In order to further enlighten readers about matters relating to the draft Framework for Fiscal Responsibility, prepared by the British Government for Anguilla and the other British Overseas Territories. The Anguillian is publishing below a response from the Caribbean Development Bank made available by the Ministry of Finance.
The response was given in an address by Ms. Christine Dawson, an official of that institution. She was at the time in Anguilla, in September, at the review of the island’s public finances. Apart from the salutations the actual address she delivered is as follows.
As one of Anguilla’s main development partners, the CDB has sought to maintain a strategic presence in Anguilla to assist with addressing and resolving some of the critical development issues associated with recent global developments. In that vein, our continuing participation in policy dialogue and consultations as this one falls squarely within our mandate to strengthen partnerships with our member countries.
Throughout the Caribbean, policy makers have been re-thinking policy frameworks needed to address the current development challenges confronting the region. The CDB, along with the International Monetary Fund, facilitated a forum last week to further the debate on economic policy in the Caribbean. Those discussions sought to discuss lessons from the past and develop concrete proposals for how to tackle the daunting challenges of strengthening our regional economies and improving fiscal and debt sustainability policy frameworks. In the area of sustainable fiscal policy, some of the main messages that emerged included the following:
1. Fiscal consolidation is needed.
2. This requires a comprehensive strategy that incorporates structural reforms and other actions to boost growth, and;
3. Fiscal rules are needed.
Importantly, as well, was the identification of the need for ownership of policy frameworks as critical reform to be successful and sustained. In that light, public consultations and negotiations are key for building consensus for policy change especially during difficult times such as these.
Anguilla experienced a boom-bust cycle during the past decade related to the global financial and economic crisis. During 2004-07, the strong economic growth allowed Government of Anguilla to pursue pro-cyclical fiscal policy increasing spending while preserving fiscal recurrent balance , adhering to debt limits and accumulating fiscal reserves as required under its agreed Borrowing Guidelines (BGs) with the United Kingdom Government (UKG). As we all know, the global and financial crisis and the collapse in revenue, in large measure, accounted for the deterioration of the economic context after 2008. The sharp fiscal compression in ensuing years has, however, added to persisting hangovers. Fiscal austerity and restrictions on borrowing have limited Government’s ability to counter the impacts of the crisis, or to stimulate growth.
GOA has been required to restore fiscal stability by balancing its budget by 2013. Although confronted with a difficult context in which to meet this fiscal commitment, good progress has been made to consolidate. Within the existing recessionary economic environment concerns remain on the pace and size of the fiscal adjustment required, the ensuing economic impacts and the related social costs.
To embed fiscal discipline, GOA is considering the UK proposal to adopt in law, a Framework for Fiscal Responsibility (FFR) to replace the BGs. Within the broad rubric of good governance, this framework is aimed at promoting stronger and more transparent public financial management (PFM) systems to improve the long-term health of public finances, and provide a basis on which public finances can be transparently managed.
Inspired by New Zealand’s Fiscal Responsibility Act of 1994, an increasing number of countries have adopted such rules-based fiscal responsibility frameworks to tackle poor fiscal management, persistent and excessive imbalances, and to build credibility. Based on IMF data, there are currently 76 countries with fiscal rules, up from only 5 in 1990. While Anguilla has seen its budget deficit and debt level rise dramatically due to the impacts of the current global crisis, the country’s fiscal record is not one of indiscipline and imprudence. Anguilla has exhibited a high propensity to rules-compliance and fiscal discipline urged on, in part, by the high political cost associated with the loss of GOA’s “self-determining” policy-making ability.
The guiding principles of the proposed fiscal framework supports:
(a) effective medium-term 3-year planning, with improved project appraisal and evaluation, more transparent procurement, and stricter management of actual and contingent liabilities;
(b) putting value for money considerations at the heart of the decision making process;
(c) effective management of risks; and
(d) improved accountability in all public sector operations.
Fiscal stability in Anguilla is not a quick fix. It will require structural change underpinned by a policy agenda to redress inherent fiscal deficiencies aimed at broadening the tax base which is disproportionately concentrated in a few volatile and transitory revenue sources, improving the resilience of tax revenues, and improving expenditure allocations and efficiencies. Such a fiscal framework should allow for an expansion in fiscal space that would permit a rebalancing of expenditures, within available resources, in favour of growth-enhancing capital investments . Historically, while GOA has a tradition of maintaining fiscal discipline, the ability to advance development has always been constrained by limited budgetary savings, a consequence of the jurisdiction’s low tax regime .
A fiscal responsibility framework should be a useful mechanism to restore fiscal health and sustainability to Anguilla. A comprehensive and consistent macro-fiscal framework would allow for long-term macro-economic stability and greater accountability and transparency in fiscal operations within the context of a medium term fiscal. It will be important, however, that this framework not be rigid, be owned by the Government and people of Anguilla, and incorporate some measure of flexibility to permit a review and change of the fiscal and/or borrowing limits in the event of unexpected developments which serve as fiscal shocks. The framework could consider, for instance, special treatment for investment expenditure and/or the reserve fund in the event of an economic downturn. Successful global fiscal responsibility frameworks have included escape clauses that provide for flexibility to rules to deal with unforeseen shocks.
The implementation of a FFR will provide a mechanism to enhance governance in Anguilla. The framework, however, prescribes a significant amount of reform actions within an unrealistic time frame, without identifying resources for its successful implementation. Its implementation will place considerable institutional demands on Government to implement wide-ranging Public Financial Management reforms to move toward more transparent and integrated approaches of strategic allocation, execution and performance measurement within operations. Anguilla’s reform path has, in the past, been characterised by a pragmatic, phased approach arranged around existing capacities to undertake reform. Progress has been achieved in areas including the modernisation of budget systems, the introduction of management information systems, the establishment of a revenue authority, and the introduction of accrual accounting. A PFM reform action plan has already been mapped for the medium term. The main hurdle to advancing this agenda is related to capacity and resource constraints.
The enactment of the new PFM law by 2012 will entail that Government ‘leapfrog’ its PFM reform agenda. In the UK, the implementation of accrual accounting and budgeting took more than eight years to complete (1994-2002). At some point during that time, the British authorities reverted back in practice to a form of cash budgeting. For small developing countries pursuing these more advanced reforms, the evidence shows even less success in the absence of technical assistance. Little attention appears to have been given to assessing technical assistance needs and supporting the building of local capacity prior to the introduction of this framework.
The view that the FFR as currently proposed is restrictive and has an ‘anti-development bias’ is a valid concern. Delaying critical investments needed to enable development in order to accumulate sufficient revenues within a capital investment fund will undoubtedly stymie development. It is our view, that the current BGs should be amended to provide greater capacity to borrow to fund such critical investments in infrastructure and social development.
The official BGs ties borrowing capacity to current revenue which has been volatile, and which has constrained fiscal policy unnecessarily, squeezing essential spending during a downturn. While GOA will need to give consideration to broadening its revenue base, the Bank support the proposals that the new framework re-specify its target for fiscal and public sector debt sustainability as a per cent of GDP, and that the fiscal parameters be developed within the context of a related primary balance benchmark. IMF’s recent report suggests that such a target for Anguilla, being a small and highly vulnerable economy would be significantly lower than the 60% target set by the ECCU Monetary Council for ECCU members and presents the case that an appropriate target would be toward the lower end of the 25-45% range identified in the literature. Importantly, the ceilings set should be flexible to allow counter cyclical responses to crises.
Macro-fiscal stability, while a necessary condition, is not sufficient for growth and sustainable development. As a developing country, there are other policy considerations that matter to Anguilla’s socio-economic development. Revenue recovery and GOA’s return to compliance with its BGs will depend on its fiscal reform, but also hinges on the pace at which growth recovers. Fiscal consolidation should be designed in a manner that does not compromise essential social and infrastructure spending. Consideration should be given to better reflect this balance and accommodate a stronger development posture within the prudential benchmarks being targeted. The proposed capital investment fund, as designed with inflows from revenues, appears limited in its facilitation and timely (urgent) implementation of public investments.
The CDB will shortly commence the preparation of our Country Strategy Paper for Anguilla that will articulate a programme of assistance for the next 3 years. Our ability to effectively partner with Anguilla to facilitate development will hinge, in part, on the outcomes of these negotiations this week. Our mission is to support, and promote Anguilla’s full recovery. In that light, our hope is for the conclusion of productive and fruitful discussions.
