BARBADOS BUDGET: TAX CUTS, CHEAP HOUSING, LAND

C O N F I D E N T I A L BRIDGETOWN 000368 SIPDIS SIPDIS DEPT FOR WHA/CAR SOUTHCOM ALSO FOR POLAD E.O. 12958: DECL: 03/26/2017 TAGS: ECON ECPS EFIN EIND ELAB ENRG ETRD PGOV PREL PINR, BB, XL SUBJECT: BARBADOS BUDGET: TAX CUTS, CHEAP HOUSING, LAND REFORM, AND A BIT OF EARLY CAMPAIGNING REF: BRIDGETOWN 332 Classified By: DCM Mary Ellen T. Gilroy for reasons 1.4 (b) and (d). ¶1. (C) SUMMARY. Last week's budget presentation by Barbados' Prime Minister Owen Arthur and opposition leader David Thompson's response were greeted with much anticipation. The charged atmosphere was mainly due to the political context in which the two speeches and the ensuing debate took place, rather than their economic and fiscal content. Many expect that PM Arthur will call parliamentary elections later this year, and the budget debate therefore had the feel of an early stage in a political campaign. Both PM Arthur and Thompson coupled their proposals for generous tax cuts, housing benefits, and other goodies with sharp attacks on each other. Most consider Thompson to have acquitted himself well, but it is unlikely that his populist message will generate the necessary momentum in his foundering campaign. END SUMMARY. A STRATEGIC PLAN FOR BARBADOS... -------------- ¶2. (U) In his March 14 Economic and Financial Policy Statement presentation, which was televised and broadcast on all national stations, PM Arthur presented a three-hour-long summary of his government's economic accomplishments and his plan to build the economic platform for his government's goal of Barbados "becoming, by 2025, a fully developed society that is prosperous, socially just and globally competitive." Unsurprisingly, with Barbados' economy growing for five straight years and unemployment at its lowest in decades, PM Arthur took the credit for these achievements. However, as his policy proposals made clear, his government is fully cognizant of the fact that pocketbook issues continue to top Barbadians' list of concerns and could threaten the ruling party's reelection chances. ¶3. (U) Respondents to a recent poll identified among the top five "major national issues" the cost of living, unemployment, housing, and the economy (reftel). These were very much the issues on which PM Arthur focused his budget proposals. He offered tax cuts and other assistance for small businesses, farmers, the working poor, home owners, those with savings in credit unions, and several other groups. To address spiraling housing costs, PM Arthur announced new measures to facilitate access to land "at affordable prices" and construction of low-income housing. He also proposed a new policy, which he claimed would be modeled on the United Kingdom's Section 106 Agreements, whereby the Barbadian government would require large-scale real estate developers to set aside a minimum of 25 percent of constructed housing units to meet the country's affordable housing requirements. ¶4. (U) PM Arthur's budget included several macroeconomic proposals, most notably a pledge to "institute measures to reduce the ratio of public debt to GDP to under 60 percent by 2012." To achieve this target, according to PM Arthur, the government will avoid net external borrowing in the period 2007-2012. PM Arthur also committed to liberalize fully domestic interest rates, so that the country's interest rates would be "driven by market factors." To that end, he proposed "to cede authority to the Central bank to make changes to the minimum deposit rate without recourse to the Minister of Finance." For PM Arthur, who also serves as the country's Finance Minister, this step more than any other symbolizes his confidence in the Barbadian economy and his trust in the capable and steady leadership of the Barbados Central Bank by Dr. Marion Williams. ¶5. (U) PM Arthur couched all his economic and fiscal proposals in a "Green Economy" context. His government recently released for public comment a draft National Energy Policy which placed a premium on energy conservation and alternative energy development. Consistent with these priorities, PM Arthur's budget sought to "promote mainstreaming of green economic and sustainable development principles" through new incentives for various sectors, including construction and transport, as well as individual homeowners. PM Arthur also proposed to double the one-percent Environmental Levy, effective July 1, 2007. ...OR A "WASH-PAN BUDGET"? -------------- ¶6. (U) Not surprisingly, opposition leader David Thompson dismissed PM Arthur's proposals as a "wash-pan budget" filled with "political hush money." Thompson's March 15 response was peppered with attacks not only on various components of the Arthur budget, but also against the Arthur government's record of 12 years. He balanced the attacks with what he termed a "new deal" for Barbados. Perhaps borrowing from John Edwards' "Two Americas" campaign speech, Thompson spoke eloquently about the emergence of two Barbadoses and the plight of the country's poor. He too focused on housing, land ownership, and the cost of living. If anything, however, Thompson's proposed benefits, subsidies, and tax cuts were even more generous than PM Arthur's, which opened Thompson to the same charges as those he leveled against PM Arthur. Various members of PM Arthur's cabinet immediately pounced on Thompson for proposing a "dangerous" budget that would likely break the Treasury. ¶7. (C) While Thompson can be expected to mount over the coming weeks a spirited defense of his "vision" for Barbados and his proposals, his budget response brings into sharper focus questions about his ability to steer the country's economy. Thompson, who served as Minister of Finance during Barbados' financial crisis in the early 1990s, does not have much credibility when it comes to economic issues, and this latest foray into economic policymaking will probably not help him, especially with the private sector. However, Thompson may have already written off that group of voters and campaign supporters. He has recently stepped up his attacks on "interest groups," which he has charged with various misdeeds, including artificially increasing prices in Barbados. These attacks, of course, play well with Thompson's target group of potential voters, the working poor, the unemployed, and the landless. BARBADOS OPEN OR CLOSED FOR BUSINESS? -------------- ¶8. (C) The two political leaders offered significantly different visions of Barbados and its place in the global economy. Among PM Arthur's most significant proposals is his plan to liberalize all remaining exchange controls with respect to CARICOM by the end of 2007 and to remove "substantially all of the remaining restrictions with respect to non-CARICOM transactions... as soon as practicable thereafter." This proposal was hailed by PriceWaterhouseCoopers and others in the business community as an important and necessary reform to improve Barbados' prospects as an attractive destination for foreign investment. In addition, under his 10-year Strategic Plan for the International Business and Financial Services Industry, PM Arthur announced several proposals that should facilitate foreign entrepreneurs' entry into the Barbadian market, including the faster processing of work and residency permits. Furthermore, PM Arthur announced a tax cut designed to encourage repatriation of foreign dividends by Barbadian and international business companies. ¶9. (U) PM Arthur's ambitions also include plans to establish Barbados as an "Asset Management Centre" and an "International Arbitration Centre." He preemptively sought to address any concerns regarding possible money laundering, tax evasion, and lax regulation by announcing the creation of an "Institute for International Securities and Financial Regulation," which will be partially funded by the European Union. As envisioned by PM Arthur, the Institute "will focus on the training and re-training of professionals in the public and private sectors by providing specialised, relevant and continuing training opportunities in the financial services sector." ¶10. (C) Unlike PM Arthur's vision of a Barbados that is open to and welcoming of foreign investment and trade, Thompson's proposals, especially with regard to land purchases, are designed to limit foreign investment. Skyrocketing housing and land prices have been at the top of voters' concerns, and in his budget response, Thompson clearly tried to exploit these anxieties and the strong preference among Barbadians for owning "a piece of the rock," i.e., Barbados. He warned of "the encroaching mob of foreign land speculators" and pledged to introduce "a policy of zoning certain lands for exclusive Barbadian purchase" and offering generous subsidies and tax breaks for Barbadian buyers. Thompson also questioned the wisdom of removing Barbados' exchange controls, warning of volatility in capital flows, capital flight, and even financial collapse. COMMENT -------------- ¶11. (C) With throngs of party supporters decked out in their party colors surrounding the Parliament to greet the arriving parliamentarians, the budget presentation and the opposition's response resembled political rallies. This resemblance was probably not accidental. While PM Arthur claimed that this was not an election budget, observers judged it in that context and gave him high marks for the comprehensive and inclusive set of proposals. In a subsequent meeting with Ambassador Ourisman, a group of leading media and press representatives assessed PM Arthur's performance as brilliant. ¶12. (C) For Thompson, who trailed PM Arthur by over 20 percentage points in a recent public opinion poll (reftel), this was an opportunity to make or break his campaign. His speech, with its strong populist bent, may have given his campaign a boost, but it also probably raised questions in the minds of those Barbadians who want to see their country open to the outside world and integrated into the global economy. So far, Thompson's polarizing brand of politics has achieved little more than keeping his base energized. To improve his election chances, Thompson will have to broaden his appeal, something that he probably failed to do in this early campaign round. OURISMAN