On June 3, the Government Financial Team presented a biannual budget proposal calling for expenditures of $1.485 billion in fiscal year 2022 and $1.51 billion in fiscal year 2023, record-setting amounts.
Beyond not having enabling legislation for considering a two-year budget, the proposal raises several questions about the administration’s stance on sustainability, public sector effectiveness and fiscal stabilization.
Budgets are very important documents because they establish an administration’s priorities, reveal its vision, and indicate if fiscal discipline is being pursued.
The Government of the Virgin Islands has a history of deficit spending, high debt, low economic growth rates, vulnerability to external shocks and several public institutions under federal consent decrees for deficiencies in how they operate. Given this backdrop of weak public financial management, the most prudent approach would have been to conduct public expenditure and tax reviews to help inform and improve management, budgeting, and resilience building.
The purpose would be to identify areas of waste and ways to improve efficiency and effectiveness in spending, and ways to make local taxes more efficient, equitable, and perhaps easier to collect. Even adopting a “fiscal rule,” defined as a set of parameters adopted in the budget process to limit and control spending excesses, would make sense to better manage fiscal affairs.
The current executive budget does not break sharply with the past. It just proposes a massive expansion in government spending mainly to increase salaries for government employees, to fill 1,200 government vacancies and to benefit some historically underfunded departments — Human Services, Waste Management, Agriculture and the two hospitals.
The expanded spending plan is based wholly on the unprecedented availability of federal funds that are not likely to be long-lasting, and moreover, will have conditions.
A quick and cursory analysis of the budget proposal raises the following questions and issues:
1. No solid empirical understanding of economic context.
The 2020 GDP growth figure has not yet been calculated by the Bureau of Economic Analysis, but GDP growth will likely be negative in 2020, given the COVID pandemic-induced slowdown in economic activity.
The USVI as a tourism-based service economy is likely to be much more negatively affected than more diversified service economies or those with much larger manufacturing or agricultural sectors. None of the testifiers spoke about what was the economic impact of COVID in the territory.
• How many businesses failed?
• What is the likely trajectory that surviving businesses are to follow in a recovery phase?
• Did the pandemic leave any scars in the private sector? No survey was done as to business owners’ plans, expectations and perceived problems. The testifiers just touted the 2.2% real economic growth figure for 2019. The assumption is that we have a boom in air arrivals and cruise ships will restart soon, so all is well.
2. No focus on government operational solvency and performance.
The budget presentation was absent of any deep discussion of public administration effectiveness, efficiency and impact. A sounder and more transparent budget process would be results-based. This means that agencies and departments would get monies based on demonstrating that they deliver effective services and making notable progress in improving quality and capabilities.
Budgeting currently seems to be based on inertia and reaction: Increase agency budgets slightly based on the previous year’s allocation. When crises hit, implement freezes. When austerity is required, make meat ax cuts even if they compromise operational effectiveness. Worry just about covering salaries above all else. Depend on federal grants for many operational activities.
No mention was made of restructuring the V.I. Water and Power Authority financially and making it more operationally efficient, even though it clearly constrains economic development and competitiveness. While Waste Management Authority is slated for a 30% increase in budget allocation over the previous fiscal year to help with vendor debts, the real problem was not addressed.
Waste Management needs independent and reliable streams of revenue to become more self-sufficient. The WMA needs to charge user fees, convert waste to energy and sell that energy, as well as sell recycled materials since its two landfills are at or near capacity.
3. No wholehearted commitment to public sector modernization.
The local government needs to be modernized, provide more online services, digitize data and become more agile and efficient. The budget presentation alluded to piecemeal plans to improve information technology, such as installing online tax payment capacity at BIR, financed by federal monies, but no comprehensive plan or timeline for revamping the entire public sector.
4. GERS unfunded liability problem ignored.
The budget provided no plan for preventing the looming insolvency of GERS, just the promise of a $10 million payment while the unfunded sponsor liability is $1.6 billion. The Pension Fund needs $150 million of fresh funds each year to stave off insolvency.
5. No recognition of debt overhang issue and overdependence on federal government.
The central government’s current debt is approximately $1.8 billion, translating to a per capita local debt burden of $17,241, higher than most other U.S. jurisdictions. To improve credit ratings and regain access to capital markets, the V.I. government has to improve fiscal balances and resolve the unfunded pension liability problems. It either needs to run budget surpluses and pay down debt or refinance and even restructure its debts.
The inability to borrow and the lack of surpluses make the local government dependent on federal assistance to cope with unforeseen shocks, and makes it difficult to plan and pursue capital improvements autonomously.
6. No sustainability.
Without serious efforts to improve the business climate and stimulate private sector growth and employment, the massive expansion in the government wage bill and higher agency operational spending will likely not be sustainable once the federal disaster and COVID stimulus monies end.
Once the COVID pandemic recedes and other Caribbean destinations reopen, the V.I. will likely face more competition for tourists, potentially flattening projected government revenue streams in out years.
— Mark Wenner, St. Thomas, is an economist.