Cuba’s fiscal deficit surged in 2008 reflecting climatic disturbances, the world recession, and a burst of government expenditure (see table below). Since then the deficit has been substantially reduced owing partly to a shift toward domestic expenditure restraint under Raúl Castro’s administration, and in spite of a drop in external financing. Those are the good news. The not so good news is that recent data also uncover worrisome elements of vulnerability, particularly on the revenue side, and raise questions about some surprising developments in 2012.
Developments in 2007-2011
As a ratio to Cuban GDP, domestic revenue plunged by more than 4 percentage points from 2007 to 2011, a dramatic fall considering that the economy was not weak during that period (real GDP rose at an average annual rate of almost 3 percent).[1] The fall in revenue would have been even larger had it not been for a historically large rise in state enterprise contributions to the central government in 2011, the reasons for which are not entirely clear. Indeed, tax revenue dropped by an extraordinary 6 percentage points in 2007-2011[2]
During much of that period, the weakness of domestic revenue was concealed by the strength of external revenue which doubled from 2007 to 2010 before coming down precipitously thereafter. Foreign revenue reflects mostly Cuban exports of health and education services to Venezuela and of Venezuelan investments and transfers to Cuba. The latter were very high in 2008-10 (see memorandum item at the bottom of the table) but appear to have almost vanished after that, owing perhaps to economic difficulties in Venezuela. In recent years, exports of professional services have been in the range of 8 to 11% of Cuban GDP.[3]
Transfers to enterprises (including subsidies for enterprise losses and for food and medicine imports) rose by 2 2/3 percentage points from 2007 to 2009 before edging down thereafter—a somewhat disappointing performance given the government’s stated intention to eliminate disguised unemployment and phase out the rationing book.
After surging in 2008 in the midst of an expenditure boom that ended out having serious consequences for Cuba’s external position, total expenditure declined sharply through 2011. Domestic expenditure fell by a whopping 6 percentage points as Raul Castro’s administration moved aggressively to cut spending in most areas, including social spending. Unfortunately the fiscal effort also involved a substantial decline in government investment—to 5.7% of GDP in 2011, an extremely low level by international standards. Foreign expenditure moved within a relatively narrow range in 2007-11, mirroring the ups and downs in services exports to Venezuela. But these estimates are subject to a high degree of uncertainty.
Unexpected developments in 2012
The data recently published by the National Statists Office (ONE) for 2012 contain a few surprises.
For the second year in a row state enterprise contributions to the government budget were well above their average for the past decade.
After the long decline noted above, domestic revenue rose by 2 percentage points of GDP in 2012, partly because of the rise in enterprise contributions but also because of a recovery in tax revenue.
The improved performance of domestic revenue was offset by a decline in external revenue (for the third year in a row), and a sizeable increase in total expenditure. Domestic outlays rose by 1 ½ percentage point, as a continued decline in current expenditure was swamped by an unusually large large and very puzzling increase in government investment.[4]
Expenditure abroad also rose, in spite of an apparent decline in services exports, reflecting an extraordinarily large increase in financial operations (an item that includes payments on the government’s external debt). As of now, there is no clear explanation for this increase.
A few conclusions.
Aside from the surprising aspects of the data for 2102, fiscal developments in the past half-dozen years points to some preoccupying vulnerabilities. Domestic tax revenue, the most important and stable source of government revenue, shows a steeply declining trend. External revenue has been strong, but has declined considerably since it peaked in 2009. There has been considerable restraint on domestic outlays since 2008 but foreign expenditure has increased because of an unexplained surge (possibly temporary) in “financial operations” in 2012. Exports of professional services remain high, possibly because a few countries in addition to Venezuela have joined the bandwagon. If these exports—which are the political counterpart of Venezuelan oil exports to Cuba—were to decline substantially in the future the Island would have to buy petroleum products from alternative suppliers, most probably at distinctly less favorable terms. This is a worrisome prospect, particularly if the weakness in domestic revenue were to continue.
Sources and methods
Tax revenue includes taxes on turnover & sales, services, payroll, other sources; and capital revenue
External revenue is the difference between “otros ingresos no tributarios” and “transferencias al sector empresarial, otros”, both from the budget. I believe the latter is a good proxy for government transfers to domestic enterprises for the purchase of imported oil and oil products from Venezuela.
Net external revenue excludes financial operations.
Transfers exclude “transferencias al sector empresarial, otros”.
Domestic current expenditure excludes estimated exports of medical and education services
Health and educations services exports are estimated
Financial operations presumably includes net factor income paid abroad; and may include some domestic transactions
[1] See Table. The figures quoted are in percent of Cuba’s nominal GDP. They are taken from Cuba’s Office of National Statistics) or estimated by the author. (See Box). Unless otherwise noted, data refer to the budget of the government, which includes central, provincial and local governments but excludes state enterprises.
[2] Luis R. Luis has suggested that it may be appropriate to look at the difference between tax revenue and enterprise contributions to the budget because taxes in Cuba (notably the predominant turnover and sales taxes) are perceived on the state enterprises. But even this difference declined by 3 ½ percentage points from 2007 to 2011.
[3] These exports are proxied here by expenditure on health and education minus an estimate of domestic spending in these categories. Another way to estimate exports of professional services is to subtract tourist expenditure in Cuba from total exports of services. Historically, these two estimates have been relatively close, but they started to diverge in the past few years. In 2012, exports of non-tourist services reached almost 14% of GDP (an unusual large 2 1/2 percentage points jump from 2010), thus exceeding the estimate based on health and education expenditures by 6 percentage points. So far, I have found no explanation for this difference, but I suspect that Cuban exports of non-tourist exports to countries other than Venezuela have increased.
[4] This increase puzzling not only because of its magnitude per se but also because it exceeds total investment in the national income accounts by a large margin, implying negativegross investment by the state enterprises! This is a stunning result even considering the methodological differences between national account and budget numbers.