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We need a firm fiscal policy

Clyde Mascoll

We need a firm fiscal policy

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The Barbados economy wants money, especially from foreign sources, but even more important, it wants a good housekeeper to ensure that policies are implemented.
The latter is to persuade would-be investors that someone is serious about solving the country’s economic problems. It is one thing to promise a home-grown programme of austerity or stimulus, but it is another thing to botch its implementation.
In this environment, it is natural for people to compare what is happening at home with occurences in the rest of the world, especially the United States. The comparison is unfair but it is still being done. The two countries are as opposite as it gets from an economic perspective. To demonstrate this, Nobel Prize winner in economics Paul Krugman’s macroeconomic managers’ framework is utilized. He noted that “they want discretion in monetary policy so that they can fight recessions and curb inflation. They want stable exchange rates so that businesses are not faced with too much uncertainty. And they want to leave international business free – in particular, to allow people to exchange money however they like – in order to get out of the private sector’s way”.
Lower borrowing
Krugman’s framework is for a developed economy. In Barbados, monetary policy is not used to fight recessions and curb inflation. It is employed to lower or increase the cost of borrowing via adjustments in the minimum deposit rate, but this is not known to influence economic activity in any significant way. There is very little or no effect of monetary policy on inflation, which is for the most part imported, except when fiscal policy triggers domestic inflation as happened in 2011. The recent policy of the Central Bank of Barbados to manipulate the Treasury bill rate is designed to control the cost of borrowing to the Government and allow the bank to hold more Treasury bills in its effort to finance the Government’s excessive spending.
In the current circumstances, where there is excess liquidity/money in the banking system because the appetite for borrowing is low, the required reserve ratio, that is, a proportion of commercial bank deposits held as cash and in Government securities, cannot be increased. In the absence of excess liquidity, the ratio would have been increased.
The fundamental economic policy difference is the fixed exchange rate of Barbados versus the floating exchange rate of the United States. In choosing its fixed rate, the macroeconomic managers gave up the potency of discretionary monetary policy which means that they have to rely very heavily on prudent fiscal policy to keep the fixed rate. The absolute ignorance on the part of the ruling party in disregarding the implied fiscal rules developed since Independence and pursuing what is politically correct for them is a dismissal of the fact that economics is a discipline that produces Nobel Prize winners.
It is therefore understandable why in the current economic crisis, which includes concerns about our foreign reserves, that trained economists would express concern about the stability of the exchange rate now that there is more than a fiscal crisis. There are some who prefer to sacrifice economic training on the altar of political expediency in the sunset of their careers.
Concern about the stability of the fixed rate has severe implications for confidence which may be divided into internal and external. In this sense, internal confidence is rooted more in the politics of the government, whereas external confidence is more focused on the economics of the country. They are inextricably linked, but collectively confidence can make the world of difference, when viewed positively.
Excessive spending
In Barbados, people are not allowed to “exchange money however they like” but strides have been made in getting the Government out of the way of the private sector, until recent times. In fact, within the last five years, macroeconomic managers have gotten in the way of the private sector and households to accommodate a Government that has indulged in excessive spending.
Given the inability of the policymakers to use monetary policies effectively, it is self-evident that prudent management of the fiscal accounts is a must for any government that wants to grow the economy and lay the foundation for social development.
In our economy, we would hardly ever be able to exchange money however we like, but we know that we have to earn money, especially from abroad, and spend it wisely to build confidence and create the conditions for growth and development.
Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy. Email [email protected]