IMF Urges Barbados To Rein In Deficit

by Amanda Banks, Tax-News.com, London

17 August 2005

Barbadian Prime Minister Owen Arthur has pledged to reduce the government's budget deficit following the release of an International Monetary Fund report this week which warned that the high level of public debt threatens to hinder Barbados' economic progress.

In the IMF's annual assessment of the Barbadian economy, the Fund's Directors observed that the expansionary public investment program, implemented to revive the economy after the recession of 2001-02, has contributed to to a level of public debt far exceeding the average for Latin America and the Caribbean.

While welcoming the efforts to reduce the public sector deficit over the past two years, they noted with concern that the primary deficit remains among the highest in the region and that public debt will rise steadily in the absence of fiscal consolidation. Against this background, they cautioned that the injection of fiscal stimulus in FY 2005/06, in the midst of a robust private-sector led recovery, could make the path to debt reduction more difficult.

According to a Caribbean Broadcasting Corporation report, the Prime Minister was quick to respond to the IMF's concerns, and was expected to attend parliament on Tuesday to announce measures dealing with the public sector deficit, which moderated slightly to 6% of GDP in 2004/2005 from 6.5% in the previous year.

Under financial legislation put before parliament in March, Arthur announced that spending will rise by 1.6% to BDS$2.4 billion, including investment to prepare for the country's hosting of the 2007 Cricket World Cup; but revenue is estimated to rise by 9% to produce a primary surplus, helped by an increase in VAT receipts to more than BDS900m, and sales of government assets including BDS66m from the sale of shares in the Insurance Corporation of Barbados and BDS100m from the sale of the government's interest in the GEMS hotel project.

Meanwhile, corporation tax is being reduced to 30% in 2005 and 25% in 2006, while personal income tax is also being cut, and allowances increased.

"For the first time in this country, a government is doing two things that have tremendous fiscal implications - raising the income threshold below which people do not pay tax from $15,000 to $25,000 and cutting the rate of tax," said Owen at the time of the announcement.

"And while we're doing that, we are also seeking to bring the taxes paid by companies in Barbados down to the most competitive level in CARICOM, from 40% to 25% to give Barbados a chance in the new single market and economy to be the preferred location for doing business," he added.

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