The Budget

21.DEC.07

Like the proverbial curate’s egg, the budget debate was good in parts. There were several outstanding contributions. However, to name names would be invidious, if not presumptuous.

There was a fair amount of common ground on specific issues. All agreed that tourism has to be a, if not, the lead sector. The Leader of the Opposition prefers other forms of tourism to cruise ships. The Government long ago accepted this, and that is why it is building two airports and promoting schemes like Buccama.{{more}}

No one denied the importance of the construction sector, though curiously an obvious point was belaboured, namely that construction was not tradeable. So what? In our model of development, foreign exchange comes from remittances, tourism and grants, not construction. The Opposition has no illusions about the prospects for our banana industry. In fact, the future of the agriculture sector lies in its past. We have to produce many of the commodities we used to produce before bananas took over: sweet potatoes, dasheen, tannias, coconuts small stock, poultry, onions, carrots and other vegetables. No doubt the Government’s plan for agriculture will address these matters. Like Senator Francis, the Opposition Leader noted that the manufacturing sector had been expanding. In fact, he practically anticipated the case so cogently argued by Minister of Industry, Dr. Thompson, for more resources to be devoted to manufacturing and Information Technology.

As far as inflation is concerned, even blind Bartinmaeus of biblical fame could have seen that inflation has not been due to the imposition of VAT. The villains of the piece are: the falling dollar, rising prices, increases in the cost of grain and the resultant increases in meat prices.

Our fiscal situation is indeed intriguing. Thirty years ago, recurrent revenue could barely cover recurrent expenditure. All capital expenditure was funded by grants from the mother country – U.K. Today, we still have difficulty finding sufficient revenue to cover recurrent expenditure. Capital expenditure has to be met not merely by grants but by substantial borrowing. There are, however, good reasons why so little has changed in this respect. When you move from colony to independent nation, as we did twenty-eight years ago, then you must have increases in expenditure. To name a few: the cost of the Foreign Ministry, Embassies, contribution to international organizations, and defence, like the Regional Security Scheme.

Secondly, as a newly independent country, there is always a feeling that you have to make up ground lost during the colonial period. This almost inevitably means improving the health and education services, and as we are finding, this can be costly.

There is, however, a more fundamental issue; can a very small island be viable financially in the sense that it can raise enough revenue to cover recurrent expenditure and have a surplus to fund capital expenditure? We have gone almost full circle on this one. It used to be said that when a country became independent, it ought not to rely on grants but should borrow. Now, after many developing countries have borrowed, cannot pay back and have had to have their debt written off, grants are back in fashion. The European Union and the World Bank are now making grants, just as the old British Colonial Office used to do.

In these circumstances, how big should the public debt be? St. Kitts is the extreme case; it has a per capita income three times that of St. Vincent and the Grenadines, though it is less than half our size. Its Debt to GDP ratio is three times that of St. Vincent, with public debt being almost twice the GDP. Even the EU cannot help us on this one. They were among the first to lay down guidelines for the size of the public debt. But then France, Germany and not to mention Italy turned around and breached all the guidelines. If these rich countries cannot agree on the appropriate size for the public debt, what are the poor like us supposed to do?

All this is not to say that we not to strive for fiscal prudence. The Government was right to introduce VAT and make modifications as they go along. Otherwise, with trade liberalisation, we, who are so dependent on import duties, would have no tax base at all. The Government is also right to increase duties on alcohol and cigarettes, not only to get revenue but also to promote the Wellness Revolution. Similarly, the Government is right to introduce increases in license fees and try to charge the full cost of petrol not only to get revenue but to try to ensure that St. Vincent and the Grenadines does not become one big traffic jam from Calliaqua to Campden Park. I feel certain that many additional measures will have to be taken if the whole traffic situation is not to get completely out of control. Finally, the Government is right to lower the rate of personal and corporate income tax in order to incentivise society. The obverse of this is, however, that handouts from the Government must not be distributed so indiscriminately as to destroy incentives. Of course, we must first ensure that we can afford the handouts.