How draconian will be Budget?
THIS?WEEK, as new Minister of Finance Chris Sinckler delivers his first ever Budget, we are going to hear many percentages of gross domestic product (GDP) being quoted, while the actual amounts of revenue and expenditure may well get lost in the crosstalk. So let’s look at a few real numbers, which our children will be dealing with long after we are gone.
Take this simple but crucial bit of arithmetic: under the administration’s draconian Medium-Term Fiscal Strategy (MTFS), the Government says it will borrow $1.3 billion between now and 2015 while at the same time reducing its debt-to-GDP ratio down to 90 per cent.
Sounds good, doesn’t it?
How do we borrow more while at the same time reducing our debt-to-GDP ratio? Why, because the GDP will expand, of course!
But let us not forget the real numbers, no matter how nicely they all seem dressed up in GDP percentages.
The national debt stood at almost $7.1 billion for the fiscal year ended last March 31, giving the country an official “debt as a percentage of GDP” of 104.7 per cent, with GDP officially estimated at $6.75 billion.
In the current fiscal year (2010/11) which ends next March 31, the actual national debt we have to pay back is expected to rise by another half a billion dollars to $7.55 billion, and the debt-to-GDP ratio will go up to almost 110 per cent, with GDP expected to rise to $6.8 billion.
How then does the total debt get back down to 90.5 per cent in fiscal 2014/15 although the debt we owe will actually have risen by another half billion to $8 billion by then? It’s simply because if the economy grows cumulatively at around three per cent per year over the next four years, as the MTFS predicts, it will be two billion dollars higher than it is today, some $8.7 billion.
That is why it is misleading to focus on GDP ratios instead of real numbers.
By the way, here’s how Investopedia.com defines GDP: “The monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, Government outlays, investments and exports less imports that occur within a defined territory.”
Up to the end of August this year, the latest Central Bank Review (Table 4 on Page 11) shows that Government had reduced spending by $165 million to counter its loss of $130 million in revenue, for an overall improvement in the fiscal balance of $34.2 million.
While this may be on track to produce the $51 million improvement in Government operating finances, the actual outturn to date seems far removed from the MTFS estimates of only $34 million in spending cuts and revenue increases of $17 million.
So the pressure is on Minister Sinckler to find ways to cut expenditure to match the revenue shortfall, which begs the question: will the administration have to bring forward some of those cuts in transfers that it has been planning for coming years, according to the MTFS, in order to stay on course?
These include, and I am quoting here, “place caps on the transfers to the statutory boards, statutory corporations and Government-owned companies, such as the Queen Elizabeth Hospital, Transport Board, Barbados Agricultural and Development Marketing Corporation and the University of the West Indies . . . . Eliminate transfers to other Government-owned corporations and authorities such as the National Housing Corporation and the Barbados Water Authority”.
With our Standard & Poor’s rating hanging on for dear life just one notch above the fiery hell of junk bond status, Mr Sinckler may not have much choice but to wield a very sharp budgetary knife.
• Patrick Hoyos is a financial analyst.