Poor fiscal management killing our economies

Thursday, April 12, 2012    

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IN recent years, several technical papers from the International Monetary Fund (IMF) have pointed to the enormous debt burden of Caribbean Community (Caricom) countries and identified poor fiscal management as a major contributing factor.

Since the problem of fiscal management is not new and has persisted, it is reasonable to expect that the responsible governments would have implemented remedial action. The empirical evidence suggests that the governments in the region need to do more to improve their fiscal management. Jamaica is a vivid example, but is not alone.

For fiscal management to improve the problem has to be tackled on both the revenue and expenditure sides of the ledger. On the revenue side, taxation policy remains back of the envelope alchemy rather than the application of economic science. Many of the smallest economies have been too slow to transform their taxation models from revenue based on taxing imports to a system based on sales tax and income tax.

Admittedly, broadening the tax base is not easy in a stagnant global economy and in small undiversified developing economies with large informal sectors, but the effort has not been enough. The reasons which account for inadequate effort are the generosity of developed-country donors in providing aid and the excessive borrowing.

There are limits to borrowing and several countries in the region are approaching the manageable ceiling and some have had to restructure their debt, most recently St Kitts. Foreign aid declines each day for the middleincome countries of Caricom, indeed aid to the least developed countries dropped in 2011 for the first time in 20 years.

All this points to the need for better management of expenditure through improved budget practices, but in this regard the region is doing a poor job. Interestingly, the Caricom states are the least improved in the hemisphere and the countries with better budget practices are experiencing higher growth than those in our region.

The lesson to be learnt is that better fiscal management does not come after development, it is a prerequisite for macroeconomic stability, resilience to external shocks and economic growth.

A survey of countries in Latin America and the Caribbean (LAC) implementing a system of results-based budgeting which is the core of an approach called “managing for development results” shows Caricom lagging behind. Of 25 LAC countries, eight of the bottom ten are in Caricom, with Jamaica at number 18. On a scale which goes up to 5 no Caricom country exceeds 1.0 and Jamaica has a score of 0.75. The report concludes that countries below 1.0, “have not even begun to make the transition toward constructing the necessary capacity for results-based budgeting”.

There is much that affects small developing economies, such as those in Caricom, but fiscal management is not one of those exogenous factors. Results-based budgeting can help to improve fiscal management and there is free technical assistance available. There is no excuse for the failure to improve fiscal management in Caricom countries.





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