Govt’s fiscal stimulus is the problem
The more I hear the various members of the Government’s economic team, the more confused I become.
In the last week, the chief economic adviser said that an austerity programme was in place. The other chief economic adviser has been talking about fiscal adjustment for the last two years. Yet the recent Economic Review stated that the fiscal deficit widened by $117 million. When this growing deficit is being financed by the printing of money, the foreign reserves will fall as happened since April.
In the current economic circumstances, fiscal adjustment must mean reducing the deficit either by increasing revenue or reducing expenditure, or both. The intent of the reduction is to protect the foreign reserves by reducing the demand for imports and the printing of money. Since the deficit is increasing, the reserves are not being protected, especially when the Central Bank is printing more money.
It follows therefore that the increasing deficit is a sign that the economic team is getting it wrong. Failure to adequately address the excessive spending of the Government is still at the heart of the fiscal crisis, and the recent taxation measures will not offset the obvious decline in the Government’s major revenue sources of personal, corporate and value added taxes. The declining revenue reflects the lack of growth in the economy.
The belief that an imagined fiscal adjustment can lead to a real protection of the foreign reserves is truly a figment of someone’s imagination or an unrealistic oversimplified graph. The best immediate protection is to secure some foreign exchange through borrowing, but this was recently tried and it failed for obvious reasons.
It must be amazing for the public to learn that “every day the Minister of Finance and top policymakers of the Central Bank and ministries of finance and economic affairs receive a chart of the foreign exchange reserves”, yet the public was not given the reasons for the decline in the foreign reserves a few months ago.
For those of you who have been following the economic developments for the last couple of years, it must be surprising to learn that “the [economic] team produces an annual forecast which informs fiscal policy”. The public is constantly told that no one has a silver bullet; nobody knows the future; and that economic forecasts are no better than going to a fortune teller. No wonder that the fiscal strategy was so off the target or preferably “not on track”. The team should at least be led by someone who believes in its forecasts; otherwise, what is the sense of formulating fiscal policy from them?
Unless the concept of austerity when applied to fiscal management has changed “temporarily”, the deficit should be falling, not rising. The Medium Term Fiscal Strategy was abandoned because it was not on track; the same must now be true of the fiscal adjustment. More important than the deficit is the absence of appropriate financing, which constitutes the biggest threat to the country’s exchange rate over the next nine months.
There is certainly no consensus between the Minister of Finance and the Prime Minister on the expenditure cuts. This is similar to the conflicting views on privatization of Government assets in the last general election campaign. The more recent lack of consensus is yet another example that the country’s financial leadership is in serious conflict with its political leadership. Sooner, rather than later, something has to give!
At least, the economic team recognizes that a growth strategy is needed that is led by the foreign exchange earning sectors which are in the private sector. But the Government is the investor in two hotel plants, even though it is being suggested that “we do four things at internationally competitive prices (tourism, international business, rum and green energy)”.The obvious question therefore is: why, if tourism is internationally competitive, does the Government have to be the one investing in the two hotels?
Furthermore, this investment is fiscal stimulus which will increase the national debt. If increasing the debt is the consequence of fiscal stimulus, then the Government has been stimulating the economy for the last five years. Unfortunately, the national debt grew more since 2008 than in the 14 years prior, without any new road or other physical infrastructure to show for it.
The real problem is that the nature of the concealed Government fiscal stimulus has been absolutely wrong and is truly the cause of the country’s current economic crisis.
Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy. Email [email protected]