Any attempts to correct the fiscal imbalance must of necessity involve revenue enhancement.
I, therefore, propose, effective December 1, 2010, to increase the value added tax (VAT)?rate from 15 per cent to 17.5 per cent. This increase in the VAT is intended as a temporary measure for the next 18 months . . . . This measure is expected to raise an additional $124 million.
“I also propose to eliminate the tax-free allowances for travelling and entertainment granted to employees starting for the current income year. This measure will result in revenue savings of $25 million. – Minister of Finance Chris Sinckler’s first Budget Speech, November 22, 2010.
The Estimates were released a couple of weeks ago and provide interesting reading. Unfortunately, they prove the failure of the austerity measures of the Government following the death of David Thompson.
Mr Sinckler, in his first Budget speech, was facing economic armageddon and he followed the austerity mantra then in global circulation.
Here is how New York Times columnist Paul Krugman put it recently: “In early 2010 austerity economics – the insistence that governments should slash spending even in the face of high unemployment – became all the rage in European capitals . . . . (The doctrine asserted) that savage spending cuts would lead to a surge in consumer and business spending . . . .
“(However) the confidence fairy has failed to show up: none of the countries slashing spending has seen the predicted private sector surge. Instead, the depressing effects of fiscal austerity have been reinforced by falling private spending.” (Krugman, February, 2012)
The austerity mantra continues to hold sway, but in a New York Times editorial last week, the newspaper noted: “Political leaders across Europe have begun to push back against the campaign of Chancellor Angela Merkel of Germany to put the continent’s economies into a straitjacket of unrelenting fiscal austerity. It is about time. Two years of insisting that weak economies carry out tax increases and spending cuts have brought nothing but recession and deepening indebtedness.”
Much of Mr Sinckler’s efforts as Minister of Finance have been centred on getting Barbados’ fiscal deficit down in order to avoid a credit downgrade to junk bond status by the ratings agencies.
He is now claiming some victory by getting it down a tiny bit below projection for the year just ended.
But the price has been far too steep for all citizens and we have little to show for it. Right on Mr Krugman’s point, our economy did not grow last year by the amount on which the Budget measures were predicated.
With the unemployment rate now at over 12 per cent, we have a VAT rate which seems to be performing as per the minister’s prediction. Is the one reinforcing the other?
In the financial year April 1, 2011, to March 31, 2012 (the main period of this 18-month increase), VAT receipts rose by $90 million, $35 million more than predicted in the Estimates.
VAT is now predicted in this new financial year to bring in a further $66 million, moving to $942 million for the entire 2012-2013 fiscal year.
I guess we must assume that some of this increased VAT revenue is made up of retro filings by people wanting to enjoy the full amnesty from interest and penalties which expired on December 31.
I wonder how that target will be achieved if Mr Sinckler does allow the increase to expire at the end of next month as promised. Like a cancer, VAT grows while the body it feeds on does not.
As for the abolition of the personal allowances, what has been the outcome? Income tax revenue, which had totalled $355 million by the end of March 2010 and had risen to $411 million by the end of the financial year in which the allowances were abolished, remained flat in the ensuing financial year.
Revised estimates for the year ending March 31, 2012, show income tax revenue of just $1 million higher, $12 million. And that presumably includes people taking advantage of a similar amnesty for retro filing of income tax as offered as for VAT. There was no $25 million increase as predicted by the minister.
Import duties also remained flat, bringing in $180 million, about $2 million less than the take for the previous year, although the estimate had been put at $216 million. Imports in the last calendar year were just $100 million more than for the previous year, according to the Central Bank. And some of that might be higher oil prices.
And excise taxes? They brought in only $14 million more, reaching $260 million, not the $275 million in the Estimates and Budget, probably again more due to oil price rises than more consumption.
“In aggregate these tax measures are expected to generate in excess of $175 million in tax revenue for the Government of Barbados,” said KPMG in its Tax News Flash dated the very same night. (I really love it when highly-paid tax consultants suddenly become journalists for one night, burning the midnight oil to give us their immediate, immediate analysis of these Budget speeches. It is a tradition with decades of history and long may it continue.)
Alas, not even the Government itself felt so strongly by the following March, putting the estimated overall revenue increase at just $90 million, for a 2011-2012 total of $2 490 million. But, as it turned out, the market felt even less confident, bringing Government’s total revenue in at $2 408 million, $2 million less than it was at the end of the previous year.
Yes, folks, despite all that extra VAT you have had to pay and, if you are in the middle class, up to $5 200 more in PAYE thanks to the loss of those allowances, plus 50 per cent more in excise taxes and some strange messing around with land tax bands and valuations, Government actually brought in $2 million less in the fiscal year following Mr Sinckler’s Budget Speech.
Oh, confidence, thou art fled (as expected) from austerity measures.
The Government has a very convenient whipping boy in “global recession”, but, in my view, the austerity policies adopted by Mr Sinckler have failed and have helped to drive more nails into the coffin of the Barbados economy.
• Pat Hoyos is a publisher and business writer.