Jun 2010 Financial News

Standard & Poor’s forecasts improvements in deficit

Jun 07, 2010

BY THE end of this year international rating agency, Standard & Poor’s (S&P), expects Barbados’ general government deficit to improve 3.5 per cent of GDP, from the 4.7 per cent seen last year.

According to S&P’s in-depth report on Barbados, released at the end of last month, this is forecast, along with a narrowing of the central government deficit to 7.2 per cent of GDP this year from 8.4 per cent in 2009, and the continuation of NIS surpluses of 3.7 per cent of GDP.

The report pointed to the fact that Barbados’ fiscal accounts have deteriorated sharply since 2008, with general government deficit rising to 4.6 per cent of GDP in 2008 from 1.8 per cent in 2007, and increasing further to 4.7 per cent in 2009.

“Most of the deterioration was a function of a substantial increase in spending, especially for wages and transfers”, the report said, noting that wages increased by 10.4 per cent between 2007 and 2009 and accounted for 24 per cent of general government spending, the second-largest outlay after transfers and subsidies, and 10.7 per cent of GDP in 2009.

“We expect the growth in wages to be contained until the economy begins to recover” said S&P officials, arguing that attrition and general co-operation by trade unions should help keep wages in check.

As stated above, transfers and subsidies account for the largest portion of government spending, however, figures for the first quarter of this year indicate Government’s commitment to reducing this burden.

It was noted by S&P that transfers and subsidies already declined by 45 per cent in the first quarter of 2010 from the same period of last year, a fact that was mentioned by the Governor of the Central Bank of Barbados (CBB), Dr. Delisle Worrell, in his review of the economy for the first three months of the year.

Within the framework of its medium-term fiscal strategy, Government has endeavoured to reform public-sector enterprises, making them more self-supporting through utilisation of their own assets and by reforming the tariff system over the long run.
“In the near term, the budget projects that the cut in transfers and subsidies to public institutions will be close to 12 per cent this year,” S&P said.

The rating agency stated that they expect additional spending cuts in the areas of goods and services, following the 34 per cent reduction already seen in the first quarter of this year).

“The capital spending program is also budgeted below 2009 levels...we believe that these measures will offset the expected decrease in revenues in 2010, as subdued incomes last year will dampen income tax receipts in 2010,” the report said. “This is particularly relevant to corporate taxes and is exacerbated by the large contribution to revenues from the offshore sector, which is traditionally more than 50 per cent, where profitability was hurt by the global crisis in 2009. Revenues fell 22% in the first three months of 2010 compared with 2009.”

In March, the Barbados Government presented a medium-term fiscal strategy that aims to achieve a balanced budged by 2014 and a surplus in 2015.

The fiscal strategy is designed to work in the context of the government’s new medium-term economic strategy, which outlines plans for both revenue generation and reductions in expenditure.

S&P noted that on the revenue side, the fiscal strategy envisions tax structure efficiency improvements, improvements in tax administration, a broadening of the value-added tax base, restructuring fiscal incentives, keeping licenses and fees constant in real terms, and other measures.

On the expenditures side, the government is targeting the containment of wages and spending for goods and services, placing caps on transfers to the largest statutory bodies and reducing transfers to others, eliminating transfers to the National Housing Corporation and the Barbados Water Authority, and reviewing procurement procedure and other measures.

The fiscal strategy also addresses the areas of debt management, public/private-sector partnerships, divestment policy, public enterprise reform, and incomes and prices policies within the context of the social partnership mechanism.


Source:
By Randy Howard
Barbados Advocate
Monday June 7, 2010

http://www.barbadosadvocate.com/newsitem.asp?more=business&NewsID=10684