What should be the focus of the 2010 budget, given the current economic environment?

The following was published in the Barbados Business Authority on April 19, 2010.
BBA Apr 19 2010 Budget Expecations

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The next Budget is already largely prepared. The government unveiled its Medium Term Fiscal Strategy (MTFS) several weeks ago. This set a clear annual adjustment path towards a balanced budget by 2014, from a deficit of about 8% of GDP in 2009, to be achieved by holding revenues broadly constant as a share of national income and cutting spending gradually as a share of national income. So, what will the Finance Minister tell us in the next Budget? If he points to a different path, then one must ask 'What is the medium term strategy meant to be?' Thus, one focus of the Budget should be to confirm the MTFS as a credibile policy framework.

In the near-term, there will be little growth to drive the Barbadian economy.
The major industrial countries on which Barbados relies heavily for tourism and exports are just edging their way out of recession, so will provide litte pulling power. The government expects negative real GDP growth to continue in 2010, on the back of a tourism sector that is still suffering, while positive growth is not forseen until 2011 (+2.6 %). But, while more output may be lacking, the government has the opportunity to focus on getting the country to improve the quality of its outputand be more productive. That means especially making better service a reality across all sectors and having meaningful public sector reforms.

The country still has serious problems centred on government financial operations and the level of government debt.

While the MTFS does not see much increase in the relative share of revenues, the government needs to square that with its commitment to improve tax collection and reduce arrears. Therefore, the Budget needs to explain how revenue collection will be more efficient yet revenue yields will not grow noticeably.

The government has promised in the MTFS to look harder at its spending and aim to get better value for each dollar—in its words, 'focusing on quality spending, and reducing wasteful expenditure will allow the Government to allocate resources to high priority areas'. Part of the Budget focus should be to make that commitment clearer, by identifying what it deems as 'quality' and 'wasteful' and identifying clearly the priority areas that could benefit.

The government should also show how it will fulfill its MTFS commitment to 'seek to effect a prudent debt management strategy over the medium term'. To do that it said 'Emphasis will continue to be placed on accessing long-term funds from international financial institutions to finance public sector infrastructural projects, although there may be selective recourse to external commercial borrowing'. The first quarter funding seems to have been at variance with that, when the government financed its operations entirely by new domestic loans, bonds and treasury bill issues.

The government's other major fiscal concern is how it will reduce the high levels of debt, consistent with the MTFS. Public debt is forecast to decline from about 110% of GDP in 2010/11 to about 91% in 2014/15. The government is already due to borrow US$200m abroad to repay a US$100m loan and add US$100m to reserves to overcome a forecast shortfall in tourism earnings. The government needs to show that this will not raise overall debt levels, worsen debt service ratios, and that this way of covering for weakness in tourism really will be an exception.