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Analysis of the 2023 Estimates of Revenue and Expenditures – The Budget: A political economy perspective – Part II

Last week’s article looked at the 2023 budget in the context of the challenging global economic conditions, rising interest rates, slowed growth and high inflation which have exacerbated the cost of living crisis on the island.

Highly dependent and open, the tri-island state is vulnerable to high inflation in advance economies in particular those that are trade partners such as the United States and United Kingdom.

Grenada is forced to import these elevated prices through imports from our trading partners which has resulted in high cost of living that disproportionately affects poor and low income households.

In this regard it was felt the budget had to be analysed by how well it seeks to protect those households who bear the brunt of the ravages of high cost of living, and maintain prudent macro-economic fundamentals in line with the fiscal responsibility requirements.

The article concluded that the measures outlined in the budget sought to do both – that is maintain tight fiscal management and protect the poor and vulnerable from high food prices.

The article further concluded that although the budget was a good one the proof of the pudding is in the eating, that is success will depend on how well the budget is implemented.

In light of the lack of capacity and capabilities in the public service the challenge going forward for the new government is how quickly it can get competent personnel in key critical positions to ramp up implementation of the 2023 budget.

There are capacity concerns in all of the ministries that have the lion’s share of the capital budget and the new Ministry of Implementation is yet to have a sufficient cadre of staff.

Additionally, most of the projects in the 2023 budget developed under the defeated government are riddled with implementation problems – the result of poor design, insufficient analysis of project risk, inadequate social and environmental assessment, and limited stakeholder engagement.

It would be a herculean task to improve implementation rates for these projects while at the same time getting the personnel in place in the respective ministries.

Considering the general warrant to spend funds allocated in the budget will be issued sometime after the middle of January 2023 and the close off in November before projects traditionally shut down in December, there will be around ten (10) months to spend funds allocated for the respective projects in the budget and lift the implementation rate.

Juxtapose on that situation is the efforts to advance the transformational agenda. It will be quite a tall order for the new government.

Notwithstanding some of the initiatives mentioned by some parliamentarians on the government side, such training of public officers in project proposal writing, if the new government is not prepared to take bold action to strengthen the senior management team and key ministries then at the end of 2023 the budget implementation rate will not improve significantly.

Another framework for analysis of the budget is the political economy – that is the relationship between government and various groups and stakeholders in society that informed choices in the budget.

It should be said at the onset that budget choices need to be understood against the macro-economic constraints placed by the 2015 Fiscal Responsibility Act.

As indicated in last week’s article, the budget is anchored in a sound macro-economic framework with the Act being an enforcement mechanism. The 2023 budget doesn’t deviate from the macro-economic policy stance of previous budgets up to 2015 when the Act was passed.

Due to the many external shocks during the period essentially the trust has been to maintain tight fiscal discipline while protecting vulnerable groups and households. This is exactly what the 2023 budget sought to do, the relief measures on food items proportionately consumed by poor and vulnerable households will help to alleviate the negative impact of high cost of living on the poor.

The increase allocation for pension payment will help retired public officers maintain a reasonable standard of living after leaving the service and not slip into poverty.

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These groups are significant constituents that the new government pledged to protect.

Although the new government is constraint by fiscal requirements, it has made deliberate policy choices to help certain groups withstand the brunt of the cost of living crisis while attempting to preserve macro-economic stability.

However, policy outcomes can’t be explained on the basis of only one or two political or institutional dimensions for the allocation of pension payments to retired public officers will give them a peace of mind and a psychological comfort knowing they do not now have to make difficult choices such as foregoing purchasing food over getting medication or can leave something for their grand children or assist with their education.

However, there are a few political economic downside to the budget. Apart from relief on fuel and food items, it didn’t seek to reduce the tax burden on the middle class who have had to bear the unequal burden of high taxes for well over a decade.

Moreover, the re-evaluation of properties will cause property tax to increase placing further pressure on the middle class.

One could understand because of the revenue targets outlined in the fiscal framework the time wasn’t right to do so considering the looming threat of a global recession.

Nevertheless, government is expected to rake in a larger amount of revenue from the Value Added Tax (VAT), and some consideration could have been given to some slight relief for the middle class to boost discretionary spending and increase aggregate demand in the economy.

Although action to address the situation with NIS is urgent, the phased increase of the age for retirement may cause a run on the public service by some of the estimated two thousand public officers who have achieved the pensionable years of service of twenty six and one third years and are now liable for pension.

If significant numbers of these public officers decide to retire and not wait until they reached sixty one or sixty five years, this could cause a significant increase in the monthly pension payment in the medium term.

The mention of pension reform with the thinking of some persons in the orbit of the government of having one pension, that is seventy five percent of the last salary, paid by NIS could also add fuel to the fire and cause eligible public officer to retire early.

There is also a related concern that there needs to be more dialogue on policy sequencing since timing is equally important since some of the measures proposed for correcting the NIS problem could have unintended falling out that may put the new government in conflict with certain groups in the society.

There is also the potential for negative fall out from the small business grant program if significant numbers of applications from party supporters are not successful since there is a widespread perception that the opposition representatives got large numbers of their supporters to apply early and there maybe alliances with some in the unit overseeing the program.

In conclusion, the results of the June 23 elections clearly reveal that the opposition has significant support among the rural poor and there is no reason to believe the situation has changed considerably or would in the next year or so.

If history is our teacher, the 2008 to 2013 period is quite instructive particularly if inflationary pressures and high energy cost don’t abate in advanced economies. Policy makers should know allegiances among this grouping can change as the weather.

Going forward the new government should give more consideration to the political economy context and the results of the last elections into consideration and determine which of the constituents or combination thereof that would cause it to expand its base and increase the margin of victory in the next elections for four years will come in a twinkle of an eye and a day in politics is a long time.

Special Correspondent