The BCCI’s Position in Budget Consultation Part II

The BCCI’s Position in Budget Consultation Part II

Contributed by the BCCI

In the previous installment of the Business Perspective (BP) Column we had started dissecting the Belize Chamber of Commerce and Industry (BCCI)’s position on certain matters related to the ongoing budget consultations. Of course, our last conversation on this matter had to begin with the matter of the wage bill, as this singular component of the ongoing consultation has a way of becoming the center of attention—and for good reason.

Considering that we had dedicated the immediately preceding BP Column to this topic, we see no reason to reiterate things here, except to remind readers that the BCCI’s official mission statement begins like this: “To foster the economic growth and SOCIAL WELL BEING of the nation through the free enterprise system at all levels.” Our Vision carries a related theme: “To contribute to the SUSTAINABLE DEVELOPMENT of Belize through effective representation of the business community.”

As the reader may be aware, “Sustainable Development” (SD) is a compact term that speaks to four broad SD “pillars”; namely, the economic, social, environmental, and institutional. Anyone who is, therefore, familiar with Belize’s Growth and Sustainable Development Strategy (GSDS)—which itself is informed by the Sustainable Development Goals (SDGs)—would recall that all stakeholders who contributed to this plan have effectively signed on to ensuring adequate social protections and assistance.

Clearly, at the time when the GSDS was put together, no one was expecting a COVID 19-type recession that would have pushed down our economy by 14% according to preliminary estimates from the SIB. No one could have fathomed that Government Revenues—which averages about 30% of that same GDP statistic that just plummeted—would have fallen off as much as it has due to a depressed economy. It’s an unusual time in our economic history and, therefore, it requires unusual and expanded thinking as it pertains to all stakeholders’ commitments under the aforementioned economic and the social pillars.

It is for this reason one could not easily ignore the advice of the likes of the World Bank (WB) to governments that in these “unusual” economic times—which the WB classifies as the “Emergency Phase”—even the wage bill could take on the shape of “an effective safety net for households to complement the various business and citizen support schemes that many governments have implemented.”

ON THE OTHER HAND: THERE’s THE LOCAL CONTEXT

Okay, with those kinds of commitments in mind, even the WB would remind of the importance of the “local contexts”. On the one hand, the government and civil society have committed to ensuring sustainable development, which includes its economic AND social pillars. Yet, on the other hand, the fiscal position has (further) deteriorated due to an unholy combination of the current economic fallout triggered by exogenous factors (climatological and pandemic-related) and the pre-COVID elevated debt levels. Every government faced with this mix of circumstances must engage in a very “sensitive” balancing act, especially one that has limits on its monetary autonomy due to the added responsibility of managing a fixed-exchange rate regime.

Let’s start here with the fiscal position. Tax Revenues generally account for close to 90% of the government’s total revenues. Typically, total revenues average about 30% of GDP. However, if GDP declines by 14%, then what does that mean for those tax revenues? All things being equal, it would mean that revenues—which were estimated at about $1.15 billion—would naturally slip to about $970 million, which would have represented approximately a 17% drop.

But “all things are not equal” during these COVID times, and the official reports coming out of the Ministry of Finance (MoF) say that government revenues fell by roughly twice that amount: That is, by about 30%, thereby, placing revenues in the vicinity of $825 million. This latter revenue figure is further evidenced by the fact that the MoF says that its wage bill of $684 million accounts for 83 cents of every dollar of revenue.

If we recall that budgeted revenues for Fiscal Year 2020/21 was $1.15 billion, then a drop to about $825 million is a revenue shortfall of more than $320 million. And while revenues have plunged, expenditures—with added responsibilities brought on by these COVID times—would have, at the very least, remained around the budgeted $1.33 billion; thus, easily yielding a 2020 deficit (and by extension additional public sector debt) of more than $500 million.

Now, the reasonable person would accept that most of that deficit was unavailable. Even the usually fiscally conservative International Monetary Fund (IMF) had gone on record to recommend that governments should resist the temptation to tighten their fiscal policies too soon. Writing in a November 2020 piece, entitled “The Crisis is Not Over, Keep Spending (Wisely)”, the Fund’s writers reiterated this point saying: “Support should be maintained throughout the crisis. A premature withdrawal of support would impose further harm on livelihoods and heighten the likelihood of widespread bankruptcies, which in turn could jeopardize the recovery. … Where possible, economies should therefore resist tightening fiscal policy too early and instead ensure continued support for healthcare, individuals, and firms.”

However, the advice didn’t stop there. They added: “In economies constrained in their ability to spend, a reprioritization of spending may be warranted to protect the most vulnerable.” This returns us to two things: First, we are returned to Sustainable Development’s “social pillar” that we spoke of earlier. Second, we are now returned to that part of the BCCI’s letter that said that if the government makes any cut(s), “it is also important for us and the public to be informed as to the precise purpose to which the resultant fiscal savings shall be targeted.” Tied to our overarching mission and vision, the first and the second points are not mutually exclusive, and, therefore, all stakeholders must be clear as to what would the savings be repurposed.

The National Debt and Recovery

The size of the national debt isn’t lost on us either. It is a fact that Belize entered into this recession with debt well above 90% (with some IMF estimates placing it at 105% in 2019). To put it succinctly, this pre-COVID debt level added to our economy’s vulnerabilities to external shocks like present pandemic-induced downturn.

Anyone who had perused the BCCI’s Sustainability Agenda 2020/21 (commonly dubbed the “BCCI Manifesto”) would know that we have been advocating for Government to adopt a Fiscal Policy Rule that, among other things, targets the prudential benchmark of a 60% debt-to-GDP ratio. The wisdom of the benchmark is simple from vulnerability-resilience vantage point: A country with high debt—especially high external (foreign-currency) debt—would be less able to withstand and recover from exogenous shocks.

Nevertheless, for more than two decades, government officials have taken a “liberal” stance on this issue, despite sound advice from domestic and international partners. As a result, we entered this pandemic with $3.8 billion in total (domestic and external) debt, and by November 2020, our debt ratio was already hovering around 129% of GDP (slightly reduced estimate if the recent figures of a 14% decline from SIB are utilized).

However, there are usually only two general categories of responsible options on the table when an economy finds itself in this predicament: We either grow the economy faster or we focus on fiscal tightening. (There is a third category that relates to improving the efficiency of tax collections, but that is a point to return to later).

Speaking to the ‘economic growth’ option, we see this fact in both the IMF’s and WB’s advisories: governments’ fiscal policy positions are key variables in the “recovery” equation. Government support remains a pivotal determinant as to the quality of the recovery that Belize will witness in the short and medium term. What does this have to do with the debt? A lot. The fact is that as the economy recovers so does government revenues. Simultaneously, expenditure pressures for government support should also begin to decline as people begin to return to work. These twin occurrences would begin to narrow the deficit.

To Its Credit

As the preceding conversation has sought to outline within a limited space, the national budget and all its moving parts has to take socio-macroeconomic considerations into account. As the saying goes, ‘Heavy is the head that wears the crown’, because every decision has its benefits and associated costs. Every government is called upon to take these variables and more (in our case the “and more” includes special attention to our exchange rate peg) into account. Therefore, to its credit, the government is doing well to consult with stakeholders. It will also do well to ensure that it is appropriately weighing how its decisions today could impact the recovery while it simultaneously must recall its Sustainable Development (SD) commitments.

This balancing act is not an easy and straightforward task for any country’s government that has a healthy understanding of how its decisions carry socio-macro implications in both the short, medium or long term. Therefore, the only thing that can be truly expected of any administration is that it takes the time to adequately analyze and weigh each option’s possible ramifications.