Is a strategy of fiscal consolidation good for economic growth?
For the last three years, Government has pursued a policy of fiscal consolidation.
In other words, it has introduced a number of measures, including expenditure cuts and increased taxes in an effort to narrow the gap between what it spends and what it earns.
This preference for austerity measures has taken place at a time when the economy has not been growing, and in fact some observers have linked the two, meaning that the effort to reduce the fiscal deficit has sapped business confidence and substantially reduced consumer spending. The end result was a misfiring economy that continues to struggle for real growth.
Based on last week’s Budget presented by Minister of Finance Chris Sinckler, it is clear that Government intends to continue its fiscal consolidation strategy while trying to stimulate increased investment, and hence stimulate economic growth.
The biggest sign of Government’s intention to pursue more austerity was the introduction of a new National Social Responsibility Levy, which is in effect a tax on all imports. This imposition was expected to raise $142.1 million in annual revenues, the minister said.
Sinckler said Government’s “principal concerns” were that “our debt levels are way too high and still climbing”, and “our fiscal deficit is still too large and must be better controlled”. And “as a result of the two variables above our growth levels are being seriously restricted as we cannot find the fiscal space to assist in further unleashing growth”, he added.
Despite Government’s efforts, the fiscal deficit has increased. “The deficit of $190.4 million represents 2.1 per cent of GDP. The deficit for the corresponding period in 2015 was $172.9 million representing 1.9 per cent of GDP,” Sinckler reported.
He also said Government’s priorities between now and 2018 were “improving the foreign reserves position through continued disciplined fiscal policy and enhancement measures for higher earnings of foreign exchange, accelerating GDP growth to reach at least 2.5 per cent by the end of 2017, and further reducing the fiscal deficit by addressing both expenditures and revenues so that by 2018 the deficit will be no higher than the rate of growth of the economy”.
He said achieving these goals would allow Governmet to stabilise the national debt by 2018 and thereafter reduce it.
However, there are those, including economist Jeremy Stephen, who is not convinced that more austerity is the solution. He also suggested fiscal consolidation could have a dampening effect on economic growth.
Stephen said he was unsure if the economy could adequately absorb the “shock” of the new import levy and noted the economy was already short of confidence.
“Yes tourism would have increased or brought greater expenditure but not necessarily better expenditure per tourist [even though] more tourists were coming. I don’t think that the confidence in the economy allows for that additional levy to really make the money that they are expecting to make, at least within the first year of said levy,” he said.
Discussion about whether or not austerity measures negatively affect economic growth prospects is also one confronting the Caribbean and international community.
In new research on the topic, United States economists and university professors Oscar Jordan and Alan Taylor concluded that only a strong economy could bear a programme of austerity or “fiscal consolidation” without significant output losses.
They found that a fiscal consolidation of one per cent of GDP translated into a loss of 3.5 per cent of real GDP over five years when implemented in an economic slump, rather than a loss of just 1.8 per cent in good times.