Friday, May 18, 2012

Growth will not come from the budget

THE Government has presented the 2012/13 estimates of expenditure, and it is reflective of the serious fiscal crisis that faces the country. About a month ago I wrote that "...the fiscal crisis we face today is maybe the toughest one we have ever had to face". And the fact that 54 per cent of the $612 billion budget is allocated to debt servicing is evidence of this. This also means that the amount of money left for expenditure in the local economy is just $276 billion.

Anyone who understood what was facing us is certainly not surprised by this very tight budget, especially as we all know that it is essential for us to satisfy the IMF and the perception of the creditors from whom we will have to, in very short order, approach for loans.

Even with this tight budget, though, the Government did the right thing by reallocating some of the funds to deal with the JEEP programme, which is well needed to provide income for those with the highest propensity to spend. However, the budget presented will not be enough to promote the much needed economic stimulus. The problem of course is that our refusal to have accepted that the economy needed stimulus over the past two years has resulted in an economy that has contracted over that period.

I think even the previous naysayers must now agree that Maynard Keynes was right when he indicated how necessary fiscal stimulus is in times of economic recession. As an example, Europe could continue to face difficulties well beyond when the US has fully recovered because of the mistake they made by relying solely on austerity measures.

As a result of our policies, and the resultant need to tighten the fiscal budget, the fiscal accounts are losing its relevance in terms of being able to help generate growth in the economy. This is why the economy is just projected to grow between zero and one per cent this fiscal year.

My own view though, is that even with the current fiscal situation, the economy can still grow within the two to three per cent range if we are serious. For this to happen though it is going to require a change in the way that we think about sustainable development. One of the first changes in thinking is that we need to understand that the preoccupation with the fiscal accounts, to the detriment of the economy and external account, must change.

In fact, the first thing we need to recognise is that any significant tax package will more than likely cause a further contraction in the economy. This may be the way that those who craft the budget are looking, but it has not worked before, and therefore more than likely will not work again. If we ignore logic for fiscal expediency, then we could find ourselves at this juncture again next year.

If, however, logic does not prevail and there are going to be new taxes, then logic again dictates that it would be better to reduce the tax at the levels where there is the highest propensity to spend in the local economy and place the tax burden where there is a higher propensity to save, or spend externally. What would be practically translated into is reducing the PAYE rate, while increasing the consumption tax on imported items that are locally produced, as an example. Even this sort of approach is not sustainable, however, as it could result in capital moving offshore.

The corner that we have painted ourselves into, however, is one where we had no option but to present this type of budget. The result of our failed fiscal policies over the decades, and the absence of policies that enables the market towards productivity.

While we recognise that the budget will not assist with any growth in the economy this year, there are three initiatives that could help to significantly stimulate the economy. These are:

* The move by Minister Paulwell to bring greater competitiveness to the energy sector, while at the same time bringing greater awareness to the benefits of going with renewable energy primarily at residences. This is something that I have been pushing for over two years and I am happy to see that the current minister is taking this seriously, as because of the past reluctance to properly embrace this, it has cost the country significant amounts of foreign exchange;

* The three mega-projects being introduced by Dr Davies, if they can get past the bureaucracy that has stifled so much of our progress, will definitely provide a significant stimulus to the economy; and

* The push by the Transport Ministry to bring some order to the transportation system has the potential of providing significant savings to the energy bill and increasing productive hours. This can easily happen if we do what is necessary to properly structure and realise the benefits from the transport system.

So while the projection is for the economy to grow between zero and one per cent, I think that this view of how the economy will perform is really restricted by the capacity of those looking at the economy to think outside of what exists today. If we do a little thinking, and acting, outside of the box, it is my view that we can see two to three per cent growth. But we must first have the will to do what is necessary to achieve this.

Private-Public Hospital (PPH)

Only this week I was at a private hospital that I'd had a bad experience with late last year. Again I had another bad experience, which made me wonder if it wouldn't have been better for the patient to have gone to the University Hospital, or even KPH.

It seems as if this hospital is taking the Public-Private Partnership (PPP) thing to another level and is now touting the concept of PPH, as the wait to see a doctor topped two hours at this newly crowned PPH. The only difference is that the cost of the PPH is more than the pure public hospital, even though the wait time is the same or worse.


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