Wednesday, April 17, 2024

LEFT OF CENTRE: Keep inflation under control


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IN ATTEMPTING to address the issue before us, it is clear Barbados cannot sustain its current level of expenditure unless there is significant sustainable growth in the economy. Every dollar spent by Government is a dollar taxed.
The economy is currently afflicted by two problems requiring diametrically opposed remedies; economic stagnation, which dictates expansionary policies, and creeping inflation caused by a fiscal gap, which requires contractionary policies.
The issue is whether Government should prioritize economic growth or inflation control. The International Monetary Fund is asking Government to raise sales taxes and eliminate subsidies.
This strategy will certainly reduce the fiscal gap. However, it may not reduce inflation since sales taxes and withdrawal of subsidies tend to be inflationary. These two requirements can, however, cause short-term instabilities if mishandled.
If governments spend more than they earn, they can cause high inflation by borrowing to close the fiscal gap; hence the high prices.
It does not lie in the mouth of Government to accuse anybody of price-gouging.
There is strong evidence that high inflation and depreciation, the main manifestations of financial instability, undermine real growth.
However, there is little evidence that moderate inflation does so, though it pinches poor people hard.
Barbados’ fundamental problem is its failure to accumulate human and technological capacities. Thus the majority, unskilled and working in technologically backward sectors, earns a low income.
This also reduces Government’s ability to earn adequate revenue and foreign exchange, keeping fiscal and external balances perpetually under pressure.
The economy is described as “in crisis”. This term has little economic meaning and represents political rhetoric. However, economic crisis is an operational concept and describes an economy contracting significantly and/or facing a precipitously depreciating currency or high inflation.
The latter is important, as continued borrowing by Government could soon escalate inflation levels from moderate to high and cause an economic crisis.
These twin objectives can only be achieved by not increasing taxes or reducing subsidies that affect common people, for doing so would add to their misery and reduce their private consumption – which, in turn, would slow overall economic growth.
Efforts to reduce the fiscal gap and inflation should instead focus on pin-pointedly removing subsidies benefiting those better off and aimed at eliminating opulent consumption.
In addition, such efforts should target Government wastage. These include rationalizing the large fleet of its gas-guzzling vehicles; privatizing the Transport Board with appropriate subsidies to the poor, disabled and pensioners; increasing efficiency in the public service; merging Invest Barbados and the Barbados Investment and Development Corporation into one entity; and merging the Urban and Rural Development Commissions.
In these circumstances, the Ministry of Public Works and Transport should be abolished altogether as most public construction is now done by private contractors and the tenantry roads are done by the two Commissions. This work could be supervised by a technical board of engineers and planners in future.
Finally, we are far away from the 1960s and if indeed education and health are investments, then beneficiaries will have to contribute to the extent of their ability to these investments in future.
It does not make sense impoverishing all of us to try to sustain an unsustainable dream.

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