Fiscal Blunders in Barbados Spell Gloom and Doom

Barbados is begging for handouts in the form of debt relief. This is nothing new for countries in the Caribbean region. Indeed, since 2010, St. Kitts and Nevis, Antigua and Barbuda, Belize, Grenada, and Jamaica have all been hit by financial distress and debt defaults. This distress can be laid at the feet of fiscal mismanagement and blunders.

In Barbados, the newly elected Prime Minister Mia Mottley at least had the courage to recently utter a little-known truth. Once undisclosed liabilities are added to the Barbados fiscal tab, its overall debt as a percent of GDP surges from 137% to 175%.

A bleeding budget and fiscal deficits have resulted in Barbados’ mountain of debt. The biggest source of the bleeding has been transfers to state-owned enterprises (SOEs). The largest expenditure category in the budget are “transfers”, with a whopping 60% of the total transfers going to SOE zombies.

There is only one proven way to stop the budget bleeding caused by the SOEs. Barbados should privatize its zombies.

But, though privatization may stop some of the budget’s hemorrhaging, it won’t stop all of it. To save the patient, fiscal order and transparency must be established.

Barbados currently lacks the fiscal institutions to control the budget deficits and government spending. To put its fiscal house in order, Barbados’ government should publish a national set of accounts. These should include a balance sheet of its assets and liabilities and an accrual-based annual operating statement of income and expenses. These financial statements should meet international accounting standards and should be subject to an independent audit.

Just what is an accrual-based operating statement? At present, accounts in Barbados are kept on a crude cash basis. Revenues and expenditures are recorded when cash is received or paid out. With accrual accounting, spending and revenues are recorded when they are incurred, regardless of when the money actually changes hands. Accrual accounting gives a much more accurate picture of the realities and avoids the many financial tricks that politicians can play with cash accounting. For example, under cash accounting, politicians can promise pensions for future retirees, but since no money is paid until people retire, there are no budgeted costs under cash accounting until the pensions are paid. With accrual accounting, the promises to pay future pensions would appear in the government’s accounts when the promises for future obligations are made. Consequently, under accrual accounting, the government cannot distort the magnitude of its spending obligations.

Do any countries use accrual accounting for their public accounts? Yes. For instance, New Zealand started to use it in 1989. As a result, New Zealand presents a far more transparent and honest picture of its government operations than do most other governments. This has allowed New Zealand to make more informed decisions and control its budgets more effectively.

In addition to rigorous and transparent accounts, supermajority voting should be established for important fiscal decisions. Many countries do require supermajority voting for important decisions. Such a voting rule protects the minority from the potential tyranny of a simple majority.

The arithmetic of the budget shows us that two new fiscal rules would be sufficient to control the scope and scale of the government and protect minority interests. Total outlays minus total receipts equals the deficit, which in turn equals the increase in the total outstanding debt. Rules that limit any two of these variables (total outlays, total receipts, or the deficit) would limit the third variable. Which two variables should be limited?

The easiest way to answer the question about which two variables should be limited by supermajority voting rules is to sketch an amendment to the Barbadian constitution:

Section 1. The total Barbadian debt may increase only by the approval of two-thirds of the members of the House of Assembly and the Senate.

Section 2. Any bill to levy a new tax or increase the rate or base of an existing tax shall become law only by approval of two-thirds of the members of the House of Assembly and the Senate.

Section 3. The above two sections of this amendment shall be suspended in any fiscal year during which a declaration of war is in effect.

The adoption of these three rules would generate a significant confidence shock in Barbados. And, with that, an investment boom and prosperity would follow.

Steve Hanke is a professor of applied economics at The Johns Hopkins University and senior fellow at the Cato Institute.