WHAT MATTERS MOST: Fiscal urgency

By Clyde Mascoll | Thu, September 02, 2010 - 11:59 PM

Regardless of when or how the Barbados economy comes out of the current recession, the self-imposed fiscal position of the Government is so bad, that it would take about five or more years to restore it to some state of normalcy.

The notion of normalcy is based on best practice over the period of Independence and nationalism.

According to the historians, Barbados was always cautious on the nationalisation of enterprises and practised minimum Government ownership of public utilities.

The emphasis has been on Government partnership with the private sector, rather than state ownership.

Is it not therefore ironic that the profitable public utilities are predominantly privately owned and the others totally publicly owned?

Notwithstanding, this country has a tradition of stable Government because it has always been recognised that the ability to provide social goods and services to Barbadians is largely based on our country’s capacity to pay for them. This has been achieved because the people have tolerated a level of taxation in return for good education, adequate health care, subsidised transport and access to water, among others.

The country is now in a position where it has to borrow money on a monthly basis to pay civil servants; this is unheard of in our proud history of fiscal management.

As it stands, there are three broad legislative requirements in our fiscal management: (1) the Appropriations Bill (The Estimates); (2) the overdraft limit on Government temporary borrowings and (3) the limit on local long-term borrowings.

Given our relatively proud history of fiscal management that has been completely abandoned in the last two years, it is now necessary to use best practice to further legislate other broad fiscal principles to prevent this country from experiencing a dramatic fall in its standard of living, regardless of when the recession comes to an official end.

Based on best practice, Errol Barrow’s fiscal legacy is the pursuit of surpluses on Government’s current account; that is, Government collects more revenue than it needs to pay civil servants, meet transfers and subsidies, cover interest payments and purchase goods and services.

It is necessary to legislate the need to run a surplus on the Government’s current account without specifying the amount; this will now take years to be accomplished, given the poor fiscal position of the Government.

The Owen Arthur fiscal legacy is to contain the fiscal deficit to 2.5 per cent of the gross domestic product which should be legislated with a provision that under specific conditions the limit may be only temporarily exceeded.

In the face of a healthy National Insurance Scheme, the last administration was able to put more emphasis on domestic borrowing as a way of financing the deficit. It is therefore possible to legislate a ratio of local borrowing to foreign borrowing in the pursuit of a set of fiscal principles.

In the absence of legislating other fiscal principles, any economic recovery programme is not going to be feasible in the foreseeable future. The inability to finance the existing size of the Government is the real elephant in the room.

The role of the public sector in the growth and development of small Caribbean-type economies and societies cannot be ignored under the guise that the state of the economy does not matter.

• Clyde Mascoll is a professional economist and former Government minister in the last Barbados Labour Party administration.