This report explores the fiscal space that is available for the Government of Saint Lucia to finance social protection programmes. Subsequently, this fiscal space - in so far as available - will be translated into a proposal for a minimum SPF package covering the basic needs of Saint Lucians in the areas of health care and provisions for children, individuals in their working ages and families with children, and for Saint Lucians after retirement.

What is fiscal space? The closest definition provided by available literature is that fiscal space concerns 'the financial resources that governments can mobilize to finance a certain series of programmes, without endangering the government's current or future financial position or credibility'. There are two approaches in the literature. One is normative in that it seeks to establish 'debt limits' or boundaries

that governments should keep clear from. The other approach is more pragmatic. It identifies the dimensions that governments can explore in their quest for fiscal space. These dimensions are the following: (i) decrease or re-prioritization of public expenditures (reallocation within the overall spending portfolio), (ii) increase of public revenues,(iii) deficit financing, (iv) resort to external

development aid (grants). Other dimensions that have been mentioned are (v) tapping into fiscal or foreign exchange reserves, (vi) fighting illicit financial flows, and (vii) the pursuit of more conducive macroeconomic policies. Governments across the globe are in the process of tapping into these dimensions. Scaling down subsidies (fuel, food and agricultural inputs), capping public sector salaries, rationalizing social protection spending (for example through intensified targeting), are among the most popular approaches. On the revenue side there is scope to increase tax rates, widen the tax base (introducing VATs, for example), and improve compliance. However, governments in their effort to step up revenues find themselves in the trade-off between economic and social objectives sooner or later. The tax bases that would maximize revenue collection are the same ones the poor and vulnerable are most dependent on (such as, low paid labour, basic commodities and services). Still, stepping up revenues and reprioritizing expenditure are the two dimensions Saint Lucia's government needs to concentrate their efforts on, since the other dimensions are irrelevant to Saint Lucia.

The main reason for this lies in Saint Lucia's economic environment. Economic growth has slowed down to an almost complete halt in the past decade. The island is vulnerable to economic and environmental disasters, not least because it relies on just a small number of economic activities

that are highly exposed to international markets and patterns. From a fiscal perspective, the high debt/GDP ratio stands out. This ratio has increased over the past decade and stood at 80 per cent

in 2013/14 and is expected to 'go through the roof' (100 per cent of GDP) in the near future. The government's response to the increasing debt/ GDP ratio so far has not been to achieve a primary balance surplus. Therefore, the main conclusion is that opportunities for new spending initiatives are extremely limited. The demographic situation does not help either.

There is a large segment in the 15-24 age-group who are on the threshold of and/or are making their entrance into the work force. The labour market over the past decade has not been able to absorb the inflow, and seems unlikely to be able to do so in future. Over 50 per cent of the current unemployed population are in the 15-29 age-group. On the fiscal side, the government is working hard to improve its public financial management (PFM). Successes include the streamlining of macroeconomic and fiscal forecasts, the move towards integrated budget preparation and economic planning, and enhancement of the strategic content in the budget preparation process. The reform of PFM for Saint Lucia is a

crucial condition for exploring fiscal space for social protection purposes. Saint Lucia's social budget spans close to one quarter of total government expenditure or 8 per cent of GDP. Moreover, expenditure on social programmes has been rather stable at that level from 2009/10 onwards.

This report constructs two scenarios for social protection expenditure. For that purpose, a distinction was made between two time periods. For the first period, up to 2018/19, the report makes use of International Monetary Fund (IMF) projections. For the remainder of the projection horizon, two sets of economic and fiscal scenarios have been compiled. The neutral economic scenario continues where the IMF forecast stops, projecting real GDP growth to be just above 2 per cent. The second economic scenario is more conservative. It uses average real GDP growth in the decade before 2019/20 to set the rate for the period afterwards. This results in an estimate of 0.7 per cent average real GDP growth for the remainder of the projection period. On the fiscal side there is a neutral scenario and a fiscal consolidation scenario. The former assumes that Government will be successful in curbing expenditure growth and at the same time step up revenues. This will not be sufficient, however, to curb the rising trend in the debt/GDP ratio. The fiscal consolidation scenario assumes that the government will balance its budget in 2024/25 and this will lead to a gradual fall in the debt/GDP ratio, materializing before the end of this report's projection horizon. The combination of the economic and fiscal sets results in four scenarios.

The projections for the labour market do not forecast a substantial easing of the present problems. The overall unemployment rate falls from 23.3 in 2013/14 to 19.9 in 2024/25 in the most favourable of economic conditions. In the economic bad weather scenario, overall unemployment rises a fraction to 24.6 per cent. In both scenarios youth unemployment is twice (males) to four times (females) the adult rate. Perhaps, some of the current active labour market programmes turn the tide, but their effectiveness still needs to be proven. In order to assess the fiscal space that can be available for the government to finance a package of social protection programmes, the report has explored a simplified simulation model. The rationale behind this exercise was to obtain an estimate for the growth in non-interest public expenditure that will keep clear from the 'debt limit', here taken as an evolution in the debt/GDP ratio that does not converge, or fall to a level below the present level. This simulation reveals that any fiscal space in terms of increasing public expenditure is close to non-existent.