In spite of badly overestimating Government revenue for the last two fiscal years 2012/13 and 2013/14, the Government is forecasting an increase in revenue of almost $300 million for the coming fiscal year 2014/15.
It is easy to conclude that this is simply another error on the part of the Government, if it is not understood how critical the estimated revenue figure is in financing the fiscal deficit.
The optimism may be based on the municipal solid waste tax, the tax on financial institutions and the cess on gasoline that can yield significant revenue for the Government, while putting the economy into a more dangerous state of comatose.
It is unbelievable that the Government is trying to raise taxes in a declining economy.
Raising taxes gives the Government two curious bites at the crumbling fiscal pie.
By law, the Government’s overdraft facility with the Central Bank of Barbados is set at ten per cent of the estimated revenue. Once the Estimates are approved, the overdraft limit is automatically determined. The overdraft is the limit for the printing of money.
For example, in March 2012, Parliament approved Government revenue of $2.656 billion for the fiscal year 2012/13, therefore the overdraft limit was set at $265.6 million. Notwithstanding that the Government only collected revenue of $2.427 billion, the overdraft facility would have been set at the higher approved figure of $265.6 million.
In the following year, the Government estimated the approved revenue for the fiscal year 2013/14 at $2.625 billion. However, the amount actually collected was revised to just $2.202 billion. This pattern appears simply to be a flaw in the forecasting techniques.
It is not simply a flaw. The more optimistic forecast creates room for the printing of more money or alternatively does not allow the existing balance to exceed the legal limit. Legally, the Government is supposed to repay the amount, that is, bring the balance back to zero. But this has not happened for quite a few years.
Under Section 42 (1) of the Central Bank of Barbados Act, the Central Bank serves as the banker of the Government of Barbados. The act further provides that the bank may, inter alia: (1) make temporary advances [printing of money], subject to repayment within three months following the end of the financial year in which they were granted; (2) purchase securities that were offered to the public at the time of acquisition and (3) purchase securities from account holders of the bank.
Since September 2011, the bank indicated that the overdraft limit would be fully utilised. The Government has been in no financial condition to repay within three months following the end of the financial year, which was March 2012. This caused the bank to seek an alternative way to print money without going back to Parliament.
As a result, in September 2011, “the board at Meeting No. 11/2008 set a limit of $120 million for purchase of primary securities. However, no limit exists for purchases of securities from account holders as the bank serves as lender of last resort to the banking system”.
To the unsuspecting, the purchase of primary securities [treasury bills in particular] is not another way of printing money. But it is irrespective of the impression that some may want to convey to the public. In fact, in Jamaica the board of the Bank of Jamaica does not have the discretion to set the limit for primary issues because it is known to be another way of printing money. Therefore the limit is set by an act of parliament as it should be.
In a speech to the Chamber of Commerce in 2013, the minister of finance gave the impression that the private sector in Barbados was just an extension of the Government because the former was asking to be paid. This is utter rubbish! He then went on to suggest that “the recent raising of the treasury bills limit is part of the strategy to address this vexing matter”.
The limit was raised but the private sector cannot boast, to this day, of being paid. However, it is known that the Central Bank purchased most of the treasury bills, which is not desirable as the printing of money has finally contributed to the loss of foreign reserves. It is a dynamic process that does not happen instantaneously.
Institutional failure, especially among labour and finance, has finally taken its toll on the economy. History will not be kind to the leadership.
Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy. Email mascoll_clyde@hotmail.com
