“Borrowing to pay the interest on debt is a financial disaster waiting to happen which any teenager with a credit card could have told the minister.”
Barbados 2011 Budget Statement: A failed opportunity by the DLP Government
By Hal Austin in London
A Global Overview:
The global economy is in the throes of a major historic swing, with economic power moving gradually, but irreversibly, from the old developed economies to the newly Emerging Markets, led by China, India and Brazil, but including nearly all of the Asian, ex Japan, Latin American economies.
This is evidenced by the interesting fact that while the old economies – the US, UK, euroland and Japan – are in terrible trouble, about to fall back in to a double-dip recession, the Emerging Markets are continuing to grow at astronomical rates.
“Barbados is caught in this bind, an over-dependence on the old markets for tourist traffic, while not making any real effort to deal with the growing new economic powerhouses.”
To find a solution to this crisis, first the government must know what the problem is. And there is no evidence that the government or central bank has been treating the global economic crisis with the seriousness with which it deserves.
The global financial crisis of 2007/8 was not caused by the traditional inflationary or balance of payments shocks, (but? *) by the build up of historically high imbalances in the property sectors in Europe and the United States, the packaging of that debt and the subsequent contagion across markets. (* Editor’s note: The manuscript we received from Mr. Austin is unclear whether the word “but” might have been omitted from this location. Would Mr. Austin kindly email us to advise. Thanks!)
The following recession and attempts at a subsequent recovery have all been atypical with uneven economic growth, fiscal crises in the southern part of euroland and a battle between the Republican-controlled Congress and the Democratic-controlled Senate over macroeconomic policy, which has undermined confidence and looks set to plunge the world back in to a double-dip recession.
This broadly is the global landscape in which the Barbados government is functioning and which the Budget on August 16 was meant to provide the necessary fiscal and monetary cover for local businesses, consumers and workers.
The Budget: An Overview
Sadly everything in the Budget was predictable and uninspiring – the old clichés, the rhetoric, the criticism of adversaries, the over-dependence on civil servants and party hacks for ideas.
“The threat to issue bonds to reduce Bds$1bn in debt, with a target of $755.3m during this financial year, is a not so clever way of passing on government debt to bondholders, many of whom will be households.”
Mr Sinckler told the House: “In the next five years, maturities of the medium term securities will increase from $256m in 2012 to $413.6m in 2016. Consequently, if the deficit continues to be at the 2011/2 level, annual issuances of local debt will increase to approximately $1bn in order to satisfy maturing issues and to finance the deficit.”
This says it All. The government will be issuing IOUs to cover debt owed to other IOU owners and to finance its continuing current account deficit.
This is not only unfair, but to my mind borders on the fraudulent, since government is highly likely to default on these long-dated promises, certainly not priortise them for the honouring of coupons since they will have little or no impact on the much-treasured credit rating agency approvals.
This is a government that has failed to meet pensions and salary obligations for workers.
What makes this policy particularly ill-thought out, is that clearly the government has lost the confidence of the global lenders, it has lost the confidence of regional lenders and it has not turned to households, who no doubt will be mainly pensioners and people looking to diversify their savings, to fund this massive black hole which the government has done nothing in two Budgets to reduce. Continue reading