The job: turning decline into growth

Finance Minister Larry Howai is clear. “A judicious mix of stimulus measures to move the economy forward…at the same time…identifying austerity measures to get the best value for money,” states the minister, in giving the population some hint as to the general approach of his first budget. After three years of negative economic growth, with annual budget deficits reaching over $7 billion; frankly, it is the only option for the minister.

The Minister of Finance has to cut unnecessary and wasteful spending and find new sources of income in an international economy that is into its fifth year of decline. So the projected approach is fine. The trick lies in where is the spending to be cut and from what? And most importantly, what are the measures Mr Howai will identify to turn the three years of decline into positive growth that can be sustainable?

Interestingly, Mr Howai chose to make mention of the austerity measures at a forum of the International Monetary Fund: was he attempting to impress upon the fund officials that the ministry will be responsible and take its own medicine? Despite speculation in the direction of the minister looking to an IMF balance-of-payments loan, given the country’s favourable export earnings, its relatively large quantity of foreign reserves and the fact that it has reserves to pay for more that 12 months of imports, a BOP agreement is not an option.

However, the Minister of Finance probably wanted to convince the IMF officials that his government is capable of swallowing IMF-type medicine, before it is given in the future on an IMF prescription pad. A cutback on transfers to inefficient state enterprises, on social welfare programmes—as far as that is possible without negative fall-out—and selling off state enterprises which have no strategic purpose are possibilities. It is not reasonable to expect Mr Howai to have had sufficient time for a full assessment of the stock of state enterprises, but it is a direction he must focus on in time.

Cuts in expenditure on the Gate programme, especially on students who are not passing their exams, are sure to come. However, can the Government simply put 2,000 or so young people out in the cold without severe social implications?
The cutback on the petrol subsidy may very well start this year. However, it must be accompanied by sophisticated measures to prevent a spiral of price increases in the economy.  

If the minister and the Government are tempted to freeze the salaries of public servants and to attempt to do so unilaterally, they must be prepared for trade unions which are already on the warpath. Dialogue and tripartite agreements would be a far more sensible approach. But in addition to other measures, including tax increases on targeted luxury items, the major area of savings for the minister to focus on are ranked for him by the Global Competitiveness Report 2012–2013.

“Inefficient Government Bureaucracy, Crime and Theft, Poor Work Ethic in the Labour Force, and Corruption” are listed by the report as the four most “Most Problematic Factors for Doing Business” in this country. For instance, Mr Howai has to resist subsidising the election campaigns of the parties to the tune of an annual $410 million—$1.2 billion over the next three years—with the proposed grant to the MPs for so-called constituency projects—a slush fund for corruption and nepotism.

But most importantly, Mr Howai must recognise and admit that not one of the areas of growth identified by his predecessor has got any further than last year’s budget statement. Ultimately, therefore, the economy needs viable and sustainable economic projects. Anything else is purely book-keeping.