In his 2010 Financial Statement and Budgetary Proposals Minister of Finance Chris Sinckler announced a mix of measures, including a 2.5 per cent increase in the Value Added Tax (VAT), a 50 cents hike in bus fares and a 50 per cent hike in the excise tax on gasoline.
He removed tax-free travel and entertainment allowances as well as income tax allowances for savings in credit unions and investments in mutual funds.
With the changes, the rate of VAT moves to 17.5 per cent, while the excise tax on gasoline goes up by 18 cents per litre; that is, an estimated 31 cent per litre when VAT is applied or about $1.17 per United States gallon.
In today’s SUNDAY SUN, freelance journalist Marva Cossy, analyses the impact on lower and middle income Barbadians, who make up 83 per cent of the working population and have disposable income of $3 500 or less monthly.
To analyse the issue, one can look at some of the necessities for middle and lower income families.
Food tops the list, followed by spending on transportation, which accounts for about 17 per cent (half of what they spend on food) of their disposable income.
These are averages for the low to middle income groups captured in the Cost of Living Index, but it must be noted that even with these two groups, the earners at the lower end will consume a higher portion of their income on these items.
Water, electricity and cooking fuels – mainly gas – are among the other leading budget items for both groups.
Let us examine the food issue from the middle class perspective. This is important given that middle households spend about a third of their disposable income on this item.
Between the end of 2007 and March 2010, food prices jumped by about 22 per cent. Using the relative spending of the household on the various items in the index, the Barbados Statistical Service suggests that these households with $3 500 of disposable income initially spend roughly $1 200 for food.
Rising costs during the recession would mean that they could only get $983 worth of food; add the VAT rise, as per the Budget, and the amount falls to $959.
In other words, if they continue to spend the same portion of their budget on food, they would have to choose cheaper brands or eat less of what they are accustomed to. Alternatively, they would have to spend more money to buy the original basket of food.
This illustrates the severity of the tug on their pockets.
Now let us look at the average worker. Government statistics reveal that the typical Barbadian employee earns between $200 and $499 weekly in the service industry. This income range does not attract income taxes but pays national insurance.
Prior to the 2010 Budget, the cost of living movements had eroded the spending power of the typical Barbadian worker earning $200 per week by about $28 and the worker earning $499 per week by about $70. These figures suggest that over the last two and a quarter years, the typical Barbadian worker’s wage and salary spending power range fell to $172 and $429 at the lower and upper end, respectively.
The added 2.5 percentage points to the VAT also compounds the issue of their declining household budgets in real terms as utilities’ bills such as electricity, water and telephone will all be subject to the increase. Not too long ago, electricity rates went up following the 60 per cent hike in water rates.
It is therefore clear that the Budget’s effect cannot simply be taken on its own but must be analysed in the context of what has been happening to the household purchasing power; for this is at the root of whether people are able to bear the additional pressure. Â
Another example of pressure is bus transportation which will cost 50 cents more per ride from January for travellers except school children in uniforms.
It can be assumed that those using public transportation are usually from the bottom rungs.
Given that shop assistants, according to wage regulations, receive $5 an hour or $200 per regular work week, we can assume many of the 23 100 workers in lower salary scales get about $250 weekly and take one or two trips to work. This change in bus fares means getting to work will cost these workers about $20 or $40 more per week.
This 33 per cent jump in bus fares will therefore not be easy for low income workers.
All around transportation cost has gone up.
The excise tax on gas and adjustments made to diesel will add to the business cost for freighting and is likely to be passed on to consumers. Workers using private motor cars will obviously pay more for gas.
But with Sinckler making travel allowances taxable, middle income workers have been served double doses of the bitter medicine.
Prior to the Budget, employees could receive up to 12.5 per cent of their basic salaries or $7 200 and $7 800 as tax-free travel and entertainment allowances, respectively. These are now taxable at a rate of between 20 per cent and 35 per cent.
This could see the disposable income of middle income workers declining by as much as $210, while the upper income earners could suffer a fall of about $437.50 as illustrated by the graphic above.
• Marva Cossy is a freelance journalist.
