Fiscal Responsibility Legislation?

ON February 4, 2016, US Congressman Rod Blum introduced a Bill in the 114th Congress of the United States entitled the Fiscal Responsibility Act of 2016. The Act provided for the reduction of 5% of salaries of the entire Congress whenever there was a fiscal deficit and for the next year that the deficit continues that reduction increases to 10%.

I found the proposed legislation most interesting and a very important measure of failure of the legislators. While the deduction may not affect the livelihoods of the politicians, it surely would say that you have failed the people.

Grenada introduced another format of Fiscal Responsibility Legislation which the IMF has lauded as having a significant effect on the economy of Grenada. Grenada, with its 15-0 majority, had the parliamentary muscle to push through this law to save their economy.

Economic Development Minister Oliver Joseph of Grenada has been quoted as saying that “only two other CARICOM member states have it and a lot of member states are refusing to introduce it because it introduces strict discipline… (the bill) says what your debt to GDP ratio should be, what your primary balance should be, if you have to give any increase in the wage bill, what percentage of the GDP should be used, all these things are set out in law…It’s there to ensure that we are guided and have fiscal prudence and that everything we do is done in a transparent, accountable manner and that we get the result that would help the country’’.

One of the strengths of the John Compton era was fiscal prudence, a phenomenon which has disappeared from governance in the last 21 years. Sir John would constantly make the point that you cannot spend what you don’t have and was a strong believer in balanced budgets.

We are now in a fiscal position where 28% of our revenue goes to debt servicing. We have been running up short-term debts to the point where we have debt payments of up to $ 850 million due in the financial year 2017/2018. Our economy has grown at an average of 1.55 % over the last 20 years, 0.94% over the last 10 years and 0.4 % over the last 5 years. Our deficit has increased by 41% over the last financial year. Our expenditure is outstripping our revenue by 3.5% every year and climbing.

The above numbers are indeed shocking and require disruptive transformation in our thinking and approach going forward. While the emotive comments are flowing non-stop on the government telegraphing the termination of the various short-term employment programmes, we have to ask ourselves: should we be borrowing money at 6% and 7% interest to create short-term employment? We have to start by creating a balanced budget and to take that bold decision that there can be no more deficits. One would hope that such disruptive thinking would be evident in the Minister of Finance’s Budget Address.

The IMF recently released a Working Paper entitled “Tax Administration Reforms in the Caribbean: Challenges, Achievements, and Next Steps”.

The study looked at the VAT systems in twenty Caribbean countries, including Saint Lucia, and analysed the VAT performance in the region. The conclusion was that Saint Lucia registered the lowest increase in revenue (- 0.9% of GDP) after implementation of VAT, with Grenada actually registering a decrease in revenue.

This failure was primarily due to the departure of VAT Implementation from being a broad-based tax with limited exemptions, a single rate and zero-rating confined to exports. For Saint Lucia, the cost of VAT incentives is estimated at 4.3 % of GDP.

The Working Paper stated: “Initially intended to be a broad-based, single rate tax, the VAT’s legislation has deviated from these objectives. Zero-rating of domestic supplies, generous exemptions, lower rating of tourism activities, and low registration thresholds, have affected its performance negatively and compromised administrative efforts.”

The Working Paper goes further in providing the evidence that the problem has been the poor implementation of the VAT and not the VAT itself, and advised that governments should move to strengthen it and return to the core intent of the tax. The Working Paper states:

“VAT productivity, generally expressed by its “C-efficiency” (the ratio of actual VAT collection to the potential VAT, if all domestic consumption were taxed at the standard rate), is uneven in the region and, on average, slightly below international standards. It ranges from 0.36 in St. Lucia to 0.79 in the Bahamas, with an average of 0.54 in the region compared to 0.55 in OECD countries, 0.59 in Europe, and 0.64 in Asia and Pacific. A low productivity ratio indicates erosion of the tax base, exemptions, excessive zero-rating, concessional rates, evasion, and weak enforcement.’’

We have a problem with our VAT that will not be fixed by the reduction to 12.5%. We have a problem with our fiscal deficit, which will not be fixed by burying our heads and kicking the economic ‘tin’ further down the road. It has to be fixed now and the bold and decisive measures must be implanted in this financial year despite the political risks.