Fiscal hawks say that deficit spending is merely a means of pushing the cost of politically unpopular action onto future generations. But austerity, whereby government spending is cut and taxes increased, reduces demand in the overall economy and drives up unemployment, at least in the short term. – Deficits Fall In Europe, But Debt Rises by David Jolly, New York Times, April 22.
With the Medium Term Fiscal Strategy (MTFS) a complete failure, Minister of Finance Chris Sinckler and his fiscal advisors are reportedly working on retooling their policies to pull Barbados out of its economic doldrums.
I used the above quotation because it helps me to understand better the reasons why I think the Freundel Stuart administration’s hybrid policy has failed. Barbados has been running record deficits, but most of the money has been used to maintain the Government’s employment numbers until the global economic storm passed and things returned to normal.
Well, here’s some good news.
The United States economy is suddenly doing far better than anybody expected, exporting more and importing less, and so its deficit has fallen to about half that of the previous year and its economy now on track to grow by three per cent this year.
In Barbados’ case, the success of the MTFS depended on our economic growth, as measured by the growth of our gross domestic product (GDP). So although Mr Sinckler had one or two years where the deficit as a percentage of GDP was within reach of its MTFS target, it was undermined by the rising cost of debt repayment and lack of economic growth.
These things all help to fuel each other, so in our case, although Government was spending more, it had to tax more to try to raise funds. But there came a period, mostly the whole of last year, when the tax increases caused consumer demand to peak and then fall off.
Our hybrid system of higher taxes to pay for not cutting spending in the face of lower tax revenue simply failed to bring home the bacon after the first full year of implementation (2011).
The result was the nightmare Mr Sinckler did not want to experience: falling revenue because those taxes were too high, resulting in Government needing to borrow even more this year to meet its basic commitments.
Some of this might be justified if the money was being used to build out something that would help build the country’s infrastructure or increase its foreign exchange-earning potential, but this is not the case. Government still has to look for investors to finance projects, thus nailing itself to a debt coffin with the appropriately named BOLTS.
In rethinking the MTFS, the focus will have to shift away from borrowing just to keep people employed, as this retains the non-productivity in our system. Last week Minister of Commerce Donville Inniss spoke about this at the Barbados Employers’ Confederation’s luncheon, but he only tiptoed around the subject. We all agree money can and should be saved by reducing the cost of electricity, insurance and other overheads using a combination of new tech (like photovoltaic systems) and commonsense methods to deal with, for example, fraudulent sick leave claims, purchasing non-essential supplies, and duplicating effort.
But even The Donville found himself caught in a little trap as he talked about the possibility of merging state agencies to avoid duplication of effort and expenses, as he was unable to acknowledge that a lot of the money you save in such mergers, be they in Government or business, is from the duplication of human resources.
Yes, people will have to be sent home. I can say it because nobody elected me. But the Dems cannot bring themselves to accept this inevitable fact. They ran against it in the Election, remember?
The European economies, which have been undergoing austerity measures for a few years, are seeing their average deficits falling. “But the fact that most economies’ deficits have fallen by less than expected and that the consolidation has coincided with deeper-than-anticipated recessions confirms that the costs have been large,” wrote Ben May, a London economist quoted in the above-mentioned article.
Barbados seems to be reaping similar results as many European countries, but we will not get ahead of the malaise of recession unless we grow our economy. There are many ways to do this but almost all of them call for cutting expenses in dramatic ways, including on human resources.
Then we must continue to spend money, but on building a Barbados that can attract more foreign investment. This is the way to grow our GDP and take our economy out of the doldrums.
• Pat Hoyos is a publisher and business writer.
