It would seem that almost every time we approach the ending of a fiscal year, at least of late, there are these looming, almost boogeyman-like fears of a broke Central Government and talks about ballooning public debt. Add to the equation a pending election, and an ostensible rationing of diesel fuel, and the average citizen would be treated to the perfect storm.
Naturally, there is no need for this column to rehash the internal memo from the Financial Secretary and the subsequent clarification press release from Central Government. Instead, it is possibly more useful to discuss the underlying source of the deficit and debt concerns. In a nutshell, with all things being equal, the boogeyman talks returns fairly regularly because the economy is not growing fast enough to keep pace with expenditure growth.
Let’s begin with this infamous primary (non-interest) balance that seems to pop up every so often. Fundamentally, we know that the primary balance is the difference between total Revenues and Grants and Non-Interest Expenses in a given fiscal year. The idea behind this particular statistic is that as long as it is in surplus, there is a degree of cash-flow wiggle room to pay off the economy’s stock of debt. This is why the holders of Belize US-Dollar Bond (“the Super Bond”) called for a fiscal surplus target of 3 percent in FY 2017/18, and a 2 percent surplus for each subsequent period up to FY 2020/21. The idea here is that with cash surplus the government would be able to service its debts, including the bond, and in so doing reduce its stock of debt. Said differently, with all things being equal, this could help to reduce the much-talked-about debt-to-GDP ratio.
Now, thinking about this logically, it stands to reason that the reverse ought to be true. The existence of chronic fiscal deficits would likely lead to further accumulation debt, as deficits have to be financed via one form of borrowing or the other. So, the obvious question becomes this: how do we stay on the side of surplus and avoid deficits? The Inter-American Development Bank (IDB), in 2015 report, offered the following caveat:
“It is difficult to increase the primary surplus in the context of low or negative economic growth. Demands arising from population growth, compensation for inflation, and some built-in mechanisms—such as inertial increases in some aspects of the wage bill—make it difficult to restrain the nominal growth of government expenditure in Belize below 4 percent per annum. … Nominal GDP increases by 4 percent per annum, a rate that is roughly similar to the floor in the growth in expenditures. …If GDP growth instead averages 5 percent per annum purely the denominator effect of dividing debt by a larger GDP would cut the debt-to-GDP ratio to 72 percent by 2025 instead of 92%”.
Since then, the International Monetary Fund (IMF)’s Article IV Consultation showed that the debt-to-GDP ratio has moved up to about 96%. That’s only to be expected, as Belize’s real GDP growth continues to lag behind expenditure growth. And as the IDB study cited above pointed out “It is difficult to increase the primary surplus in the context of low or negative growth”.
From 2000 to 2016, Belize’s real GDP growth rate averaged about 3.9%. Of course, if a shorter timeframe is utilized—let’s say from 2004 to 2016—then the average is closer to 2.6 percent. For expenditure growth, the average under both those time periods are 4 percent and about 3 percent, respectively, thereby, outstripping the real growth rate. Thinking about it logically, if your income is growing at the same pace or slower than your expenditures, why—with all things being equal—should anyone expect to see a reversing trend in the debt-to-GDP ratio?
One of two things needs to happen: either the economy picks up the pace or the expenditures are cut. History, however, has shown that the latter suffers from rigidities built into the system, especially when looking at recurrent expenditure. Consequently, all eyes must remain on the growth option.
But therein lies the proverbial rub. Because government’s expenditure had grown over the last few years, the beginning of the FY 2017/18 saw several tax increases designed to “help” cover public expenses, and aid GoB in meeting the 3 percent surplus. At the same time, however, these measures also served to help deteriorate the very same business climate necessary for robust business and, by extension, economic growth.