Is a strategy of fiscal consolidation good for economic growth?
There is no secret that I have expressed my concern regarding the continuing pursuit of an austerity economic policy to effect debt and foreign reserves sustainability. This policy was being pursued by a strategy of fiscal consolidation, an exercise of expenditure reduction and increased taxation and a monetary policy stance of accommodation to the Treasury.
It is almost impossible to effect debt and fiscal deficit sustainability through aggressively reducing a current account deficit from 12 per cent to about four per cent in about four to five years in the context of this country’s sovereign credit rating as it relates to the fact that we are now between five and six notches below investment grade.
I have argued that this could not be seriously done without having a serious impact on the growth of the economy and by extension revenue.
The measures that were introduced between 2013 and 2016, they had some effects. They were able to reduce the wages and salaries bill to the Government and they were also able to reduce transfers and subsidies on the current account, but while that is true, those same measures also significantly increased the attendant short-term and medium-term debt stock, as well as the interest charged on those debts. And, as a result, the total debt stock – both domestic and foreign.
As a result of that, I am confident that we will continue to have an impact on economic performance and consumer spending.
In the recessions of the ’70s, ’80s, ’90s and 2001 too, investor confidence in Barbados remained solid, and this was manifested through continued strong appetite to subscribe and take up Government savings bonds.
This trend was reversed in 2014 and the last 11 series of savings bonds issued had a very poor uptake. Therefore, it was my contention then that the Central Bank will be forced to continue aggressive open market activity.
This is precisely what has been happening and what has continued to happen. That is the reason why one has had $1.3 billion total net lending to the Government directly through treasury bills uptake and through direct credit from the Central Bank itself.
For many years, these problems were building up in Barbados and the central Government under both administrations carried the recurrent expenditure of inefficient state operating enterprises.
The entire Caribbean and Africa have been challenged for many, many years with respect to high debt services, high debt stock, high fiscal deficits and the prescription by the international sovereign debt restructuring architecture has been “before you engaged in such activities, we are going to introduce an austerity programme”.
And part of that austerity programme, when it comes to central government, requires essentially wage cuts, pension cuts, downsizing of services and entitlements as well as moving to socialised loses, that is, issues with respect to health care, housing, education, and then the state-owned enterprises.
We should move at a faster rate towards refinancing and debt restructuring. It is at the point now where for every reduction in transfers and subsidies as well as reduction in wages and salaries you are increasing the debt service on the interest rate.
So, in other words, you are creating a vicious cycle. Debt cannot be solved by taxes and raising revenue.
Minister of Agriculture Dr David Estwick made these comments during last week’s Budget debate.