RIGHT OF CENTRE – Cuts likely to be most successful
THE “GREAT RECESSION”, the tumultuous period between 2007 and 2009, has had a significant impact on the Barbados economy.
In real terms, the total output of goods and services produced by the economy contracted by around four per cent between 2008 and 2009.
Since this period, the recovery has been modest.
The slow pace of economic recovery coupled with underlying structural problems resulted in a significant deterioration in Government’s fiscal accounts.
As would be expected, deterioration in the fiscal account in addition to accounting for previously “off-budget” projects resulted in a significant expansion of the national debt.
At the end of 2007, gross central Government debt was just under 70 per cent of GDP. By the end of 2010, however, the level of national indebtedness had risen to 98.5 per cent of GDP.
Many local and international commentators have argued that there is a significant need for fiscal adjustment, primarily on the expenditure side. This recommendation is premised on a few key economic facts.
First, on the expenditure side, large transfers to public institutions are a significant burden on public accounts. At the end of fiscal year 2010/2011, transfers and subsidies were almost 40 per cent of total current expenditure.
Second, expenditure cuts are likely to be more successful. Increasing taxes during a recession is unlikely to yield more revenue since tax bases – profits, consumption, imports and others – are falling.
Third, as the nation’s indebtedness rises, more funds will have to be directed towards servicing debt rather than growth-enhancing expenditures such as health care, education and social services.
Fourth, a further deterioration in the fiscal account could result in another downgrade from international rating agencies and increase the cost of external debt.
The case for fiscal adjustment on the expenditure side, however, should not mask the fact that there are other structural issues that need to be addressed:
– VAT arrears. Part of the reason for deterioration in the fiscal account was also partially due to a significant rise in value-added tax arrears, which reduced the efficiency of revenue collections.
– Simplification of tariff policies. Based on calculations in a paper that I wrote and was recently published in the Journal Of International Trade And Economic Development, a single applied tariff, à la Chile, would avoid disputes in relation to tariff classification and could be revenue-neutral.
– Resource efficiency. There are tremendous opportunities in relation to green businesses – energy management or efficiency, waste management, decontamination among others – that the island should exploit and which require an appropriate regulation and enabling environment from Government.
– Ease of doing business. There is a need for greater transparency and efficiency in relation to doing business on the island.
– Still a place for manufacturing. There are many examples of small island manufacturers doing quite well, but a national strategy is needed if this is going to work.
The above list is not exhaustive and is largely based on my research.
Nevertheless, many of these problems have been known for years and therefore simply require political will from both sides of the aisle.
The “lean and mean” adjustment of the early 1990s is instructive: that reform package included bold expenditure cuts, tax reform as well as policies aimed at addressing structural issues that were inhibiting the long-run growth potential of the island.
A similar effort is required sooner rather than later.
Winston Moore PhD is an economics lecturer in the Departmen of Economics, University of the West Indies, Cave Hill Campus.