Last Updated on January 16, 2022 9:15 am by Editor
At the current (2020) debt burden as measured by the Debt to GDP ratio, Barbados has to find $57 more for every $100 dollars it earns to service its debt. That is the basic meaning of the Debt to GDP ratio of 157% for 2020 we presented in Fig. 3 in part 1 of this article.
We hope you had an opportunity think through the data in Fig. 3 because it shows a steady DECREASE in our ability to service debt from 2010 onwards.
What is somewhat scary about this- and what we wish to explore here in part 2 – is the fact that NOT all the taxes and other revenue collected by government can be used to pay the interest and principal on our debt.
Some of the revenue that government collects has to be used to pay current expenses such as the salaries and wages of government workers, utilities (phone, light), providers of services to government and build or repair infrastructure such as roads, schools etc.
In addition, when the government announces that it wishes to pursue developments such as new housing projects, it should be quite clear that it can only do so by additional borrowing or inducing the private sector to do the development or by entering into a PPP (Public Private Sector Partnership).
Therefore, although the debt to GDP ratio helps us understand the basic problem with the country’s finances, it does not help us comprehend the short-term and day-by-day situation with government finances.
The rough equivalent of the problem is a personal financial situation in which you have to pay back debt amounting $1,500 per month and your net salary (salary after government deductions) is $2,700 per month. Out of that you have to set aside living expenses (food, utilities etc) of say $1,400 leaving you with $1,300.
Clearly unless you adjust your living expenses you will be $200 short of your debt on repayments. Additionally, if you want to invest, say in a small business or buy some asset such as land, it is clear that you have to borrow.
To understand the corresponding situation in our country, we have to talk briefly about another aspect of government finances known in accounting as revenue and expenditure.
Revenue and Expenditure
Every year the government (and more professionally managed companies, may I add) prepare a report on the last year’s financial performance as well as projections for the revenue and expenditure (expenses) for the coming year.
In government accounting, the report and projections are often referred to just as “the Budget”. The full name is the Annual Financial Statement and Budgetary Proposals. It is prepared by the office of the Minister of Finance who may or may not be the Prime Minister.
This important document consists of two main elements. The first element, the Financial Statement, reports on revenue and expenditure for the past year. The second element, the Budgetary Proposals, outlines the planned or projected revenue and expenditure for the coming year.
Fiscal Year and “the Budget”
The financial or fiscal year of the Barbados Government is April 01 to 31 March. Income tax filings are set for 30 April each year allowing companies and individuals at least one month to prepare their returns.
Barbados has not had a full Annual Financial Statement and Budgetary Proposals since March 2019. This was preceded by the mini-budget of June 11, 2018 published by the BLP government 18 days after coming to office.
The government’s budget is actually the expected revenue and expenditure and the difference between the two for a fiscal or planning period of one year.
Ironically, you have to read the Approved Estimates or listen to the Estimates Debate rather than “the Budget” debate itself to pinpoint the difference. The budget debate is devoted primarily to detailing and publicizing the measures or (fiscal) strategies that will be used to achieve the estimated revenue and expenditure
It is critical to understand that the figures in the Budgetary Proposals are only projected or planned amounts. They are based on the official estimates which are presented and debated in the Barbados parliament prior to the presentation and debate of the Annual Financial Statement and Budgetary Proposals.
Any number of events can occur in the year to affect those projections. In 2021 we have seen very visible examples of such events in the form of covid-19 pandemic, hurricane Elsa and the ash from the La Soufriere volcano.
Fig. 4 shows the Approved Official Estimates document for 2019 – 2020. It reveals a difference of approximately 53 million. Specifically, this is the amount by which expenditure is greater than revenue.
Three Types of Budget
The nature of the difference between revenue and expenditure leads us to three different types of budget: a surplus budget, a deficit budget or a balanced budget. These differ with respect to whether the revenue is greater than, less than or equal to the expenditure.
Surplus Budget: The first and obviously most desired budget is where the revenue exceeds the expenditure. In public finance, this is called a surplus budget. For example, if your revenue is $500 and your expenses $400, then you have a surplus of $100. The equivalent situation in personal finances is that your income exceeds your expenses, that is, you have money left over after you pay your expenses.
Deficit Budget: A deficit is the opposite of a surplus. It is a projection where the expenses are greater than the revenue. For example, if your revenue is $500 and your expenses amount to $650, you have a deficit of $150. This is definitely not a desired situation.
The equivalent in personal finances is where you do not have enough to pay your expenses. So what is the solution? Either you default on your debt payments, cut expenses or worse, borrow.
Barbados has been running a deficit budget for the last ten years as the Fig.5 shows. Anything below the blue line is a deficit. As you can see, the biggest deficit to date was in 2013.
This particular chart shows the deficit as a percentage of the GDP. The ideal and commonsense choice would be to express the deficit (or surplus) as a percentage of revenue. In Fig 6 we have used this approach on the figures for 2019 – 2020 estimates.
However, showing the deficit (or surplus) as a percentage of GDP does make some sense because, as you might recall from Part I, GDP is also a measure of all the revenue earned by a country.
Unlike the larger deficits of the previous years, the deficit in 2019 – 2020 was approximately 2% of revenue. That was primarily because in 2018, the new BLP government entered into an agreement with the IMF. In keeping with that agreement, government began to cut expenditure. As you may recall, many government workers were laid between 2018 and 2019.
If you cannot increase your revenue (earnings) then you have to cut expenditure or borrow more.
The typical way government increases revenue is via taxes. Therefore, for as long as the government does not try to live within its means we shall have to increase taxes one way or another. This leads us to the third type of budget.
Balanced Budget: The next most desirable type of budget, after the surplus budget, is one where the revenue and expenditure are equal or balanced. It is a budget where we can meet our expenses but it also a budget where we have nothing left to invest, save or spend at our discretion.
The balanced budget embraces the principle of “living within one’s means” and is advocated by many classical (meaning “old fashioned”) economists. More so-called “modern” economists favour some form of deficit budgeting, in other words, some form of borrowing.
Debt and the Budget
It is important that you see the tight connection between earning revenue, paying expenses and incurring debt in the context of government finances.
It should be clear that running a deficit budget will mean that the government will have to borrow to make up the shortfall in revenue.
However, when money is borrowed, the interest becomes part of our expenses because that is how interest is treated in accounting. So, all other things being equal, this borrowing will further INCREASE the size of your deficit and the vicious spiral of debt!
The alternative is to expand revenue by increasing GDP during the period. Perhaps, this is the most difficult problem that third world capitalist/democratic countries like Barbados have to face.
Significant and sustainable increases in GDP should come primarily through private sector investment. However, democratic governments cannot compel the private sector to invest in such activities; it can only persuade by fiscal incentives (e.g. tax concessions) and facilitate.
Debt and Economic Strategy
It is important to understand that in an economy some of the measures employed by government do not really increase the overall net revenue although they may sound good on political platforms. Some of the strategies used to increase employment fall into this category.
For example, the creation of small businesses focused on retail operations, while it will increase employment and change the reported GDP figures does not necessarily increase foreign income (foreign exchange).
Importing items and selling goods at a profit gives the retailer economic value (profit) but from the country perspective this is offset by the fact that the payment for the merchandize goes outside of the country to the suppliers thus reducing the foreign exchange earnings which poses another problem in itself.
What is needed is innovative thinking that addresses the creation of industries that utilize local inputs or value added services that allow us to earn export revenue.
Utilizing local inputs eliminates payments to foreign suppliers thus plugging the leakage of foreign exchange. By exporting services, individuals utilize their existing expertise (medical training, management consulting, architectural skills etc) as “inputs”.
In summary, anything short of an export-led strategy will not bring this country out of the financial mess in which it finds itself. So far, none of the two major parties has been able to address this fundamental issue in any SUSTAINABLE manner.
Nothing is ever simple so we must also consider other factors that impact the situation. These have to do mostly with management or governance of the economy. Perhaps three of the most important of such factors are wastage, inefficiency and corruption.
Wastage: One major source of wastage is duplication. The creation of agencies that duplicate or overlap with other agencies is wastage.
A good example is the creation of the NTI or National Transformation (formerly “Training”) Initiative. Essentially this is an educational institution that has drifted into duplicating much of what is being done and can be done by existing educational institutions such as the BCC and SJPI.
Inefficiency: This refers to speed and thoroughness of getting things done versus their cost. Here the inefficient collection of tax revenue, needless paperwork and just sheer terrible customer service are three of the issues we can point to immediately.
Corruption: Corruption is a big problem all across the world. In Barbados, it is evidently a huge problem which needs to be tackled seriously and not with tokenistic measures.
Even the recently passed Prevention of Corruption Act 2021 in Barbados has been questioned. In a BT article dated 27 November, 2021 government minister Kerry Simmons implied, among other things, that the fines stipulated in the Act might be inadequate.
Barbados is glaringly absent from the list of country chapters of Transparency International. In addition, the country has only signed, but not ratified/ accepted/approved, the United Nations Convention against Corruption. We must wonder why.
Well did the scripture state, “the borrower is servant [slave] to the lender” (Proverbs 22:7). We are now well into a form of neo-slavery. Therefore, our road to liberation from debt is definitely not going to be easy.
We would do well to return to the concept of eschewing and disdaining mendicancy as advocated by the late Errol Barrow:
Let me tell you what kind of mirror image I have of you, or what the Democratic Labour Party has of you. The Democratic Labour Party has an image that the people of Barbados would be able to run their own affairs, to pay for the cost of running their own country, to have an education system which is as good as what can be obtained in any industrialized country, anywhere in the world”. Source.
I am not at all sure the post-Barrow DLP has adhered strictly to that “mirror image”. Comments by Freundel Stuart made a few years ago seem to suggest that. Certainly the deficits pursued by the last DLP administration mirror that.
In any event, the mandate is good advice for any party wishing to change the fortunes of this country which we all love so much.
Therefore, Barbadians need to understand that placing unsustainable demands on government for housing and tax eases etcetera is only going to worsen the problem. More emphasis now needs to be placed on wrestling to the ground the the triune evils of wastage, inefficiency and corruption.
The corresponding and long-standing practice of parties seeking re-election on the basis of promising tax relief one way (only to have the tax reappear somewhere else) as well as promising “development” that results in more borrowing is self-defeating. We might as well all play the ring game, “A ring, a ring of roses, a pocket full of posies…”!
Dr. Aldon Tull, the author, is a retired educator who holds a Master of Science in International Marketing and the Doctor of Education.
He can be reached at email@example.com at 246-228-3720 or on Whatsapp at 246-846-3191
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