BARBADIANS have been prepared to pay more taxes by the governor of the Central Bank and the minister of finance over the last few months. But, there has to be major conflict between the chief economist and the politician in the area of policy effects.
It is widely known that there is a persistent fiscal deficit that has not fallen in relation to the excessive taxation imposed on the backs of Barbadian taxpayers. The problem lies in the fact that the economy has not grown over the last eight years. This is the direct consequence of the stifling taxation policy of the Government.
It is Economics 101 that consumption is the basis of economic growth. Barbadians simply have not been able to increase their consumption because of the lack of spending power. The latter is the result of disposable income that is the money left after income taxes have been taken out of the worker’s pay packet. In the absence of salary increases and lower income taxes, Barbadian workers have struggled to buy more goods and services in the economy.
Furthermore, as the prices of goods and services continued to rise, the spending power of Barbadian consumers declined. This is because the dollar purchases less.
There is a false notion that once more tourists are coming to Barbados, the spending power of the Barbadian consumers does not really matter for the purposes of economic growth. In essence, there is a belief in some quarters that production alone is the basis of economic growth. This notion was dismissed by the father of economics, Adam Smith, as far back as the 18th century.
Given the above, there has to be conflict between the governor of the Central Bank and the minister of finance. On the one hand, the former must know that persistent increases in taxation go contrary to the objective of economic growth. The latter is expected to be told, but may decide that it is in his interest to preach economic growth.
In an imperfect world, it is sometimes possible to get contrary results. However, it is impossible for the contrary results to persist. If there is no expectation with respect to taxation policy, then centuries of economic thought would have been useless. Furthermore, if there is no expectation with respect to taxation policy, then there is really no need for a government.
People sell their labour services to businesses in the expectation of receiving a wage or a salary. They expect to be able to purchase the goods and services that they need to keep their families at least satisfied that life is worth living. If a government is necessary to provide some basic public services, then there is an expectation that the families and businesses will pay some taxes. However, there is a limit and Barbados has long passed that limit.
This does not mean that the Government will not collect more taxes over time, but the increases have to come from the growth in the economy. The absence of growth in Barbados has been predominantly the consequence of inappropriate taxation policies. It is therefore unbelievable that any government will have the evidence to support its ignorance and persist on the wrong path.
In this regard, the governor of the Central Bank is preaching the imposition of more taxes to protect the country’s foreign reserves and by extension its exchange rate. The minister of finance is preaching more taxes as a way of growing the economy. There is obvious conflict between these two positions. Unfortunately, knowledgeable people, including the business community, sat back way too long and allowed the ignorance to persist without genuine objection.
It is unfortunate that business people only become truly disturbed when their profits are being threatened. This makes their behaviour even more surprising, since the threats to profitability have been around for quite a while.
There was the rumour [before the Budget] of a tax on banks’ assets or profits. Pardon me! Deposit rates have been lowered. So banks should make more profit. The burden of such a policy is effectively being carried by the depositors.
Having increased income taxes by removing allowances and deductions, the income tax route is exhausted. It is not possible to raise the VAT rate. The choice is a tax on expenditure and/or businesses, particularly those that have been chosen to make profits.
The taxation policies are not about economic growth. They are simply to reduce the fiscal gap that still has a lot of hidden expenditure.
Wake up, Barbadians!
• Dr. Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy. Email: clyde_mascoll@hotmail.com