In Economics, austerity refers to a policy of deficit cutting by lowering spending via a reduction in the amount of benefits and public services provided. Austerity policies are often used by governments to try to reduce their deficit spending and are sometimes coupled with increases in taxes to demonstrate long-term fiscal solvency to creditors. Austerity is imposed by the International Monetary Fund (IMF) on Nations which find themselves in economic and financial difficulties. The advent of the Fund into the economic and financial life of this Federation was the result of reckless economic and financial policies and programs as practiced by the Federal Government. The result was an unsustainable National Debt of $3billion and an accumulative budget deficit of EC$650 million (Director of Audit Report).
Austerity in the context of St. Kitts and Nevis as imposed according to the IMF guidelines has resulted in a reduction Government services; a reduction in Government expenditure on education, health, social services and infrastructure. Most significant has been the 80 percent increase in electricity rates which impacted all sectors of the community but the heaviest burden fell on the poor and needy many of whom are without electricity and water today.
The implementation of the Value Added tax in a period of recession has only exacerbated the situation as the prices of goods and services escalated and have continued to increase daily. The Eastern Caribbean Central Bank’s Economic and Financial Review 2011 on St. Kitts and Nevis stated, inter alia, “preliminary data suggests that economic activity in St. Kitts and Nevis declined for a third consecutive year in 2011. Real GDP contracted by 2 percent in 2011 compared with 2.7 percent in 2010. This decline resulted from a contraction in the construction, retail, wholesale, tourism and real estate”.
It is instructive that the IMF report dated October 5 2012 whilst applauding the Government for its stringent application of its guidelines and meeting the targets as established, however downgraded the economic recovery effort of this Federation from 0 to minus 0.7 percent. Essentially this economy is slipping further into recession with no possible end in sight. Even in such a precarious state of affairs the IMF is urging the Government to “broaden the TAX base” which can only mean the imposition of another form of income tax such as an increase in the social service levy.
Any further inroads on disposable income will increase Government’s revenue in the very short term but will reduce aggregate demand in the economy even further. What is required is not another attack on the consumer who presently is barely breaking even. Poverty levels have increased since the 2007 Poverty Assessment Report by the Caribbean Development Bank, which indicated that 23.4% of Nationals are poor that is they can only afford one meal per day. Since that report the sugar industry has closed; the tourism sector has dissipated and construction levels have faltered. Remittances from abroad are virtually non-existent. Thus, those mostly in need continue to feel the brunt of the recession.
The Federal Government has tried to reduce its debt burden by instituting a land for debt swap with the National Bank, which it owed EC$900 million. It appears that most of this indebtedness was unsecured and the Bank is now putting its house in order. This level of fiduciary irresponsibility is not evident in any other country in the Western hemisphere. It is inconceivable that the National Bank actually advanced EC$500 million to the Government without adequate security.
Most of that debt was incurred for political purposes for example to pay double salaries and to meet budget deficits especially at election time. The Bank had a duty of care, which it executed casually. This action by the Government has sent shock waves throughout the Nation since it became evident that the ordinary citizen will no longer be able to afford to purchase land in the country of their birth, at the high prices which will be placed on these lands as the National Bank seeks to recover its funds. The principles under which the lands were acquired and purchased in the name of the people of this Nation are blowing in the wind.
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