Government borrowing

by CI Martin

A critical issue underlying this year’s budget is deficit financing. Deficit financing simply means the Government is spending more than the revenue it is able to raise. It is, therefore, borrowing. Whether this is good or bad depends on three factors: the amount that is being borrowed, the purpose for which it is being borrowed and the sources from which the loans come.

A rich country can afford to borrow more than a poor one. Absolute figures are, therefore, meaningless, so that borrowings are usually expressed as a percentage of a country’s total income, that is, its GDP.

Seventy per cent is regarded as a prudent figure. The ECCB has set the ambitious target of 60 per cent for OECS territories. These are not hard and fast rules. There are sound economies with high debt ratios, for example, Japan 228 per cent, Singapore 111 per cent and the UK 84 per cent. SVG is about 80 per cent. We have to ensure that the debt does not become too large and its servicing takes up so much revenue that there is not enough left to, for instance, maintain the roads.

We turn now to the purposes for which the loans are used. If a Government borrows and uses the money to pay public servants who then do not work and help to make the economy function more efficiently, this could make the fiscal situation worse.The Government now has to borrow more to continue to pay those public servants and to service the debts it has incurred to hire them. This is probably why the IMF has suggested that the Government make an effort to contain the public sector wage-bill. It is clear from the Budget Debate that both Government and Opposition are fully cognizant of the problem. In his winding up, the Prime Minister discussed extensively the educated police recruit.The ever-watchful Camillo ruminated about us becoming perennial beggars who eventually get snubbed.

On the contrary, if the loans are used to establish roads, ports, airports and power plants, then this is regarded as very sound. The economy is being made ready to grow. Our debt profile shows that some 50 per cent of the loans has been spent on these items. The results are not difficult to observe. Our new airport, for instance, impacts on the economy not once, but twice, in the construction phase and in the operation phase. During construction people were employed, trucks hired and goods bought. The project enabled us to more easily cope with the recession. Common sense alone would suggest that the constructing of such a large project in an economy as small as ours would have immediate economic benefits. This sort of strategy was promulgated nearly 100 years ago by Lord Keynes, the greatest economist of all time, who used it to get the world out of the Great Depression. In the operation phase, we look forward to increases in tourism, agricultural exports and remittances. These benefits are, by their very nature, more for the long run than those for construction. It does not mean AIA is more important than IADC.

Finally, we come to our lenders. A distinction is usually made between loans from local sources and those from abroad. One reason for this is that it is often easier to deal with local loans. You can borrow from the NIS to pay NIS. It is called rolling over. If you borrow from international organizations, such as investment banks and mutual funds, it is not so easy to do so. They can get very nasty. Fortunately, our foreign loans are from organizations and countries that have set out to help us develop. They include the Caribbean Developent Bank (CDB), Venezuela and Taiwan. Indeed, CDB, our biggest lender, was set up specifically to help the small islands. From the very outset of the Caribbean integration process, we all recognized that it was the big territories who would benefit most. Hence the CDB was one of the instruments which was created to, among other things, help us keep up. The Bank is doing its job.

While we must be very careful about our public debt, we need not be scared.