Beyond any other budget

Against this backdrop we all look to see what the Minister of Finance would say during his second budget presentation. There will be any number of persons who will outline various recommendations, itemizing all manner of proposals - some of merit in their own right. This article seeks to identify ideas on which we should focus and present various concepts that the Minister needs to consider, as he seeks to specify the granular details of the budget.

Certainly the Minister must acknowledge, if only to himself, that the commodity super cycle has come to an end. This is worsened by the decline, terminal or not, of production in the hydrocarbon sector.

This means getting across to the population that living on the hope of a quick return to high hydrocarbon prices is not very possible and at this crucial time, it is imperative to ensure that an engagement with the population takes place. People need to be convinced of the gravity of the challenge we face; this has not taken place as yet. They need to understand that we are in a recession and in order to turn the economy around, development and growth of the nonenergy sector need to be targeted.

In such a small space it is necessary to be as concise as possible. It is important that the Minister becomes more aggressive in the pursuit of fiscal consolidation. At a 54% ratio of debt/GDP, this newspaper on Thursday September 22, made the point that a 56 per cent of debt to GDP ratio is the threshold for the Caribbean, above which increases to accumulated debt result in a reduction in economic growth.

While we appreciate the very difficult choices that the Government faces, fear of reducing expenditure too much so that economy is stalled would be understood. In fact, however, the Government actually increased expenditure and registered a $21 billion deficit, if we minus receipts from non-recurrent revenue items such as asset sales, repayment of loans from the Central Government to state enterprises and extraordinary dividends from the National Gas Company. Increased debt has to be at the margins.

Pushing beyond the 56 percent threshold will have a negative impact on growth.

That has to be avoided by the Minister in the coming budget. The size of the deficit could be worse than budgeted (US$45 per barrel of oil) since the average crude spot price started out at US$46.36 on September 30, 2016 but declined to US$29.78 by January 31, 2016.

While oil prices did move beyond US$45 for May and June of this year, in the main part of the fiscal year, it existed below the budgeted price.

Set against the backdrop of falling revenues it will be interesting to find out what has been done on the issue of transfer pricing. A transfer price is the price at which divisions of a company transact with each other, such as the trade of supplies or labor between departments. Transfer prices are used when individual entities of a larger multi-entity firm are treated and measured as separately run entities. Have guidelines been developed to address this issue? Has any consideration been given to the OECD Transfer Pricing Guidelines? The Minister needs to encourage the private sector, through incentives to increase capital intensity, to improve the level of revenue created by each dollar of assets. Identifying features of the private sector that require improvement is critical to engage in targeted policy measures to stimulate enhanced economic activity.

The World Bank identified a number of features of the private sector in the Caribbean that makes its performance poor when compared with other countries.

Firms in the Caribbean tend to be smaller, older, less open to foreign trade, concentrated in the retail and tourisms sectors, and predominantly locally owned.

Last, and certainly no small matter, is access to finance, which has been identified as a major impediment to funding entrepreneurial initiative. The latter certainly is a challenge, and a review of what is happening to the growth of business credit data produced by the Central Bank will be a good indication of two things. The challenge businesses face to access credit as well as low interest rates, may not produce the response that may be seen in more developed countries.

Lastly, the Minister needs to develop a plan that places export-oriented development as the key objective in the medium term. Fiscal policy that targets an export-oriented focus has to be conceptualized. Again it is easy to understand the need for policy consistency and to provide assistance to those who feel pain from the economic recession.

However, the balancing act is to engage in fiscal consolidation which will force targeting of fiscal incentives without stalling the economy.

In closing, we will wish to see the government establish independent review teams, coming from outside the public service, to review the performance of critical institutions to ensure good corporate governance as well as an adherence to their respective mandates.

In a recession an assessment of the marginal benefit derived from each dollar spent is integral to eliminate waste. Perhaps these general teams would provide us with a far more efficient government whose policies are targeted to deliver export dollars to provide the foreign exchange to finance our much needed development thrust.