Comments On The Budget

I guess after I joined a panel on the radio to discuss last week's Budget presentation, I should not have been surprised when I got a call from the Nation newspaper group to write them a commentary. So it was that I got a piece published in today's Barbados Business Authority, pages 16 and 29 (reproduced below)

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National Budgets should set out government expenditure and revenue for the financial year. But they should also show the population the government's economic aspirations for, and concerns about, the country's immediate economic future.

Finance Minister, David Thompson, seems to have had economic stability in his mind this week and conveyed that by presenting what I call a minimalist Budget, with few numbers and few broad measures—most of the changes are marginal. Reactions from my Barbadian friends, who are non-partisan, include words like “bland”. My sense is that Mr. Thompson decided that if we don't move perhaps the boogey man won’t get us.

The international economic backdrop is dire. Industrial countries led the world into an economic downturn from late 2007, which may not end before December 2009. Barbados' major industrial markets for tourism and goods—the UK, Canada, and the USA—have suffered badly. Caribbean neighbours too are suffering, but less so. Barbados' economy has been dragged down by this. The main saving grace of the global recession has been a rapid and steep fall in world oil prices, which is keeping inflation at bay.

Against that backdrop, what did the Budget really do? Mr. Thompson stressed the need for innovation to help steer the country ahead, but the Budget contained few major innovations. His message was that we await the train of improving international economic conditions to pull us forward. Asking the country to rally together as “Team Barbados” and trying to sell the “Barbados Experience” of a country that wants to do better, are good sentiments but for me were not matched by bold action.

The Budget arithmetic is unclear. We got few figures with which to draw a clear picture. But, two troubling images appear. The first concerns what Barbados owes and how it may repay that.

The 2008/9 Estimates indicate lower revenue and higher spending, compared to the same period last year, so we must expect a budget deficit of 5.1% of GDP, instead of the targeted 2.2%, and 3.7% in 2007/8. That dramatic reversal reflects overly optimistic revenue projections and a lack of control over spending. But, this could be seen as 'good' by giving the economy more of a boost now when other sectors are faltering.

Total public sector debt in March 2008 was B$5.8 billion, but by March 2009 was B$6.2 billion (up 45%). The debt/GDP ratio was 99% in 2008, up from 65% in 1999. This reflected an improved on-budget deficit but increased use of government guarantees by the previous administration during the mid-2000s. The ratio will be 102% by end-2009: that figure is a red flag to the rest of the world. The mighty UK has just had its rating downgraded by Standard and Poor's from 'stable' to 'negative' and could lose its vaunted AAA rating for approaching that 100% figure. Speculation last week that the USA may lose its AAA rating has put its financial markets and the US dollar under renewed pressure. So, I must agree with Mr. Thompson that public debt is a “major cause of concern” and puts at risk this country's fiscal sustainability. That concern has already been aired by the international credit ratings agencies, who help determine countries' ability to borrow in private capital markets.

That debt burden will weigh on future generations. How that burden will be shared is unclear. Mr. Thompson plans to have a primary fiscal surplus (meaning the excess of revenues over expenditures (excluding interest payments and debt redemption)) of at least 5.9% from 2011, which, if maintained, would reduce the debt/DGP ratio to 70% by end-2018. That is a big adjustment, and large primary surpluses for the next decade imply pain down the road because revenues must rise, spending must fall, or both.

The other troubling image concerns money flows from and to other countries. Mr. Thompson highlighted that the net international reserves of the central bank at May 2009 showed a loss of B$36 million, which will increase to B$100 million by end year, even after getting a US$100 million loan from Trinidad. But commercial banks' net foreign assets also fell sharply. That means that both the government and commercial entities have dwindling access to foreign exchange.

I would have preferred to see innovation to some major problems. Mr. Thompson has proposed raising water rates from July because the Barbados Water Authority's financial situation in 2009/10 is “distressing”. He noted how money was being wasted due to leaky old infrastructure and slow repairs. But will raising rates really help if reports of significant arrears due from domestic customers are correct? Those who already pay will have to pay more and those who do not pay will add to their arrears. Is a rate increase really pouring money down the drains?

Attempts to shore up employment temporarily may create longer term budgetary problems. Both allowing NIS 'loans' by a one year deferral of employer contributions, to be repaid over five years, and waiving 50% of penalties and interest for National Insurance, income and land taxes, and VAT, with arrears to be settled later could be storing up future problems if the loans and arrears cannot be settled.

More vocational and industrial training, more public housing, and helping the 'creative economy', may be good for some, but introducing measures to tackle 'structural' weakness, such as the acknowledged lack of competitiveness in the economy and impediments to doing business would be better for almost all. Mr. Thompson's desire for Barbadians to be healthier and exercise could be better served if eating healthily was more affordable, rather than giving concessions on gym membership.

Looking at the financial sector, the planned creation of a Financial Services Commission should calm some nerves about weak supervision in the nonbank sector. But, the MOU signed to create an oversight committee for CLICO adds another twist to a saga and we still do not really know the health of the company.

The Budget is benign, aimed more at keeping things at bay—stemming job losses rather than re-positioning the economy, even if we accept that fiscal space is limited. Because Mr. Thompson says that “no sure-footed policies … can be pursued … because we are walking an uncharted path” does not make it true. I think that belief bound him to avoid taking measures that could have set the country on a better path for life after the recession.

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The phone has not yet started ringing off the hook, which means that most people have not yet seen the piece. I look forward to escaping to Canada for a few days and will check my voice mail on return.