Last Updated on July 17, 2022 2:38 am by Editor
In our July 02 Facebook post we tallied the Barbados Government borrowing for last year and arrived at the round figure of 1.215 billion dollars.
Amazingly, one individual asked why we made that post! Another thought it was because we wanted to stir up discontent. It would not make much sense trying to explain to such people that they are exhibiting selfishness of an extraordinary kind.
All we can say to that is: “Where ignorance is bliss, it is folly to be wise!”
Fortunately, such attitudes were in the minority. Most Barbadians and some of our readers in Trinidad &Tobago tried to put a light-hearted, if but half-hearted, spin on it.
It is quite clear that too many Barbadians know very little about government finances with the possible exception of the taxes they have to pay. A few are vaguely (and painfully) aware of the salaries and pensions MPs pay themselves.
We took the time to publish two articles to try to educate Barbadians about government finances. Published under the title Barbados National Debt: Why it Matters to You Part 1 and Part 2 we tried to explain how government finances work.
Those two articles we largely devoted to explaining the estimates of revenue and expenditure and the annual budgetary proposals.
Over to the Balance Sheet
However, revenue and expenditure, in other words, income statement accounting, is a very different aspect of government activity compared to the balance sheet accounting which is accounting for assets, liabilities (debt) and capital.
Below is the most basic format of a balance sheet. The key point is that the assets must be equal to the total of equity and debt (liabilities). Terminology will vary slightly in the context of non-profit and government accounting.
In our humble opinion, Barbadians need to understand little more about this other side of government accounting and perhaps less of the monetary economics spouted by UWI as well as IMF officials and other propagandists.
If we may digress a bit; it is some of these economists who have helped to put Barbados and other countries in the world in the perilous financial situation in which they find themselves. How so?
Because many of them have advocated and championed deficit budgeting as against a balanced budget. If you read the two articles we mentioned earlier you know that a deficit budget is one where the budgeted expenses are greater than budgeted income or revenue. Let’s take a simplified example.
In a year, a country projects income or revenue at say $4000. In a deficit budget, the country will budget expenses at some higher figure, say $5000.
The difference of $1000 is called a deficit or more precisely, a budget deficit. It means that funds have to found from somewhere to pay those expenses which are represented by the difference of $1,000. Those funds invariably come from borrowing. It does not have to be so, however.
Successive governments have taken deficit budgeting and deficit financing to unseemly levels, not only here in Barbados but elsewhere. The result is borrowing money as though it were going out of style. Too far east is still west!
As we explained in our previous articles, all countries have a national debt. The problem is whether or not those debts are manageable, in other words, whether the country can make the payments of interest and principal when they become due. So, let us turn to the subject of interest for a moment.
Interest
Interest is the amount lending institutions charge on the amount they lend which is called the principal. In advanced finance, interest it is called the cost of capital. In other words, it is the price you pay to borrow money. To give some simple examples:
Example 1
If $2000 is borrowed at 10% interest for one year it means that the borrower must pay $200 in interest ($2000 x 10%) PLUS the amount borrowed which is $2,000. In other words the borrower must pay back $2,200 in one year.
Example 2
If the loan were $1 million dollars ($1,000,000) then the interest would be $100,000 ($1,000,000 x 10%) and the repayment and the payment would be $1,100,000.
Here we are simplifying things and assuming that interest is going to be charged at the end of the year instead of monthly. That is what was called simple interest in the Mathematics class you dreaded.
Now most loans are definitely not that simple, pun intended. They are usually based on what is called compound interest. This is interest charged on the reducing or outstanding principal balance of a loan. Compound interest is usually (but not always) charged monthly.
Mortgages are based on compound interest and they have a repayment period of several years; for example, 15 to 25 years depending on factors such as the age of the borrower, income etcetera.
Now we do not have the different interest rates for each specific loan at hand at the moment but let’s say on average it is 0.1 % (one-tenth of a percent) per month. This gives 0.1% x 1.215 billion dollars which is $1,215,000 ($1.215 million) PER MONTH.
By itself, this is not a phenomenally large amount but if this amount was not factored into the current 2021 – 2022 budget, government will have to find the additional funds to pay this interest and it means that the final budget deficit will be larger than estimated (See Revenue and Expenditure Budgets 2017 – 2023 below)
In addition to all of this, we need to know the conditionalities on these loans, especially those from China and the IMF. For example, are any of these loans secured on national assets such as land, seaport, the airport etcetera?
We call on the government to publish the conditionalities of these loan agreements ASAP for all the public to see. This is a minority government and the majority of the population needs to know what binding agreements this government has entered into on its behalf.
We do not wish to embroil the reader in the heavy mechanics of compound interest loan payments. What we want the reader to appreciate are a few simple points of general accounting that also apply to government accounting and finances.
The first point is that the income statement and the balance sheet are connected. The second point is that interest on debt is an expense and thus has to be added to the expenditure side of the budget.
Therefore, the more the country borrows the greater is the interest. This means that in the next budget period the expenses will be greater by the amount of interest that has to be paid, all other things being equal.
The third point is that any profit (called “surplus” in non-profit and government accounting) is added to the capital or equity (funds) of the country. Unlike interest, a surplus – if it occurs- is a capital-increasing event. It is a “good” economic event.
However, since one does not expect to have an excess of revenue over expenditure (surplus) in our budgetary proposals (such things are virtually unheard of in countries like ours) so there is no corresponding “surplus” to add to our “national capital” or national equity in the “national balance sheet”.
On the other hand, when things get really bad, countries can sell off national assets (a.k.a privatization) like the Hilton Hotel to earn revenue and balance the revenue and expenditure budget.
We are simplifying things here but hopefully, the reader can see why there is always continuous borrowing under our current economic setup.
What we have is debt trying to chase away debt! If anyone can find a situation where this has ever worked for a country, we will publish it, subject to due diligence, of course.
1.2 Billion
One of the questions someone asked on social media in response to the publication of our debt compilation is “what is the loan for?”. That is a very good question. But the 64 million dollar question is: how will this government pay it back?
In part 4 we will address this and related matters. You will be surprised to find out how this government is planning to hedge against fallout from this debt burden!
Unfortunately, even though you may not want to believe it or dismiss as conspiracy theory, globalist forces are hard at work trying to bring about the demise of national sovereignty in the pursuit of a one world government.
One strategic path to this is to enslave governments through debt to the point at which they have no choice but to comply with the demands of a global UNELECTED elite and their enormous god-complex. Take a good look at the current situation in the USA as a case in point.
In the meantime, we urge all Barbadians to start learning a little more about finance and accounting – and more particularly, about government finances – if they are going to take charge of their financial future.
