STATEMENT ON GOVERNMENT’S FISCAL CONSOLIDATION PROGRAMME 2013-15 PRESENTED TO THE HOUSE OF ASSEMBLY BY Christopher Sinckler, Minister of Finance and Economic Affairs

Mr. Speaker, you will recall that on August 13th this year, I presented to this Honorable Chamber, on behalf of the Government, the Financial Statement and Budgetary Proposals.

That statement and the measures which accompanied it were cast against the backdrop of the continued negative impact which the unsettled global economic climate is having on our domestic economy. Indeed Sir, it can now be said without serious contradiction that such a challenged and unhelpful environment has coughed up not one or two, but more than five years of consistent undermining of our own efforts to reinvigorate externally-led growth through the foreign exchange earning sectors.

That statement and the measures which accompanied it were cast against the backdrop of the continued negative impact which the unsettled global economic climate is having on our domestic economy. Indeed Sir, it can now be said without serious contradiction that such a challenged and unhelpful environment has coughed up not one or two, but more than five years of consistent undermining of our own efforts to reinvigorate externally-led growth through the foreign exchange earning sectors.

While it is also fact that when compared to previous deep recessions such as in 1981-82, or 1991-92, we have managed to avoid any potential dramatic economic decline relative to GDP growth, except for 2009 at the height of the global financial and economic collapse, the continued depressed international demand for our goods and services over such a prolonged period has continued to take a heavy toll on our fiscal, debt and now external current account positions.

It is for these reasons, and the need to continue to stabilize our economy, while accelerating our economic growth programme, that government unveiled a revised Medium Term Growth and Development Strategy to take the country through to 2020.

That Strategy set the main national tasks as:

  1. Returning the economy to a sustainable growth rate of 3 per cent while maintaining macroeconomic stability;

  1. Facilitating broad based adjustments and reforms in the

economy;

c) Enhancing social and human development and;

d) Enhancing energy and environmental sustainability in the

context of the Green Economy.

Based on those tasks, the broad objectives going forward are to:

  1. Reduce the Fiscal Deficit to below 2.0 per cent by 2020/21;

  2. Achieve a more comfortable level of Debt Sustainability;

  3. Strengthen the Net International Reserves position to at least six months or 24 weeks of import reserves cover;

  4. Reduce the unemployment rate to 7.0 per cent over the planning period through private sector job growth;

  5. Reduce the cost of doing business and the cost of living;

  6. Increase the exports of goods and services;

  7. Enhance international competitiveness, national productivity, efficiency and service excellence;

  8. Enhance business facilitation;

  9. Expand and accelerate public and private investments;

  10. Preserve a strong social safety net;

In the context of planning for the achievement of these objectives, and cognizant of the unsettling deterioration in the country’s fiscal, growth, debt and international reserves position, particularly from April this year, government designed and presented as part of the Budget a 19-month fiscal consolidation and economic growth programme to arrest the slide and turn the situation around.

That programme has been designed to accelerate fiscal consolidation over the adjustment period while seeking to facilitate faster and more sustainable rates of growth through the planning cycle for the MTGDS.

We indicated that our overall targets are to reduce the fiscal deficit to below 3 % by the end of 2014/15 fiscal year, arresting the loss of reserves, while rebuilding the same to at least 14 weeks of import cover, and returning the overall economy to modest growth of 1.5 to 2 % from 2015 onward.

On the fiscal side the programme is a combination of both revenue and expenditure initiatives calculated for overall savings of $435 million dollars: $150 million dollars in extra revenue and $285 million in expenditure reductions.

Mr. Speaker, at the time of the delivery of the Budget, I gave this House and the country as a whole the assurance that we would give periodic updates on the implementation of the various measures outlined and any adjustments which we believed would be necessary to assist the country in achieving its objectives.

In keeping with that commitment, and mindful that we have completed the first three months of implementation of the programme, I am happy to lay, along with this statement, a report in matrix form, outlining the progress we have made to date on the implementation of the measures.

In that report, Sir, members will see that, contrary to the perception being given in some quarters, government has in fact made a solid start to the implementation of most, if not all, of the nearly 50 initiatives outlined in the Adjustment Programme.

To be sure, based on an analysis from the Division of Economic Affairs, in the short three months that have elapsed thus far ending November 30th, 10 initiatives have been fully implemented while 40 others are at various stages of implementation.

All of the tax measures set for implementation in 2013, with the exception of one, the tax on lottery winnings, which we expect to have passed in this House in January, have been implemented. 

The Finance Division has indicated that to date the returns from those measures are trending close to predicted performance, but of course it is still very early and data is only preliminary at this stage.

On the expenditure side I can report the following:

All ministries have made cuts and have reported on the areas of adjustments recommended by the Ministry of Finance. Based on those adjustments in the areas of Other Personal Emoluments (OPE), Goods and Services, and Transfers, and with no further intervention, we would fall $32,115 million short of our target of total savings demanded over the adjustment period.

This would be as a result of shortfalls in OPE of $12,568 million; Goods and Services of $5,098 million and Transfers of $14,448 million.

This Mr. Speaker is not acceptable. Indeed, given recent data on the continued challenges with both the underperformance of revenues and continued haemorrhaging of international reserves albeit at a slightly slower rate than earlier this year, it will behove the government to not only impose the cuts set out in the August Budget to get the complete savings as forecast, but also institute additional expenditure reduction measures to accelerate the fiscal adjustment, plug the outflow of reserves, and stabilize the overall economy.

For the avoidance of doubt allow me to briefly contextualize why we have to expand and intensify our actions in the short term to achieve these objectives.

The provisional fiscal data available to the Ministry of Finance up to the end of October have shown a continued and worrisome deterioration in our revenue performance, even as expenditure has declined only marginally. It is important to note that these figures do not include the results from the August measures, but the projections to the end of the fiscal year at March 31st 2014 will take account of them.

Recent Fiscal data -Year- to-date Comparative Analysis

Current Revenue

Preliminary information received from the Accountant General indicates that current revenue for the period April 1st to October 31st, 2013 was $1,135.0 million, a decrease of $135.3 million or 10.7% from the amount recorded for the corresponding period during 2012. This amount was $277.8 million less than the original projection.

Taxes on incomes and profits realized $238.9 million, an amount of $105.1 million or 30.5% less than that collected for the corresponding period in 2012 and $140.4 million less than the original projection for the period. An amount of $64.2 million less was collected for corporation taxes when compared to the corresponding period in 2012. It should be noted that refunds of corporation taxes were $25.3 million for the period under review, while they were $2.8 million for the corresponding period in 2012-2013.

With respect to income taxes, $38.4 million less was recorded for the period April to October 2013. It should be noted that refunds of income taxes were $97.7 million for the period under review, while they were $94.6 million for the corresponding period in 2012-2013. In addition, the loss of revenue is attributed to the changes in the tax bands which came into effect on August 01, 2012. Withholding taxes decreased by $4.3 million from the corresponding period in 2012. Consolidation taxes collected for the month of October 2013 was $1.8 million.

Taxes on property increased by $29.1 million over the corresponding period in 2012-2013 to $93.9 million. This is as a result of a greater number of persons paying their land taxes early in order to gain the 10% discount on the bills.

Taxes on goods and services decreased by $46.8 million or 7.0% to $622.7 million. The original projection for the period was $731.0 million. Receipts of VAT totalled $475.1 million, a decrease of $42.2 million over the corresponding period in 2012-2013. VAT refunds for the period under review were $49.7 million compared to $20.3 million in the corresponding period last financial year. In addition to the increase in VAT refunds, the decrease in VAT can be attributed to the fact that some businesses filed returns, but were not paying the amount owing because of cash flow problems and also businesses were making use of free available credit.

Excise duties recorded $80.9 million, a decrease of $4.5 million from the actual outturn for 2012 and $21.6 million less than the original projection.

Import duties decreased by $1.0 million to $113.5 million. This represented a decrease of 0.9% from the amount collected in 2012. The original projection for the period under review was $122.1 million.

Special Receipts increased by $6.5 million to $17.5 million. This is due to an increase of $6.1 million in the Training Levy.

Non-Tax revenue recorded $43.0 million, an amount of $11.9 million less than the amount collected in the corresponding period in 2012. It is to be noted that there was a $12.5M dividend from the Barbados National Oil Company Limited recorded in May 2012. A similar amount in dividend income was projected to be received for the period under review, but this was not achieved. The original projection for the period under review was $84.1 million.

Expenditure

Current expenditure, exclusive of amortization of $444.7 million, decreased by $14.3 million or 0.8% from the 2012 figure to $1,592.5 million.

Wages and Salaries increased from $468.6 million in the corresponding period of 2012 to $473.0 million. The original projection was $478.3 million.

Expenditure on goods and services decreased by $17.9 million to $180.2 million. The original projection for the period was $192.0 million.

Expenditure on current transfers decreased by $23.4 million, moving from $572.7 million in 2012 to $549.4 million for the period April to October 2013. The original projection for current transfers was $563.0 million.

Capital expenditure for the period under review was $53.5 million compared to $41.6 million for the corresponding period in 2012. Capital formation increased by $10.6 million and capital transfers increased by $3.0 million. It should be noted that the original projection for capital expenditure was $68.2 million.

Total expenditure for April to October 2013 was $2,090.7 million, compared to $1,933.7 million in the corresponding period of 2012. The original projection for the period was $2,091.5 million.

  • Comparative Monthly Analysis for September

Preliminary information received from the Accountant General indicates that current revenue collected for the month of September 2013 is $211.0 million compared to $179.8 million in September 2012.

Taxes on goods and services decreased by $1.9 million to an amount of $89.2 million for September 2013, when compared with the amount collected in September 2012. VAT collected for the month of September 2013 was $65.7 million, an amount of $2.5 million less than that collected in September 2012.

Taxes on incomes and profits increased by $16.5 million over the amount collected in September 2012 to an amount of $48.7 million. This can be attributed to an increase in income taxes of $20.5 million, when compared to September 2012.

Taxes on property increased by $16.9 million over the corresponding period in 2012 to $51.4 million. This can be attributed to an increase of $16.6 million in land tax. Special Receipts increased by 2.6 million due to an increase of $2.0 million in the amount collected for the training levy.

Current expenditure, inclusive of amortization of $14.5 million, increased by $6.4 million moving from $223.8 million in September 2012 to $234.7 million in September 2013. Total expenditure increased by $5.3 million.

  • Comparative Monthly Analysis for October

Preliminary information received from the Accountant General indicates that current revenue collected for the month of October 2013 is $160.5 million, the same as October 2012.

Taxes on goods and services decreased by $5.1 million to an amount of $88.6 million for October 2013, when compared with the amount collected in October 2012. Excise taxes collected for the month of October 2013 was $9.6 million, an amount of $2.4 million less than that collected in October 2012. An amount of $72.2 million was collected in VAT receipts. This is $0.7 million less than that collected in October 2012.

Taxes on incomes and profits increased by $9.5 million over the amount collected in October 2012 to an amount of $35.5 million. This can be attributed to an increase in income taxes of $8.0 million when compared to October 2012. In addition, an amount of $1.8 million was collected for Consolidation Tax.

Taxes on property decreased by $3.5 million from that collected in the corresponding period in 2012 to $7.9 million. This can be attributed to a decrease of $4.5 million in land tax, whereas there was an increase of $1.0 million in property transfer tax. Special Receipts increased by 0.6 million due to an increase of $0.5 million in the amount collected for the training levy.

Current expenditure, inclusive of amortization of $171.1 million, increased by $122.9 million, moving from $280.3 million in October 2012 to $403.2 million in October 2013. Total expenditure increased by $126.5 million.

Deficit

The deficit of $511.1 million represents 6.0% of GDP at market prices of $8,458.1 million. The deficit for the corresponding period in 2012 was $378.2 million representing 4.5% of GDP at market prices of $8,449.7 million.

On the current trajectory, with the revenue declining at the rate that it currently is and with reductions in expenditure not being experienced at a similar rate, the projected deficit at the end of the financial year 2013-2014 would likely be above last year’s.

Based on this situation and given the projections which we have for major supplementaries for the QEH, UWI and Transport Board, it means that we would not be able to meet our targets for 2013-14 and would in fact be worse off than 2012-13.

It would mean that government would have to continue borrowing heavily in the domestic capital market including from the Central Bank to make up the financing gap at the risk of further hemorrhaging of the country’s reserves, which by the end of October were just under $900 million.

More importantly, should this situation be allowed to continue unchecked, it will undermine the macro fundamentals that support our firm and unshakable policy of maintaining a fixed exchange peg with the US Dollar.

I believe, Mr. Speaker, that there is a strong enough national consensus that we must do all in our power to avoid such a situation from occurring. This administration will not recoil from that mandate.

At the beginning of this recession Sir, this administration gave a commitment to our Social Partners that as long as it was feasible to do so, government would retain a policy of no layoffs in the public service. The private sector agreed to do likewise. We as partners agreed that if the situation merited such action that government or the private employer would commit to notification and consultations with the Partners so as to ensure that such an exercise would be undertaken in a fair and orderly fashion as to contain the expected levels of dislocation. The private sector has been doing this.

For the past five years, the government has remained faithful to its pledge to maintain public sector employment, and has, in some respects, even increased levels in some areas to assist Barbadians in coping with the ravages of the economic downturn.

Over the same period, and in this regard, the weight of economic adjustment has fallen disproportionately on the private sector as local businesses have had to right-size their operations to remain viable in very challenging times.

They have had also to carry the burden of inconsistent and delayed payments from government as cash flow problems, not unknown to most governments, have been more acute during the crisis.

In all of this government has done its utmost not only to maintain the social safety net, but also in some areas to expand it through such measures as free bus rides for school-age children, accelerated increases in the reverse tax credit, the lowering of income tax rates and extension of weeks for displaced workers to claim unemployment benefits, to name a few.

All of these were designed to cushion the impact of the recession on ordinary Barbadians in the hope and expectation that we would have a shortened recessionary period as per the normal trend with global and national recessions.

As it turns out, the challenge has continued longer that anyone could have predicted and the wear and tear on our fiscal situation is clearly evident and manifesting its ill-effects in other more critical areas of our economic structures.

In September this year, the Prime Minister in his capacity as Head of Government and Minister responsible for the Civil Service, and in pursuance of the implementation of Budget measures, ordered all Permanent Secretaries to examine the areas at which the measures were targeted and to report how fully these could be implemented.

The results are as I have already announced. More pointedly, the reality is that, despite our very best efforts to avoid having to adjust staff levels in order to achieve our fiscal consolidation objectives, this route is now simply unavoidable.

On current trend Mr. Speaker, it is expected that for this 2013-14 financial year, government is expected to expend $1, 286.2 million on wages and salaries across both central government and statutory corporations which rely on the State for budget support. This compares with total projected debt service expenditure of $1,431.1 million from a projected total expenditure budget of $3,845.5 million.

Of course Sir, we know that to some significant extent the large deficits which we have had to carry have in themselves been a key driver of the growing debt service as government has had to borrow more heavily to finance these large deficits.

Over the period of the economic downturn, our efforts at fiscal consolidation have been heavily tilted towards cuts in outlays for goods and services and selected increases in taxation. Little headway has been made in cutting subsidies and transfers given the deep structural make up of these. Our first major effort at addressing either this or expenditures on wages and salaries is contained in the August measures.

And since we are now of the opinion, based on the trend in the fiscal accounts over the first seven months of the financial year, that additional effort will be required to keep us on track with our end-of-adjustment-period targets, these are the areas in which I now propose complementary and additional measures.

Reduction in the Public Sector Employment and Wages and Salaries Bill:

Information supplied by the Ministry of the Civil Service indicates that there are 16,956 Public Sector posts in central government and another 9,000 spread across the various Statutory Corporations. In the general service 15,333 posts are established and I,623 are temporary posts. Further, there are 5,341 temporary employees in the public service composed of 1,082 in temporary posts and 4,177 in established posts. Some 70 public sector posts are filled with contract workers, another 72 listed as “Apprentice” and 80 persons working on a part-time basis.

In considering the adjustments which we are proposing to reduce government’s overall wages and salaries bill, we had to take a number of factors into consideration. These include but are not limited to:

  1. The total savings we are trying to achieve over the adjustment period and even beyond.

  1. The constraints of the law and the rights granted to all officers in the service including the provisions of the Employment Rights Act.

  1. The limitations imposed by the Constitutional Amendment prohibiting the altering of the salaries and allowances of Public Officers to their disadvantage.

  1. The conventions and accepted practices governing separations between the employer and the employee in the Public Service.

  1. The costs associated with any proposed layoffs and how these will be handled.

  1. The timeframes which we have set ourselves to initiate and complete the process of separation, particularly as it relates to all of the above, including appropriate time for adequate consultations with the workers’ representatives in particular.

  1. The necessary ring fencing of sensitive areas in the delivery of critical public services in health, education, national security and elderly care.

  1. The overall functioning and stability of the public service as we go forward in implementing critical aspects of our economic growth and development agenda.

With these in mind and based on a proposed saving of approximately $143 million in a full financial year or roughly $35 million over the last quarter of the current financial year, we have estimated that it will affect 3,000 employees across the overall public service: central government and statutory entities.

We have agreed that, if possible, there should be an even split in the proposed retrenchments between central government and statutory entities but, if not possible, then a split of 2000 from the general service and 1,000 from the statutory entities would be imposed.

We have agreed that, if possible, there should be an even split in the proposed retrenchments between central government and statutory entities but, if not possible, then a split of 2000 from the general service and 1,000 from the statutory entities would be imposed.

We further propose that the process of retrenchment be spread over the period January to March 2014, and be front-loaded starting with the first 2,000 job cuts by January 15th 2014, followed by the second tranche no later than March 1st 2014.

Additionally, Cabinet has agreed to institute a strict programme of attrition across the central public service, filling posts only where it is absolutely unavoidable, over the next five years, ending 2018-2019. This attrition is expected to reduce central government employment levels from approximately 16,970 to 14,612 jobs – a projected loss of 2,358 posts; and savings of $121 million. Over the current 19-month adjustment period public sector employment will be reduced by an additional 501 jobs with a projected savings of 26 million dollars.

We have also agreed that effective January 1st 2014 there shall be enforced a freeze on the payment of increments for the next two years. Appropriate arrangements will be made for this loss of income to be properly factored into the computation of overall pension benefits.

As indicated above, both the Ministry of Finance and Economic Affairs and the Ministry of the Civil Service, including the Personnel Administration Division, have been mandated to continue consultations and negotiations with the workers’ representatives to ensure that all appropriate steps are taken to safeguard the rights of all workers affected by these measures and to craft interventions aimed at mitigating the dislocation which will undoubtedly be caused, including assisting those interested to enter into retraining and redeployment programmes in the private sector.

The Ministry of Finance has also been mandated to work with the Board and Management of the National Insurance Scheme to ensure appropriate provisions are made for timely and full payment of unemployment benefits to workers that are displaced.

Cabinet has also agreed to support following additional measures:

  1. A 10 % cut in the salaries of all Ministers, Government MPs, Parliamentary Secretaries, Personal Assistants, and other persons designated as “political appointees” in the employ of the government.

  2. A 50% cut in the external travel budgets of all ministries, and statutory boards.

  3. A freeze on all non-statutory discretionary waivers unrelated to the earning and/or direct saving of foreign exchange for the next three years. It is projected that this measure could save the government at least 100 million dollars over the period.

Additionally Mr. Speaker, earlier this year, the Ministry of Finance formally requested technical assistance from the IMF’s Fiscal Affairs Department in two critical areas of government’s operations: Tax administration, and fiscal/operational reform in the key statutory entities which rely on central government for large transfers for their operations.

For some time now most internal and external examiners have expressed deep concerns about both of these areas as key examples of parts of government’s operations which exhibit unacceptable levels of inefficiency and dis-functionality resulting increasing financial burdens to the state.

I am happy to announce that the Fund has accepted the requests and starting next month, the first team will begin its examination of the fiscal and operational challenges of some of our key statutory entities.

In anticipation of that and in an effort to advance and concretize this work, the Ministry of Finance will assemble a high level task force of senior finance, business and accounting experts to work along with the Fund’s team to finalize a reform agenda for the selected entities to be presented to the Minister before mid-year.

I also anticipate that very shortly the Fund will identify a team of experts to conduct the long overdue comprehensive assessment of the direct and indirect tax systems in Barbados with a view to advising government on major reforms necessary in both tax policy and administration.

Mr. Speaker the additional measures which I have just announced, though tough, are designed for the specific purpose of helping Barbados’ economy to accelerate the process of adjustment and fiscal consolidation.

In the end though, Sir, as a country we cannot hope to cut or tax our way out of this economic decline. We must push ahead even more radically with our growth initiatives through greater public and especially private sector investment. As a government the pressure is on us to step up and remove all obstacles to investment in our country whether from domestic or foreign investors. We must work harder and faster and facilitate more.

Our private sector partners must bemoan less and invigorate more. We must together do more to help each other rather than just satisfy ourselves with highlighting every fault that exists on either side.

It is in increasing our levels of productivity, expanding our creativity and innovation that will help us build the efficiencies that will make Barbados more externally competitive and internally dynamic.

In 2014, from the government’s side, we are set to initiate a set of major public sector investments either directly on our own or in PPP arrangements. We are confident that if such investments are matched by investments from our domestic and foreign investors that 2014 will truly begin a substantial turnaround in the Barbados economy. Now is the time to forge ahead with those plans and I encourage our colleagues in business to match us in this regard.

In this way we will create newer more sustainable private sector jobs to assist in redeploying those whom we now have to release from the employ of government to the private sector.

It is never easy for any government or Minister of Finance to have to introduce measures that strike at the heart of a person’s financial and social livelihood. This is tough on all of us over here and it will be on all officers of the governmental system.

We understand and empathize with the anguish which these measures will cause the many people affected by them. They will be your constituents and ours. But having tried our utmost over the past five years and some to avoid this road, the exigencies of the negative impact of the world’s worst recession have dictated that we cannot continue on the course which we have been pursuing.

If there is any relief that we can offer to those likely to be affected Mr. Speaker, we will make that relief available to the fullest extent of our capacities and within the constraints with which we have to contend.

What we would wish to see happen though Sir, is that those who are not affected to the same degree as some of our brothers and sisters, open their hearts and minds and homes and even their financial resources if they can. We have to ensure that we carry our family, friends and former associates and, yes, constituents along this very difficult journey.

The government Sir, working with the Private Sector, Labour Movement, and wider Civil Society, will endeavour to ensure that every effort is made to secure a speedy and sustainable turnaround of the Barbados economy so that we can achieve our national objectives of a country that is socially balanced, economically viable, environmentally sound, and characterized by good governance.

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