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Fiscal Prudence

Turn Knowledge Into Action

Governments in many countries are blaming their fiscal woes on natural disasters (acts of god). However, some institutions believe the problems start with governments' lack of fiscal prudence. Others believe it is a result of corruption. Digging deeply into the way those governments handle their country's finances has revealed lack of transparency, accountability, and checks and balances. Many of them don't have a fiscal buffer or contingency reserve fund that they could use to rebuild their economy after it was damaged by a natural disaster. They were reshuffling money from one fund to pay expenses in another fund because they were overburdened with debts, their bonds became junk bonds, and they can't borrow money on the open market. Trust funds like the NIS and NHS were used like piggy banks to provide cash flow and working capital. In addition, governments' properties don't have insurance coverage; and they are not self-insured by the government. Construction contracts were given to political cronies. They were incomplete and riddled with cost overrun.

Lack of fiscal prudence has led to unsustainable public debts in many countries. Creditors and monthly recurring operating expenses cannot be paid and people are faced with adverse economic conditions. Applying for relief from the IMF, making the IMF a lender of last resort; and embarking on an economic reform plan (austerity plan) to reduce and control spending; and reduce debts (debt reduction) is a package that some countries have taken.

Under the austerity plan or reform program, public sector assets are sold (privatized) to pay down debts and to invest in new sectors that would produce sustainable growth and recurring revenue stream. Tax reform has streamlined the system of taxation. Some or many items that were tax exempt have become taxable items. The income tax threshold has been reduced and more people are paying income taxes. There were massive layoffs in every economic sector, freezes for three years on salary increases and rehiring in the public sector and massive demonstrations and migration of people, etc.

The reform process is akin to cleansing or purging the public sector and placing the burden on everybody in the country. However, that burden is felt more by poor and retired people whose fixed income is suddenly reduced by 15%-25% by new consumption taxes like VAT.

Expansion of the agricultural sector has produced more food for citizens to consume and sell to restaurants, hotels, airline caterers, cruise ships, etc. That has lowered food prices and inflation. A strong manufacturing sector has produced and exported hardware products and processed agricultural products in addition to fish, beef, pork, and poultry products. Those exports have generated foreign currencies and increased the GDP. Those governments are under fiscal restraint/constraint and can't give subsidies to those industries. However, they process business applications quickly in order to avoid losing revenues to the underground economy; and they act vigilantly to protect businesses and industries by passing and enforcing anti-dumping, counterfeit, trademark, and copyright laws.

A strong and aggressive marketing plan for the tourism sector was implemented to take advantage of regular tourist visits, yacht & ship building, yacht racing (regattas), yacht berthing for extended periods of times, and medical tourism. Regular and medical tourism has benefited the airports, seaports, local transportation, hotels, casinos, restaurants, gift shops, hardware stores, building and construction industries, private hospitals, and their employees. In addition, universities, hotels, and hospitals have encouraged foreign professional associations and businesses to hold annual seminars, workshops, trade shows, and conventions in their facilities. The domino/ripple effect has generated a lot of foreign currencies.

Fiscal prudence has created an efficient and effective public sector that has facilitated growth of the private sector. Additional public sector spending was directed towards growth-oriented capital investments that are generating recurring revenue streams. The infrastructure has been upgraded to attract local and foreign direct investments. That has certainly stimulated economic activities, stabilized the currency, reduced inflation, increased competitive advantage, and increased employment. However, those results could not have been achieved without strong leadership and strong public support.

(Excerpts from the book, "Sweet Success" by Clemson Barry, pages 73-75, "The Economy".)