Government Finances-Belize

In my last post (dealing with the Belize dollar) I wrote about government mismanagement of the Belize economy. In this post, I continue with the theme of government mismanagement in Belize.

First, a few basics. Governments, like people and businesses, have budget constraints. Governments have three general ways of financing their spending; taxes, borrowing, and creating money. I include revenue from the sale of government assets and user charges in the category of taxes. For example, a significant portion of oil revenues generated by the state oil company pays for federal government spending in Mexico. Any spending in excess of revenue must be paid for with borrowing and/or money creation. Apparently, Belize has done both. The problem with the regular creation of money to finance spending is the inflationary impact on the economy. As stated in the previous post, official figures have shown relatively low rates of inflation; although I remain skeptical of these figures.

By one common standard, the government deficits in Belize have not been outrageously large. As a percentage of GDP, deficits have been between 1.9% and 8.8% of GDP since 2002, with a small surplus amounting to 1.1% of GDP in 2008. The surplus was not the result of increased tax collections or spending cuts but appears to be the result of a one-time grant or perhaps sale of an asset. The largest deficits, as fractions of GDP, were in 2003-2005; the Belize government has done better in recent years although it may be reverting to its former habits as the 2009 deficit is 4.1% of GDP, the highest share since 2005. By comparison, the European Union allows its member states to have deficits of up to 3% of GDP; but the EU, seemingly, does little to enforce this limit.

But, by another standard the government's deficits are disturbingly large. Since 2002 annual deficits have averaged 16% of total government revenue. This average includes 2003, when the deficit was 38.6% of total revenue, and 2004, with a deficit of 30.1% of total revenue. Deficits have been relatively smaller since 2006, averaging 6% of total revenue; but still quite high. This decline as a percent of total revenue may have occurred because the country arranged a restructuring of its external debt in 2007 and interest payments to debt holders are smaller. However, in 2009 the deficit increased to 10% of total revenue. Whether the government has returned to old habits, spending well more than its income, or whether the high deficit in 2009 is a temporary result of the world wide recession remains to be seen.

There are good reasons to be skeptical of any apparent change in government fiscal behavior in Belize. As argued in the previous post, the fixed exchange rate appears unsustainable over the long run and the official price indexes appear to understate inflation. Financial markets and Belize's creditors would regard fudging the inflation statistics, if indeed that is happening, as a worrisome sign. Maintaining an overvalued, fixed exchange rate hurts Belizean export industries such as agricultural products and toursim. Indeed, tourism in Belize is appears expensive compared to Mexico or Costa Rica, another country that has, like Belize, emphasized the small-scale ecotourism industry. The overvalued exchange rate does keep import prices relatively low, so the persistence of the fixed rate undoubtedly has more to do with politics and voter support than economics. The government's fiscal mismanagement combined with an overvalued currency and, perhaps, deliberate under-reporting of inflation rates suggest that the Belize economy is headed for the same sort of nasty financial crisis which has plagued Greece, most recently, and other countries during the last 30 years.

Note: All data are from the Central Bank of Belize Statistical Digest, 2009. The dating of the government's budget figures was adjusted to conform with the calendar year, the original budget data are reported for the fiscal year in Belize, April 1 to March 31.