ended, 2013, was set at 3.8 per cent (Revised MTFS, Page 18). But it turned out to be 7.3 per cent (Central Bank, March, Page 14), even worse than the same revised MTFS document’s “worst case scenario” of 6.9 per cent for the year (Page 18).
Whatever the reasons for getting so close to the target in fiscal 2011-2012, a child could have seen even then that it wasn’t because we were following the MTFS strategy.
The Revised MTFS fiscal-deficit-to-GDP was based on a Gross Domestic Product of $9.3 billion for fiscal 2012, but the actual GDP for that year was around $8.7 billion (Central Bank, March, Page 12).
The only way to achieve the targets contained in both the original or revised MTFS was to grow your GDP by hundreds of millions every year. But since 2009, Barbados’ GDP has been stalled in the vicinity of $8.5 billion (2009, $8.8 billion; 2010, $8.5 billion; 2011, $8.6 billion; 2012 (provisional), $8.7 billion. Source: Central Bank March Press release, Table 2, Page 12). With economic growth for the current fiscal year estimated at below one per cent, GDP growth will continue to be sluggish.
But the revised MTFS is based on a GDP growth that is much more robust, and which has never been achieved during its existence. It estimated GDP as follows: (fiscal) 2012, $9.3 billion; $2013, $9.8 billion; $2014, $10.6 billion; 2015, $11.3 billion; 2016, $12.1 billion (Source: Revised MTFS document, Page 18).
Well, you say, it was just an estimate. Yes, and the economists doing that estimate were prepared for a poorer showing. They came up with a “worst case scenario”. Under that, the worst we would do was $9.2 billion in 2012 and $9.5 billion in 2013.
We did $8.7 billion (Central Bank, March, Page 12) and about the same in 2013, as there was “no real growth in the economy” (Central Bank, Press release, December 2012).
We sure showed them, didn’t we?
In order to get the declining fiscal-deficit-to-GDP ratio as required by the MTFS, you have to have an ever-growing divider at the bottom of the fraction, that is, an ever-growing national output so that your deficit reduces in percentage even if it is rising in hard dollars.
But the measures adopted by Mr Sinckler – that “mix of expenditure reductions and increases in tax rates” – have had the effect of helping to stall the economy, thus undermining the lofty goals for the Revised MTFS.
Mr Sinckler did readjust the tax bands last year to help ease some of the pain, but in the absence of a full programme to get the economic engine going, we are still well below the MTFS target for GDP, and that is why the Central Bank has finally thrown it out of the window.
• Pat Hoyos is a publisher and business writer.
