Fiscal deficit too high
Thursday March 17 2011 | 05:34 AM

The decision by Government to reduce its projected fiscal deficit in the new financial years has met with approval from the island's chartered accountants.

However, they have warned that despite the change for fiscal year 2011-12, the overall deficit is still too high.

In a statement issued yesterday, the Institute of Chartered Accountants of Barbados, through Executive Director Reginald Farley, said it welcomed "the modest reduction" but warned that with the figure now standing at over $1 billion (6.8 per cent of GDP on an IFI basis), it was still too high and needed to be further reduced.

While ICAB said it supported the Government's stated objective "to reduce the fiscal deficit and hence provide a stable fiscal framework that will enable the Government to better serve the national goals and the objectives of its Medium Term Development Strategy", it is of the view that more needs to be done to reduce the deficit if this goal is to be achieved.

During the two preceding years the deficit has also been over the $1 billion mark (2010-2011 - $1.47 billion, 2009-2010 - $1.13 billion) and if the Government is to reach its own target, it will have to make major adjustments in the few years remaining until 2014-2015. The MTDS states: "Over the medium term the aim will be to reduce the overall fiscal deficit and generate a balanced budget by 2014/15 and a surplus by 2015/16, while keeping economic growth to acceptable levels by focusing on the foreign exchange earning sectors. This will ensure a reduction in the debt ratios to sustainable levels."

"It is therefore a cause for concern that the deficit remains high even after several increases in taxation over the past few years. Taxpayers cannot afford the burden of additional taxation. Government therefore needs to focus on the two remaining options of cutting expenditure and encouraging economic growth.

"The fastest rate of expansion of Government expenditure in the last few years has been in the area of transfer payments. In the coming year some $787.2 million will be spent on Transfers to Institutions and Individuals. This is a reduction $882.1 million in 2010-2011 and the peak of $908.5mil in 2009-2010. The bulk of expenditure under this head goes to statutory boards, statutory corporations and Government owned companies. Under this head are also grants to non-profit organisations and individuals," said Farley.

Recommendation

ICAB's recommendation is that Government should continue making expenditure cuts in this area and set binding spending limits by placing and enforcing caps on the transfers to its statutory entities, thus forcing them to become more efficient and cost conscious. The Ministry of Finance, through the Auditor General's Department should conduct value for money audits in these entities to ensure that their output and general performance justifies the financial inputs provided.

"While the institute recognises the need to run an overall deficit in order to provide some stimulus for the economy, we are of the view that this should be reflected in a capital account rather than a current account deficit. Loan financing to fund current expenditure (goods and services, wages and salaries) is neither desirable nor sustainable.

"We are concerned that efforts to contain the overall deficit appear to have resulted in a drastic reduction in Government's capital expenditure in order to be able to fund the current account deficit. An active capital programme not only meets the infrastructure development needs of the country but also provides a stimulus for the economy through increased private sector activity. The increased economic activity in turn has a positive impact on Government tax revenue," Farley added.

This year's Estimates have been presented on the heels of the Central Bank of Barbados' prediction that the economy will experience growth this year. ICAB however noted that "there are also storm clouds on the horizon relating to the steep increase in oil prices, increases in the price of commodities (corn, etc.) and the threat to the vital international business and financial services sector posed by the actions of Organisation for Economic Cooperation and Development".

These elements have the capacity to derail the assumptions on which these estimates have been built and we should all brace ourselves for the possibility that adjustments may be necessary, based on these external circumstances," he added.