In compliance with Section 12(1) of the Financial Administration and Audit Act, the Financial Statement for the fiscal year ended March 31, 2002 was today laid in Parliament.
Beyond this formality, I wish to use the occasion to outline certain new orientations and instruments for the conduct of fiscal policy arising from our recent financial experience.
Over the course of the last year, we have relied upon a counter cyclical fiscal policy to help offset the severity of the recession facing this country. This essentially has entailed as a means of maintaining a satisfactory level of domestic demand in the economy the incurring of an overall fiscal deficit that has been larger than the deficit we would normally seek to incur.
This policy was feasible and could be implemented without severely impairing the balance of payments because of the extraordinarily strong foreign exchange reserves position that has been built up over the past eight years.
There is a limit however to the degree to which expansionary fiscal policies of this kind can be used if we are to achieve sustainable economic growth. In addition, the Government does not propose to foist on Barbados, debt service difficulties of a kind that have wrought so much havoc in so many developing countries.
We propose therefore as soon as circumstances permit to return our overall fiscal deficits to a level (approximately 2.5% of GDP) that we regard as being sustainable.
In relation to the fiscal year which ended in March 2002, the fiscal policy of Government was formulated to support the expansion of the economy and hence to generate a deficit of 3.5% of GDP at market prices. Parliament approved current revenue of $1,795.4 million, current expenditure, excluding amortisation of $1,621.8 million and capital expenditure of $352.8 million.
The recession taking place in the economy obviously had an effect principally on the growth of Government's revenue.
Final data on the fiscal performance for the 2001-2002 financial year indicate that there was a marginal increase in current revenue of 0.3% over the previous year's level, while total expenditure, excluding amortisation, grew by 6.1%. This resulted in a fiscal deficit of 3.8% of GDP at market prices. Despite our economic difficulties, therefore, we virtually achieved the fiscal target that was set at the start of the fiscal year.
The decline in current revenue was mainly due to the fall off in taxes on income and profits by 3.4% and Special Receipts by 4.6%. However, this decline was offset by increases in Property Tax of 9.4%, Import Duties of 8.1% and Non-tax Revenue of 12.2%.
The 6.1% expansion in total expenditure, net of amortisation, for the 2001-2002 financial year reflected increased spending on both current and capital items. The growth in current expenditure of 4.4% was attributed mainly to higher interest payments.
Some $346.8 million was spent on capital projects. This was 14.8% ,more than the previous year and was as a result of the extensive road repair programme undertaken by Government, along with continued work on the South Coast Sewerage Project and Edutech.
At March 31, 2002 the National Debt stood at $3,784.6 million, a 17.3% increase over the period ended March 31, 2001. Domestic debt grew by 7.3% while foreign debt increased by 43.0%. The increase in the foreign debt was, due to precautionary borrowing by Government to prepare the country for any financial eventuality in the face of the international fight against terrorism.
In relation to the present financial year, the 2002-2003 Estimates of Revenue and Expenditure approved by Parliament in March this year were formulated within the context of an overall fiscal deficit of 4.3% of GDP at market prices.
The estimates projected current revenue of $1,795.4 million, current expenditure excluding amortisation of $1,661.4 million and capital expenditure of $362.0 million giving a fiscal deficit of $228.0 million.
Preliminary information for the first half of the year indicates that total current revenue had declined by 6.4% when compared with the same period last year. The decline in current revenue was triggered by a decrease in taxes on Incomes and Profits and Taxes on Goods and Services. The financial performance reflects the continued downturn in the economy for the period.
It is expected that the economy will recover from its present decline during the latter half of the fiscal year thereby reducing the level of revenue losses.
It is therefore projected now, that current revenue for the fiscal year 2002-2003 will be 2.2% less than the amount collected for 2001-2002.
At the end of the first half of 2002-2003 current expenditure, less amortisation, was 2.4% more than that recorded for the corresponding period last year. The main contributors to this increase were payments for Goods and Services, which rose by 10.3% and current transfers, which increased by 6.7%.
In relation to expenditure on
wages and salaries, it is to be noted that there was a decline of 3.2% despite
wage increases and the payment of arrears during August and September 2002 respectively.
This trend merely reflects the fact that the repayment of the 8% wage cuts came
to an end in 2001; and is no longer showing as an expense in the public account.
There
was a 5.5% increase in capital expenditure over last year as a result of ongoing
work on projects such as the South Coast Sewerage Project and Edutech.
Based on the current performance, it is projected that total expenditure, net of amortisation, will be 1.8% higher than in 2001-2002, resulting in a fiscal deficit equivalent to 5.1% of GDP.
Details of the fiscal performance for 2001-2002 and for the first half of 2002-2003 are appended.
As part of its overall macro-economic strategy, the Government has sought to maintain relatively small and manageable fiscal deficits, approximately 2.5% of nominal GDP at market price. This has consistently been achieved between fiscal years 1994/95 to 2000/01. Since then, however, economic circumstances have changed, and as reported earlier, a fiscal deficit of 3.8% of GDP was realised for 2001/02 and is expected to reach 5.1% for 2002/03.
The Government acknowledges that such high deficits are unsustainable since they ultimately must be financed either by raising taxes or by further borrowing.
In an environment where tax reform is imperative and where there is the need to contain the level of the national debt, those options are not viable. The government will therefore introduce other measures to return the deficit to around 2.5% of GDP.
The Government proposes, therefore, to continue with its programme of strengthening revenue collection capabilities, to minimise the area of tax evasion and avoidance, and to place more emphasis on controlling expenditure growth by reducing discretionary spending without losing sight of the need to uplift the basic amenities of communities.
A key element of the strategy to contain the size of the fiscal deficit will have to do with new arrangements for the financing of the public sector investment programme. Capital expenditure has grown from $135.8 million for the fiscal year 1995/96 to $346.8 million at the end of the last fiscal year. The Government recognises the importance of its investment programme in promoting economic activity and does not propose to substantially reduce it. Rather we will employ other means to carry out its capital programme. These measures will include the use of Build-Operate-Transfer (BOT) arrangements and increasing reliance on Public Sector/Private Sector partnerships to create capacity in areas historically deemed to be spheres for the exclusive occupation of the State.
In addition to the above measures, the Government will accentuate the completion of outstanding projects and the implementation of those that are externally funded.
The Government's debt to GDP ratio has increased to 72.8% in 2002. It is Government's intention, therefore, to reduce the debt to GDP ratio overtime to around 60% to conform with international standards. This will be achieved by implementing the measures outlined above to reduce the level of the fiscal deficit.
In addition, the government of Barbados does not propose to raise any new commercial issues on the international capital market for the immediate future. And we will use much of the proceeds of the $300 million bond issue of 2001 to finance activities for which additional borrowing would have been required. In the final analysis, however, stronger economic growth must be the lasting solution to any fiscal situation that confronts us.