The Budget

By G.A.Dwyer Astaphan

Up to the 1990’s, the formula for calculating our national debt had not included either the federally guaranteed portion of the NIA debt or the  Federal state enterprises such as SSMC, Port Authority(SCASPA), FBDC, etc. That did not make sense, and it was changed.

Over the years the Labour Government has done a lot of good for the country, and that has come at a price.

It is also true that taxpayers have had to pay a price for:
1.  the spate of  natural disasters between 1995 and 1999;
2.  the terrorist attack on the World Trade Centre on September 11th, 2001;
3.  the closure of the sugar industry in 2005;
4.  the global financial crisis (ongoing); and
5.  the CL Financial/British American collapse (also ongoing) which ranks among the worst man-made financial calamities ever to have directly impacted Kittitians and Nevisians, and our Social Security system, with $150 million or more vanishing from our midst through  insurance policies and annuities that are now possibly not worth the paper on which they are written. Life insurance and life savings gone!

In relation to the CLICO/BA fiasco, the International Monetary Fund (IMF) in its 2009 Article IV Report on St.Kitts & Nevis stated that “the regulatory framework for the non-banking financial sector is lax. This sector had been growing rapidly with the high-interest-rate deposit-taking activities of associated insurance companies. A clear red flag” (emphasis mine).

Now, given the challenges that Government has faced over the years, one can accept high a national debt and a high debt to GDP ratio. Yet nobody of sound  mind and conscience can  deny that a national debt of EC$2.75 billion and a debt-to-GDP ratio of 197% in 2005, 189% in 2006, 182% in 2007, 178% in 2008, 178% in 2009, and 180% presently, are unacceptably, unsustainably and dangerously high.

Yes, prudent and caring governance allows for the incurrence of debt in pursuit of the best interests of the people. However, it does not allow debt to reach such dangerous levels, or to remain there for so long. Especially in such a small and vulnerable economy like ours.

And any argument which relies on the changed method of calculating debt, or natural and man-made shocks, or Government’s social programs, or our Federation’s human development index in order to justify this continuing, high level of debt is specious and spurious. Indeed, it may be tantamount to an admission that those in charge are unable to improve the situation. That’s not a conclusion that I want to reach.

The truth is that apart from the obvious need to finance disaster mitigation as well as ongoing human development programs, there have been some bad decisions, and there has also been extravagance with the public purse. And from time to time in the mix, politics and patronage have trumped fiscal prudence, and at great cost.

According to the Minister of Finance in his Budget Address “debt service in the form of interest payment accounts for 24% of our Recurrent Expenditure, while 41% goes to personal emoluments, leaving the remaining 35% for Government’s programs.

Who, save a few, can survive on 35% of his or her income? Certainly, no nation can.

And the IMF Report stated:

“Debt service costs have increased about threefold in the last decade, and the Government in under increasing stress to meet debt service obligations. Liquidity risks posed by the large rollover needs of short-term debt have also risen in the current difficult climate. Interest payments alone represented 24% of total Government revenue in 2008, crowding out social and other development-related spending and leaving little room for maneuver to respond to adverse shocks….”

(One critical area of “social and other development-related spending” that seemed to get crowded out was National Security. No serious money could be found, barring the kind assistance from the Government of Mexico and, as ever, the Government of Taiwan, to build and fix up Police stations, Fire stations, Defence Force facilities, Police Training Centre, to build a new Prison, to procure equipment, to facilitate informants and witnesses, and to improve conditions generally. Hopefully, that serious money can now be found).

And how did all of this happen?

In a nutshell, as the debt rose, Government found it increasingly difficult to access moderately priced funding abroad.

So in its quest to do what it felt it had to do, and feeling somewhat cornered, Government saw no alternative but to turn to the local financial sector, mostly the National Bank, where it was able to get money, either by loan or overdraft, but at higher interest rates, which caused the debt to spiral even more.

And in incurring this massive local debt, Government had to offer up some 4,700 acres of sugar lands (so states the IMF Report) as security with the National Bank. More crowding out.

This massive local debt has brought some vulnerability to our nation’s financial sector, to the extent that “if the economic slowdown deepens further, the adverse impact could spread to the banking sector through a rise of non-performing loans” (IMF Report).

Meanwhile, as the ‘borrow local’ drive continued, domestic debt (from the loans and overdraft) rose from about 45% of GDP in 2000 to 120% of GDP in 2006.

National Bank holds the bulk of Government’s local debt. It also holds much of Social Security’s money, on which it gives Social Security some interest, and which it uses to lend to Government. This means that Government is borrowing money at a higher rate of interest than it would, had it borrowed directly from Social Security.

In addition, Social Security has been investing in real estate developments and looking to very carefully broaden its investment portfolio, which on the face of it may be a good thing. Except that as a result of it less money will become available to the National Bank to on-lend to Government (and to other borrowers), which can have consequences.

But according to  the IMF, such consequences can be averted if Social Security puts a temporary hold on its real estate development activities, and lends money directly to Government, in the process getting its desired rate of interest on return and at the same time saving Government the additional interest costs.

Such a scenario can help out the Government, but, as you can see, it also fetters Social Security in its quest to broaden and solidify its investment portfolio, and it deprives the National Bank of money which it can use to grow wealth.

That is not a healthy situation. What we need is a situation which serves the best interests of all three institutions, given their vital importance to the nation.

Meanwhile, let us beg God to protect us from a crisis over the next 4-5 years, so that we might be able to prevent the debt and the debt-to-GDP ratio from soaring to even more dangerous heights.

A brief look at the hotel sector shows that 250 or more hotel rooms in St.Kitts (Marriott’s staff quarters, Royal St.Kitts, Sugar Bay, Bird Rock Beach, and possibly Frigate Bay Resort) are occupied by students of the local universities. As a result, home owners are beginning to look at their empty apartments and worrying.

So how many of the 2,000 plus seats on international flights landing at RLB Airport weekly are filled? Where are the visitors staying, if the hotel occupancy rates are so low? Why is the occupancy rate so low? How much are we paying in airlift? How much do we owe the airlines?

At the height of the tourist season in February, Marriott staff was working three and four days a week. Other hotels are on the brink of closure. Layoffs have been taking place across the economy, and more are expected. Consumption of, and trading in, goods and services are being negatively affected. Business loans and home loans are under threat of going sour at a rate above acceptable levels. And so on. And, of course, Government revenues fall.

So what are the measures to be taken?

If you have been following IMF Article IV Reports over time, you will note that there has been at least ‘voiced’ general agreement for several years between the IMF and Government on certain measures, including VAT. So it’s basically the politics that has held back implementation. And not so much the politics that has to do with public debate and consensus, but perhaps more the politics that has to do with seeking the right time to introduce the measures.

The Minister stated in his Budget Address that public consultations on VAT would start in April, and that VAT legislation would be introduced in November.

Now for such an important matter, the Minister may appear to be rushing the country. But he has a problem. He has run out of fiscal space, he has run out of options, and he has run out of time. He may even have lost his vision. And assuming that his coalition Government has the goodwill and support of 60% of Kittitians (and maybe 45% of Nevisians) following the recent elections, he may feel that this is his only time.

The agreed (Government and IMF) goal is to:
-accelerate structural reform, including ensuring that land sales receipts equal at least 3% of GDP, and making it easier for people to do business with Government and for foreign investors to enter our economy;
-Introduce VAT this year (I see no intention whatsoever here to reduce the tax base. Indeed, the opposite may well happen, which could lead to problems);
-Tighten up on tax concessions;
-Collect arrears of taxes, electricity, rentals and other collectibles due to government, its agencies and corporations (I think that this will be tough to effect, because people already have less money, and because there are friends of Government who have not been forced to pay up the  massive debts that they owe to Government);
-Corporatize electricity and water (which could lead to increased costs to consumers);
-Cap the growth in the Government employment and keep its wage bill in line with inflation;
-Cut borrowing by public enterprises (I believe Government should privatize the management of the Ports Authority which is a ‘basket case’ right now);
-Finance capital expenditure solely by funds from the European Union’s Sugar Grant, with disbursements of 2-4% of annual GDP between 2009 and 2014 (this will require special prioritization and discipline by Government, and it could cause serious political fallout);
-Enforce the Finance Administration Act (the IMF has never stopped complaining about the poor financial accounting of statutory bodies, and this will test Government’s will);
Strictly control public expenditure (is the discipline there, and will the example be set from the top?);
Intensify Government’s privatization process (I say sell or long-lease the Government buildings downtown and let private enterprises develop commercial space and grow wealth that way. In the meanwhile, construct a complex at Fort Thomas and, if necessary, another at the Stanford Property next to the airport, and locate all major Government offices there. It’s time to stop wasting millions of dollars a year by renting all of that space in Basseterre);
Stream-line the public wage bill (I am reading this to include more than just sending home the 55-year olds); and
Introduce Personal Income Tax (PIT), and if this is politically difficult to sell, then do it by broadening the scope of the Social Services Levy Act to include non-wage and non-salary income/revenue (the idea here, of course, is to gather more revenue, and I don’t know how far Government is prepared to go on this one).

These are not easy measures. And the next 5-10 years will not be at all easy for the people of St.Kitts & Nevis.

I must say that I thought the Minister’s announcement of a new $1,000.00 Environmental Levy on cars up to 2 years old cruelly exposed the myth that the VAT would bring, or be accompanied by, no additional burdens on taxpayers. And we ought not to be surprised if additional categories for cars 3-4 years old, and so on, are introduced. .

The Environmental Levy was always a callous, cruel, bad and unnecessary tax, and adding this new twist to it, rather than dumping the whole thing, only piles insult onto injury.

This is not visionary and enlightened leadership.

But you know, there can never be visionary and enlightened leaders if there are not enough visionary and enlightened followers. If we want to be a vibrant democracy, and a nation which is serious about holding ourselves and our leaders to higher standards, then it is we, the followers, who must take the lead and become proactive as it is we, not the leaders, who must define and drive the process. And voting is only a part of it.

This is an opportunity, and indeed an obligation, in this time of crisis, for the followers, to turn the tables around, and to turn our nation in the right direction. Heaven help us if we don’t.

And as we do these things, we must now also insist on Constitutional reform and on legislation related to Integrity in Public Life, Freedom of Information, the Public Service, Government Boards and Committees, and Electoral Reform.