Submission 23
THE CASE FOR A FISCAL RESPONSIBILITY PROVISION IN THE BARBADOS CONSTITUTION
The Director General
Ministry of Public Service
E. Humphrey Walcott Building
Cnr. Collymore Rock and Culloden Road St. Michael, BARBADOS
INTRODUCTION
In a representative democracy form of government, such as appertains in Barbados, elected officials are tasked with creating laws and making executive decisions on behalf of the population. In so doing it is expected that the elected government will exercise good stewardship and it is incumbent upon the Government to be accountable to the citizens and taxpayers of the Republic. This presentation seeks to advance credence to that rubric.
In making my submission to the committee, let me first congratulate the members of the committee for the important service to the Republic upon which they have embarked. Secondly, to express my appreciation for the opportunity afforded to the citizenry to contribute to the dialogue on desirable amendments to shape and enhance the constitution of the new Republic.
In so doing I will not engage the committee on the extended range of topics such as: enhancing the powers of the Auditor General; changing our parliamentary system to a unicameral legislature with elements of proportional representation; establishing a fixed term for national elections; prime ministerial term limits; and a more robust methodology to hold public officials to account, all of which are important concepts and very worthy of the Commission's attention. Rather, I have elected to leave the case of such propositions to the minds of experts and others who are more disciplined in such matters and to whose contributions the Commission must also give serious attention.
THE ISSUE
The issue which I wish to table for the committee's consideration is rooted in the enclave of Fiscal Responsibility and the Barbados Constitution and framed in the question -What should be the role of the Barbados Constitution in shaping sound fiscal policy?
Recounting the sentiments of an esteemed colleague, I was reminded "that the issues surrounding Government expenditure can be a philosophical one that goes beyond macroeconomic considerations. He reminded me that those of the political Left, the so called 'liberals' are often indicted by fiscal conservatives for being 'tax and spend' liberals. Conversely those on the political Right have often acquired a reputation for reluctance to underwrite the costs of social spending which often incur deficits, but which are regarded by liberals as contributing to the social good. The more extreme on the Right, the so-called 'fiscally responsible' often advocate tax cuts for the rich, which they claim will promote growth that will trickle down to the lower orders of society. This 'trickle-down' economics ignores the reality that invariably the 'trickle' becomes a mere 'drip' as socio-economic disparities worsen".
He further observed that "Caribbean politicians have historically seen themselves as responsible for the black masses who elect them with a mandate to lift them out of working class poverty. That is the very rationale for the existence of Caribbean labour Parties that feel an obligation to satisfy a certain proletarian constituency".
While much of the observations made by my esteemed colleague are factual and constitute meaningful food for thought, they must be juxtapose against:
a)An economy which is not generating sufficient economic growth1 or more particularly foreign exchange earnings, which brings to the fore a series of tantalizing questions relating to debt, both foreign and domestic. Namely, how much do you borrow? At what cost do you borrow? For what purpose do you borrow? And what is one's capacity to repay?
b)The reality of global political changes taking place where, inter alia, post-war empathy for the disenfranchised is increasingly being subjugated2 and/or shaped by trade and other geopolitical self-interests.
c)The economic management of small island states, notwithstanding their political independence, is now virtually being framed or prescribed for them by the international community, in a manner that best suits the economic interest of major industrialized countries and commercial conglomerates. That is a reality!
Small communities without natural resources which are also excessively indebted; are more vulnerable to the pressures of manipulation. Adherence to their cherished philosophy of 'friends of all and enemies of none' is becoming increasingly more challenging to maintain. Vulnerability also increases opaqueness in the transparency of governance and facilitates the myriad infelicities that flow therefrom.
Leaders of small island states must not lessen their resolve to prod the conscience of the international community of its responsibility to the world's small island states who, in the main, suffer the collateral damage arising from the exploitation of the earth's resources by the world's super powers. However, that prodding in the various theatres of influence, must not lessen their tenacity of building resilience at the domestic level, which is probably the best long term anti-dote for heavily indebted Small Island states.
Discipline, is a sine qua non for resilience building. Two countries that are often cited and admired for their post war economic development are Singapore and China. While different economic models may have been pursued by them, the single common factor between the two was the attribute of discipline. This presentation is not the exclusive answer but is offered as a contribution towards building the required foundation of the fiscal disciple that is necessary for our new republic.
CONCEPTUAL BACKGROUND
I claim no originality or exclusivity for the general concept of constitutional fiscal responsibility. I have been partly influenced by the literature, although not entirely by the methodology, of Nobel Laureate economist James Buchanan, who penned an essay on constitutional amendments he'd like to see implemented in the United States of America.
Buchanan asked the question -"What is wrong with things as they are"? He then stated that "Fiscal irresponsibility stares the USA in the face and cries out for correction. . .. Political leaders, both legislative and executive, with public support, function as if it is possible to spend without taxing. ... This observed fiscal profligacy stems from diverse sources: institutional history, Keynesian follies, supply-side exaggerations, and, finally, the very logic of collective action, which fosters the personalized illusion of something for nothing, especially amid the natural constituency pressures of a representative democracy".
After highlighting the risks and challenges associated with budget deficits under the sub caption of 'Ideas have Consequences', Buchanan further postulated that "A constitutional amendment could take the following form. In its final budget resolution, Congress should restrict estimated spending to the limits imposed by estimated tax revenues. This requirement should be waived only upon approval separately by three-fourths of the House of Representatives and the Senate. This exception would allow for debt financing of federal outlay in situations that are indeed extraordinary (major wars, natural disasters), an exception recognized by classical public finance".
Buchanan further asserted that "such a constitutional amendment would exert a major impact on world attitudes". In addition, he noted, 'that such action would increase prospects that the dollar would not lose its role as the international reserve currency and that the attainment of fiscal responsibility by the United States, both in fact and appearance, was vital"
As expected, within the ideological divisive structure of American politics together with the ubiquitous state vs federal constituencies, the responses to Buchanan's proposition were invariably mixed, although none, in my opinion, seriously addressed the root of the problem to which he referred.
THE BARBADOS ANALOGY
In the case of Barbados, I table the same question with which Buchanan began his essay. "What is wrong with things as they are"? In reply, I make bold to say that fiscal irresponsibility, whether fueled by an impatient electorate or irrational exuberance by our political leaders, is a systemic risk that threatens the health and sustainability of Barbados, a malady, which requires robust correction.
In making that observation, I point no accusing finger at the present administration which found itself in unchartered economic waters; and was therefore obliged to adopt unconventional and perhaps some unpalatable policies to salvage the national economy from nigh oblivion. Rather I make reference to the state of affairs that brought us to that crisis. In so doing, it will be futile to draw party distinctions because, in my opinion, neither political party is free of culpability.
In the case of the United States, to whom we often look for guidance, fiscal profligacy may be tolerated for an extended period of time for three reasons:
(i) The United States dollar, arising from the post war robustness of the USA's economy, is no longer required to be supported by the need for adequate gold reserves, but now merely by the 'good faith' of the United States Government;
(ii) The USA dollar is the de facto reserved currency of the world; and
(iii) The international debt of the United States is denominated in its own domestic currency.
Neither the island republic of Barbados nor its currency has any such standing or enjoys any such privilege.
Buchanan suggested that the fiscal profligacy of deficit financing in his country stemmed from diverse sources: institutional history, Keynesian follies, supply-side exaggerations, and, finally, a developing notion, which fosters the personalized illusion of something for nothing, which arose from, what he termed, the natural constituency pressures of a representative democracy. He berated deficit financing in its entirety.
I do not unreservedly adopt Buchanan's stance on deficit financing. I am of the view that the social and economic history of Barbados rendered it necessary to adopt some form of deficit financing in order to raise much of the populace from the caverns of hopelessness and poverty.
The real issue that now confronts us, as a developing country, is not 'debt' per se; but rather debt for what purpose, at what borrowing costs, and the management of that debt!
Reality, not theory, constrains me to the view that emerging from an exploited colonial past, few of us, whether personally or corporately, could have made the social transformation and economic advancement that we have achieved, without availing ourselves of some debt facilitation. Only the minority who emerged from a privileged class with inherited wealth was able to make a relatively debt free start; and even that class relied upon and utilized the facilities of the banking sector for expansion and post-colonial advancement.
In my view, deficit financing was therefore a necessary and appropriate policy tool to be utilized in Barbados for defined purposes and a limited period of time. However, even the best of medicines, used to ameliorate the effects of an ailment, are likely to be detrimental to the body corporeal if ingested for inordinate periods of time.
The same is true concerning the benefit of deficit financing if utilized for extended periods, or perpetuated by the body politic for ill-defined purposes, or to pander to the pressures of an electorate who may have been led to expect or yearn for a lifestyle that is not earned by the country but financed by debt.
BARBADOS - THE POST-INDEPENDENCE EXPERIENCE
In their passion, post-independence, political aspirants and leaders of Barbados may have contributed, perhaps unwittingly, to an emerging illusion in our society of an entitlement of something for nothing from the Government. Consequently, our leaders are now experiencing, from a wide section of the electorate, the pressures of expectation of largesse and/or a standard of living or quality of life, often fueled by electoral promises, that is unearned. As a society, there is therefore developing a cultural mindset that it is Government's responsibility (i.e. the elected officials) 'to take care of us'.
For clarity, let me say that I make no reference here to partisan politics or the necessary assistance that any government must extend to the most vulnerable in our society to aid them in their advancement from destitution. It is expected that the state should and must lend an enabling hand to such persons, not only by our equivalent to food stamps', but through creative programmes that will elevate them from the status of mendicants to productive members of society. In that context, we need to reevaluate and reshape the model of our social and welfare programmes from gifts to a more enabling structure. That however, is outside the scope of this paper.
By way of observation, I invite the Commission to take note of the below sample of demands, arising from the constituency pressures of expectations in our Republic:
From the sports and cultural sectors for grants and concessions.
From this body and that body for increased subventions or assistance of one kind or another.
From able-bodied welfare recipients who eschew the dignity of work, aided by a system that dispenses benefits rather than offers compensation for a task performed.
From alleged inefficient statutory entities for additional monies from the public purse.
From tourism developers and operators for tax and other concessions without a robust coupling obligation to remit foreign earnings to boost the Republic's foreign reserves,
From certain business enterprises for a myriad of financial arrangements and assistance aimed at their own risk's mitigation and profit maximization,
From a less than sensitive sector of the electorate who pleads for an exemption from taxes while pressing vociferously for an expansion of free services; and
The demands of a public sector (whose employees are largely shielded from retrenchment) for wage increases, but from whom, or from the system within which they function,3 the requirement for improve productivity and efficiency of service seems an imposition akin to anathema.
Of pivotal importance, it must be noted that in Barbados we appear to have reached the point where electoral success and retention of political office seem largely dependent upon pre-election gifts, illusory promises by candidates, and post-election fulfilment of an impatient electorate expectations; however unreasonable, unsustainable or unattainable such expectations may be in any given set of circumstances. When those expectations are not fulfilled, vilification of politicians then ensue.
The governance and administrative structures in our republic is in need of urgent improvement. While there appears to be a body of anecdotal evidence concerning fiscal infelicities of varying degrees within the political class, I am however, loath to subscribe to the notion that politics is a nasty game or that politicians, as a class, are crooked or by nature are evil and corrupt persons. I abhor such derogatory characterizations.
The presence of any fiscal infelicities in the management of public affairs is a matter for national concern, but the attitude of the citizenry may not be without blame in promoting an enabling culture that encourages that pattern of behavior.
When persons elected to public office have served the country and have either retired or replaced through our system of representative democracy, they are often denied common national courtesies, treated with scant respect and at times the object vitriol. This is a character flaw in our culture that needs remedying, for it tends to promote a mindset in elected public officials to 'make hay while the sun shines'.
It is however, my assertion that:
(a) The pressures from a now embedded culture of expectations from the electorate to which I earlier alluded, and
(b) The primeval natural human instinct for survival and self-preservation,
which often make politicians hostage to expectations and drive the decision-making process of the political directorate. Sometimes the decisions made and the policies adopted are against their better judgment, but the politics of political convenience often determine policy choices.
The default menu of policy choices usually consists of one, or a combination, of the following three courses of action, notwithstanding the negative impact which the implementation of policies, based upon such options, may have on the well-being and financial sustainability of the national economy. Those usual options are:
i) To pursue a policy of budgetary deficits financed by borrowing to meet budgetary expectations; and/or
ii) To increase the burden of taxation upon a targeted sector of the population; and/or
iii) To exempt an increasingly larger number of persons from the taxation pool.
In post-independent Barbados, political parties of all stripes have utilized such options. It is for that reason I stated earlier that none of the political parties are free of culpability.
The ease with which such policies were adopted has persuaded me to the view that in the decision-making process by those elected to public office, few in number were those who had asked the question -what is the best course of action for the sustainable development of the country, against the many whose predilection was probably to ask - what do the people want? Or what is best for my party? Or what best serves my re-election prospects?
The Companies Act Cap 308 of the Laws of Barbados, on which drafting committee I had the honour to serve, addressed this dilemma of leadership and duty in corporate affairs in section 95. I suggest that the essence of that provision is equally relevant to those who seek public office in the sphere of legislative and executive leadership in the new Republic.
Fiscal extravagance, though not singularly, has been a contributing factor that has caused Barbados to experience two major economic crises since its independence with an intervening period between the two of approximately 17 to 20 years. The sobering observation, by those of discerning minds, is that the latter crisis is deeper and more disruptive than the former, a trend, I submit, that is likely to continue if not addressed by a constitutional remedy.
First Major Crisis- Early 1990's
Between 1989 and 1992, unemployment and inflation rates in the country escalated, the fiscal deficit ballooned, industrial output declined, tourism earnings dropped, GDP moved into the negative range and foreign reserves were severely depleted. An international economic downturn between 1990 and 1992 combined with the Gulf War threatened the ability of the country to keep its economy intact.
By 1991 the country was squarely in a recession with foreign reserves on the verge of exhaustion. Some estimates indicated that the country held between one and two weeks of import cover. Additionally, Barbados faced the prospect of some of its loans maturing without the possibility of being rolled over at a time when private sources of finance were disappearing for emerging economies.
The adjustment measures that the IMF recommended for Barbados were primarily aimed at reducing fiscal spending.
The early 1990s balance of payments crisis in Barbados began to alter the relationship between the state, society and the market since the state had been pivotal in supplying significant social support as well as support to the private sector.
Although the adjustments were painful and unpopular, compromised positions were reached that helped the country to uphold significant elements of its post-independence model of state-supplied public services and welfare systems. Barbados was able to emerge from the debt hole of this first crisis and grow its economy from 1997 to 2007 while maintaining a social welfare system and without devaluation of its currency. But did we learn any lessons from the crisis?
Second Major Crisis 2008-
The report on Barbados's 2013 Article IV consultation with the IMF noted that while Barbados remained one of the most developed of the Caribbean states, it was severely hurt by the 2008 global financial crisis, having seen the economy contract at a rate of around 0.6% yearly between 2008 and 2013. The report went on to state: "The government's fiscal problems go back several years".
While the fiscal balance has been in deficit since the early 2000s, the structural budget balance started to deteriorate in the mid-2000s as spending and investment was ramped up for various projects, including preparations for the Cricket World Cup in 2007. Hence, shortly after Barbados began to build its recovery from a serious financial hole, it again found itself back in one.
Yet, this hole was not dug overnight. Like the crisis of the early 1990s, that of the early 2010s was also partly a consequence of external occurrences, which negatively affected the major tourism source markets and trade partners that Barbados has relied on, coupled with the combination of government spending practices and its commitment to maintain the currency peg to the US dollar.
Traditionally, the Government of Barbados kept very small fiscal surpluses and deficits. In 1991, the deficit expanded to as high as 5% of GDP. Over time the deficit escalated to approximately 15% of GDP by 2014. By this time, the country's debt-to-GDP ratio grew to an astonishing 105% of GDP. The inability (or unwillingness) of the political directorate of Barbados to deal with the fiscal deficit has worsened this trend.
Because of the inability or unwillingness of the political directorate of Barbados to deal with the fiscal deficit or their proclivity to pander to the pressures of an electorate to perpetuate the pleasures of an unearned lifestyle, or by reason of irrational political exuberance, the debt of this small island state grew to approximately 17 billion in 2018. Its Debt to GDP Ratio had reached an alarming percentage of around 176%. Barbados had achieved the indignity of ranking among the 10 most indebted countries in the world on a Debt to GDP Ratio and experienced the humiliation of defaulting on its sovereign obligations.
For clarity, I crave the indulgence of the committee to define in layman's language three terms that are used in this segment of my presentation.
Deficit or Fiscal Deficit is the shortfall in a government's income compared with its spending. The government/country that has a fiscal deficit is spending beyond its means and therefore must borrow to meet the shortfall. In addition, it also must pay interest on the amount that is borrowed to meet the shortfall.
GDP or Gross Domestic Product is a measure of a country's economic activity based on the total cash value of all goods and services it produces in a specific period. Tracked over multiple years, GDP can show whether a country's economy is growing or shrinking. A rising GDP is a sign of good economic health, whereas a falling GDP indicates that a country is not working at full capacity or may be in an economic recession.
Debt to GDP Ratio is the Debt to GDP measurement which compares a country's government debt to the value of the total economic output (the GDP) of the country. By comparing what a country owes against what it produces, the debt-to-GDP ratio reliably gives a picture of the country's ability to pay back its debts.
Having regard to the fact that Barbados is a small island state that may be susceptible to hurricanes and that is also highly dependent upon tourism and extremely exposed to the vicissitudes of international markets, the quartet of social priorities at the operational level upon which any Government must focus are; food, health, shelter for the most vulnerable, and energy security for the populace. However, at the policy level, maintenance of a prudent Debt to GDP ratio cannot be overemphasized.
There is divergence among practitioners as to what that ratio should be. The IMF has suggested that a prudent Debt to GDP ratio for developing countries should be in the vicinity of 40% and 60% for developed countries. For Barbados, I suggest that the ideal should not exceed 50%.
At the end of 2020, Barbados's ratio was in the region of 147%. This is unsustainable and requires urgent correction. Suffice it to say that where a country is a unique supplier of certain goods and services that are in worldwide demand, the risks of a high Debt to GDP ratio may be buffered. Barbados does not fall within that category!
Mr. Chairman I need not elaborate further on the details of the crises, there is an abundance of evidence within the archives of the Central Bank on each and collectively on all. While the earlier crisis had brought us to the point of humiliation the latter has brought us to the threshold of penury.
The country has defaulted on its financial obligations. We now find ourselves burdened with debt and our children and their children saddled with the obligation to pay for our profligacy, and few they were in number among the political class who apparently were willing to stand up and say to the electorate enough is enough! The livelihood which we all desire must be earned, it cannot be gifted or financed by debt!
Hence, I pondered - why was that so? And how did we get into this quandary?
Were there not good people in parliament?
Were they not aware of the harm been done to the national economy and the delayed hardship that would certainly be visited upon the very constituency sectors whose demands or whimsical fantasies they sought to satisfy?
Many of our elected officials are or were persons of learning; were they not aware of the debilitating effect of excessive national debt?
To each such enquiry I found myself responding in the affirmative, which caused me to ask the further question - then how did we get here again?
I am aware that the distinguished Chair of the Committee is a person not only well versed in the law but also in matters ecclesiastical, so it would be readily understood when I say that I found the answer to the quandary of our elected representatives in the analogy to St Paul's experience -when to him it was said 'It is hard for thee to kick against the pricks' .
In the Barbadian situation, the pricks to which I refer are the demands arising from the constituency pressures of a wide section of the electorate in our representative democracy, to perpetuate a lifestyle in its myriad forms, which the country has not earned but rather financed by debt.
In no lesser manner than seen by Buchanan, the situation cries out for correction. Persistence in the folly of pursuing a lifestyle financed by debt is not sustainable. It is without contradiction, a sure pathway to ultimate national bankruptcy.
In addition, the scourge of chronic fiscal deficits are likely to lead to a national 'brain drain' as our brightest minds and talented young persons will emigrate to escape the burden of taxation that must surely be placed upon their shoulders, and that of the middle class, to pay for our profligacy. That will make the resuscitation of our economy more difficult and protracted and the economic discomfort of the working class all the more painful and prolonged. Empirical evidence suggests that there will then emerge a social transformation in society where the most thriving industry, becomes that of 'security guards'.
THE NEED FOR CONSTITUTIONAL REFORM
Our politicians, concerning whom I make no political or party distinction, are neither saints nor devils. They are merely a sample of the constituency of humanity, whose exercise of discretion must, in the interest of the wider society, be regulated by laws if irrational exuberance is to be kept in check and the optimum advancement and good governance of the Republic in a sustainable manner is to be achieved.
It will be ironic for a political directorate to enact laws to regulate the private sector; because they are of the view that the private sector cannot properly regulate itself due to a perceived inherent business conflict between service quality optimization to the public and maximization of profits by the supplier; but fail to recognize a not dissimilar conflict within the body politic between pursuing a path that is in the best interest of the country vs that of their party, sectorial interests, or meeting the unreasonable expectations from a vocal and impatient section of the electorate of our representative democracy.
I say, without equivocation, that for the reasons herein before averted to, it is therefore both expedient and necessary for the constitution of the new Republic to address the issue of fiscal responsibility in a well-defined and unambiguous manner
In this segment of the presentation certain words or terms, that are sometimes inadvertently interchanged, will be used or referred to. For that reason, I again define and comment on the importance or meaning intended in this submission.
In the management of the economy there are three major Government accounts to which reference will be made for the purposes of my presentation.
Balance of Payments Account ( which is sometimes referred to in some of the literature as a 'current account' but for clarity not in this instance) means the country's account which records the value of exports and imports of both goods and services and international transfers of capital. This account measures the nation's external earnings and spending and it reflects (net primary income) or factor income (earnings on foreign investments minus payments made to foreign investors) and net unilateral transfers, which have taken place over a given period of time.
The Balance of Payments Account is an important indicator of an economy's health. A balance of payments surplus increases a nation's net foreign assets/reserves by the amount of the surplus, while a deficit decreases it by that amount. Protracted balance of payments deficits invariably requires a country to balance that account by either drastically reducing imports or fund it by external borrowing - which then increases the size of the country's external debt. The Balance of Payments Account of the country reflects the combined activities of both public and private sectors transactions.
Current Account (sometimes referred to in literature as a Revenue Account). In the world of commerce, the two words 'capital' and 'revenue' are among the fundamental concepts of business. Those concepts are also relevant in the economy of a nation.
In this presentation the Current Account speaks to the issue of Government's revenue and expenditure within a fiscal period, normally one year. That account records Government's revenue from taxes, rates, levies, import duties, and the like and profits from public sector industries, interests on investments, dividends, and certain penalties or fees and grant receipts known as non-tax revenue; etc.
On the expenditure side, this account reflects the cost of administering and running the machinery of the state and includes salaries and pensions of civil servants, the provision of services by the government to its citizens, such as education, health care, welfare, and the myriad of other goods, services and activities financed from the public purse. Without limitation, it also includes Government's subventions and grants to various interests and statutory corporations.
Of significance, the Current Account must also bear the burden of interest payments the state must make on its debt and, depending upon the structure of the relevant loan agreements, the annual amortization of the principal sum owed, and the costs of routine maintenance (as distinct to additions or improvements) of the island's infrastructure.
When Government's inflows (revenue) match its expenditure within a fiscal period, the current account is balanced.
If Government's revenue exceeds its expenditure, it reflects a current account surplus. A surplus enables government to be more liberal in supplying greater services to its citizens and to make investments to grow the economy. A surplus also provides more flexibility to the economy in times of economic crisis. Government can use the extra cash to stimulate the economy at times of recession instead of just depending on debt, which limits the robustness of post-recession recovery. A Budget Surplus also helps the country to clear or reduce its outstanding debt.
However, _as is so often the case, if Government's outflows (expenditure), planned or unplanned, exceeds its revenue the current account will reflect a deficit. Here is where the problem usually starts.
The reality of that situation is one way or the other, a government would usually embark on its already planned and announced projects to ensure political constancy and/or curry favour of a sort from the electorate. This is where borrowing money is seen as the easy solution.
To be clear, this presentation is not referring to temporary borrowing facilities, such as shortterm Treasury Bills, which are issued and repaid from time to time when the government nees money for a short period to facilitate its cash flow needs, arising from timing differences between revenue receipts and expenditure. Rather it is referring to the borrowing of money to finance budgetary deficits.
When a government faces this challenge, the political directorate has three workable options which are:
(i) Reduce how much it spends, and/or
(ii) Increase taxes, and/or
(iii)Keep spending and borrowing from various financial institutions or quasi state entities such as the social security funds, which then creates the risks of destabilizing such funds.
The disadvantage of the first choice is that the populace of the Republic might not be enamored with the consequential 'belt tightening' and encroachment on their desired lifestyle; while in respect to the second choice the citizens of an already highly taxed society will certainly resent the idea of increasing the taxes they are to pay to the government.
While options (i) or (ii), or a hybrid thereof, may truly be the best long-term solution in the interest of the country, either one of them could create a bad outlook for the government, especially if it decides to also freeze or cut salaries and other benefits. Governments therefore tend to resort to option 3, i.e. borrowing money.
The disadvantage of the apparent easy option of borrowing money is more than glaring. It is widely known that debt tends to pile up, especially in circumstances where the country may have encountered previous budget deficits.
The political directorate would know that borrowing more money would further widen the gap until it becomes almost impossible to fill without emptying the nation's treasury. Yet! The lure of political self-interest and appeasement of the electorate's expectations and demands, often to perpetuate an unearned lifestyle, usually corrals the political directorate down the borrowing path, to the detriment of the national economy of the country.
It has recently been revealed that the accounts of the Central Bank show a deficit of 1.6 billion dollars and that the National Insurance Fund has lost a billion dollars from its investments in Government's securities. This represents over-spending mainly on foreign imports financed with printed money which can only be repaid with foreign exchange earnings.
Those who are inclined to criticize this paper for its references to unearned life styles or irrational political exuberance should redefine for themselves the meaning of fiscal profligacy.
When the political directorate of any administration is more concerned with appeasing the unreasonable demands of an electorate in support of an unearned lifestyle, or for its own political future; than it is with making the best economic decisions for the country, then borrowing would usually appear as the best option. The challenge of paying back the borrowed funds would automatically become the responsibility and problem of a future government.
Perpetuation of any such fiscal recklessness is what this recommended constitutional amendment seeks to avert, while still providing flexibility to cater for genuine national emergencies.
Capital Account. The next major account associated with the administration of government is the Capital account. As the name suggests, a capital account holds the record of the capital assets and liabilities related to the government. It includes payments and capital receipts of the government
The government's capital expenditure usually comprises of the costs of creating assets such as schools, colleges, bridges, roads, hospitals, railway lines and housing where relevant, dams, airports, harbours, significant additions and improvements (as distinct from routine maintenance) of the infrastructure of the country, and strategic joint ventures and investments for the protection and advancement of the country etc.
An example of the later may be investments or joint ventures to prime the development of desirable economic sectors or industries from which future cash flows or significant reduction of import costs will accrue to the national economy over an extended period. Examples are the tourism, renewable energy, and food security sectors.
The Capital Account will usually be funded by debt, grants from international agencies and surplus revenue realized from the current account. It is appropriate for the capital account to be financed in that manner and that the burden of repayment of the debt to finance such projects be spread over the projected useful life of the resulting asset.
In that manner both present and future generations, who will also benefit from the investment made by Government, will contribute to its cost. Such an approach is both reasonable and equitable for the financing of capital projects. However, in pursuing a policy of debt financing for capital projects due regard must continue to be paid to the obligation of maintaining a judicious Debt to GDP Ratio.
THE RECOMMENDED AMENDMENT
This is essentially a recommendation to amend the constitution of Barbados to require Government of the Republic to annually balance its current account. _Although the term balaned budget points towards a breakeven between surpluses and deficits, it can also be a budget that posts a surplus but not a deficit. Therefore, revenues may be greater than expenses in a balanced budget, but not vice versa.
Propositions on whether the Constitution should be amended to require a balanced budget are expected to generate opposing views about, whether such an amendment would be a proper solution to the problem of persistent budgetary deficits and escalating national debt, or whether indeed a constitutional amendment is a correct method of addressing the need for fiscal responsibility.
To those who may cite a lack of sufficient precedent for a constitutional amendment for the intended purpose, I say that this paper is about the advancement of a concept. The Constitution is an instrument made by man and over time has been subject to various amendments, all of which may not necessarily have followed usual precedents.
It is the Commission's task together with that of constitutional legal draftsmen, to fashion the language and delineate the process to facilitate the recommended constitutional change if in their opinion the substance of the proposition is deemed to have merit.
Furthermore on the question of precedent, when the first deliberative assembly opted for the creation of a unicameral chamber, there was no established precedent. Yet today almost half of the world's sovereign states are unicameral. I therefore table the question in rebuttal, what is wrong in being first, if it is for the common good?
There may be persons who are generally not averse, but having regard to the present state of the Barbados economy, may be disinclined to consider a constitutional amendment for the proposed purpose at this juncture. They may argue that the state of our economy is currently unable to withstand the discipline of an immediate balanced budget requirement.
That stance is not without merit. However, it must not be used as a ruse to obfuscate the relevance of the proposition nor to perpetuate the threat of indiscipline in the management our fiscal affairs, or to permit unchecked, the unsustainable expectations of the electorate, or exuberant ambitions of the political directorate.
It is therefore accepted that implementation could be deferred until the commencement of the Government's 2025/26 fiscal period. However, implementation on that deferred date must not be left to political or legislative discretion. In making the amendment to the Constitution the date on which the provision takes effect should be clearly prescribed therein.
PROPOSING AND OPPOSING VIEWS
In making this recommendation to the Commission, it is appropriate to highlight a synopsis of the significant relevant positions of both Proponents and Opponents of the constitutional remedy.
Proponents of a constitutional amendment hold the view that future generations have a right to be protected from debts accumulated by earlier generations in support of a lifestyle financed by debt.
Secondly, because governments and the political directorate have shown themselves unwilling or unable to rein in the national debt through the exercise of their normal discretionary authority, Proponents argue that only a constitutional constraint will be strong enough to curtail lawmakers' tendency to act in fiscally irresponsible ways or yield to the demands of an electorate to perpetuate a lifestyle financed by debt.
Opponents to a constitutional amendment argue that it could limit the ability of Government to use fiscal policy to counteract recessions or respond to national emergencies such as the covid19 pandemic. Moreover, they contend that the cause of our fiscal imbalances is a lack of political will, not an inadequate process.
Opponents also suggest that a balanced budget amendment may fail to achieve its objectives because policymakers would look for ways to evade its restrictions and that the political pressure could lead to budget gimmicks that would meet the letter, but not the spirit, of the law.
Proponents of a balanced budget amendment counter and argue that respect for the Constitution will create strong political pressure to rein in deficits and impose much-needed accountability for irresponsible fiscal policy. Few elected officials, they suggest, would be eager to face the electorate to defend a budget violation of the Constitution. In addition, they further contend that a balanced budget requirement will curtail the overreach of irrational exuberance in fiscal matters, a catalyst that encourages the pursuit of an unearned lifestyle that plunges a country into a grotto of debt.
Proponents of a balanced budget amendment question the logic of Opponents concerning its effectiveness because policymakers would look for ways to evade its restrictions and engage in gimmicks that would meet the letter, but not the spirit, of the law. That such could be attempted is not denied; but taken to its logical conclusion, such reasoning would lead us to a proposition which says that society should have no laws because there will always be violators who will seek to evade them.
Some opposing academics assert that the issue is one of political will and that the political directorate can achieve the same results through budgetary policies that aim for a budgetary surplus without the need for prescriptive legislation.
Proponents are sympathetic to the sentiment of those academics. However, they argue that it is the very lack or inconsistency in the application of political will which perpetuates the scourge of deficit financing that threatens the orderly economic development and sustainability of a country and renders the need for a constitutional remedy obligatory. The absence of a constitutional prescription leaves the issue in the realm of political discretion which has proven to be ineffective.
Proponents also assert that planning a balanced budget helps governments to avoid excessive spending, engage in more vigorous costs/benefits analysis of projects and better allow them to prioritize resources on areas and services that require them the most. It also acts as a stimulus to support greater efficiency in the public sector. Furthermore, achieving a budget surplus can provide funds for emergencies
Significantly, in the case of Barbados, Proponents, among whom this writer stands, are of the view that it will create a shield for the political directorate against the sectional pressures from the electorate to perpetuate an expected unearned lifestyle financed by debt.
In our opinion, it will also, over time, assists in enhancing the entrepreneurial culture of Barbadians. At the state level it should also encourage a reorientation of the welfare system away from a model of mere handouts towards a more creative environment of selfactualization in appropriate circumstances.
It is a valid observation by Opponents that a constitutional requirement for a balanced budget could affect the ability of government to respond quickly and effectively to economic recessions and national emergencies.
It is for that reason, why Proponents, in the vein of this writer, advocate that the balance budget requirement for a particular fiscal period may be overridden or waived by a vote of both houses of parliament by a majority that would be necessary to amend the constitution. This would allow the Government to respond to recessions, major international economic disruptors that materially affect our economy, pandemics and natural disasters.
Therefore, for the reasons set forth in this presentation, the undersigned recommends that the Constitution of Barbados must be amended:
(a) To incorporate a provision that commencing from the 2025/26 fiscal year the Government be required to annually balance its Current Account, which expression shall include such other account(s) by any other designation, established or maintained for the purposes broadly outlined under the sub-caption of "Current Account'' in this presentation;
(b) To create a descriptive schedule of expenditures that may be financed under the borrowing provisions of the Capital Account
(c) That notwithstanding the provisions of (a) above, the balance budget requirement for a particular fiscal period may be overridden or waived by a vote of both houses of parliament by a majority that would be necessary to amend the constitution so as to allow the Government to respond to exigencies due to economic recessions, major international social or economic disruptors and domestic natural disasters, which materially affect the Barbados economy.
