IN RECENT WEEKS, I have paid a lot of attention to the plight of the middle class because the fiscal crisis confronting Barbados has triggered a middle income crisis.
This attention is based on research which is not the easiest to present in a column.
In light of the excessive spending of Government, the middle class, who pay the bulk of taxes in Barbados, have been forced to pay even more on fixed incomes. Neither increasing the printing of money at the Central Bank nor increasing reliance on the National Insurance Fund has proven to be adequate for the financing of the unprecedented spending of Government.
Historically, Barbadians have paid taxes that have allowed the various governments since Independence to deliver an enviable social entitlements programme.
Indeed, the social component of Barbados’ development has been responsible for its very high ranking among developing countries in the United Nations Human Development Index. In some ways, Barbadians have tolerated the levels of taxation because of the benefits that accrued to them.
Since 2008, the fiscal model that has assisted in the management of Barbados over the years has gone haywire because of the Government’s incompetence, not the international economic environment. It is still true that the country does not have an economic crisis, but rather a fiscal crisis that is paralyzing the economy.
In an attempt to cope with the self-imposed fiscal crisis, the Government has created a middle class crisis of a kind never before witnessed in Barbados. During our worst economic crisis in the early 1990s, the middle class feared much better than in the current fiscal crisis. There are reasons for this.
Barbados’ tax system does not affect all income classes the same. The value added tax (VAT) hits the low income groups proportionately harder. On the other hand, the income tax structure is designed to protect those at the bottom of the income ladder. This protection comes in the form of an income tax threshold as well as a reverse tax credit.
According to the income tax threshold, the first $25 000 of income earned per year or $2 083 per month is tax free. The first $24 200 of taxable income per year or $2 017 per month pays a 20 per cent rate.
Coincidentally, when the monthly tax threshold income is added to the maximum of the first taxable income category per month, the result is $4 100 per month which is the maximum national insurance income level. This is the kind of finding that triggered a fuller investigation of the incidence of taxation.
In the fuller investigation, it was noted that the maximum monthly allowances are $1 250, that is 25 per cent of $5 000 per month. The taxation measures since 2008 of removing some allowances and deductions, taxing allowances and, of course, the increase in the VAT rate, have been a major burden especially to middle class Barbadians.
The same way, in which the allowances reached their maximum benefit on a person with an income of $5 000 per month, the burden of imposing taxes on allowances was felt most by those within this income category.
Further analysis has also shown that many middle income earners took home less pay in 2011 than in 2007, in spite of receiving increases in salary between 2008 and 2010. Since 2010, public sector workers have not had an increase in salaries and the increments have not been sufficient to offset the taxes on allowances and slight increases in National Insurance contributions.
Furthermore, when the analysis is done on the spending of take-home pay, the increases in food prices, electricity and other utility bills, road taxes, gasoline prices and the VAT have so eroded the incomes of all classes of workers, that several individuals have had to borrow to maintain their standard of living.
Since borrowing is not a good option to meet current consumption, it is easy to understand why private sector employment has suffered. Simply put, less household spending means less private sector jobs. This was reflected in the fall in nominal GDP in 2010, and the figures for 2011 are awaited.
The tax on allowances has to be removed immediately. I never expected the VAT rate to come back to 15 per cent and still do not.But the key domestic policy to help economic growth is to increase household spending through tax relief. Clyde Mascoll is an economist and Opposition Barbados Labour Party spokesman on the economy. Email [email protected]
