Now that government has taken legislation to Parliament to make the VAT rate of 17.5 per cent permanent, it is clear that the general election is around the corner.
Having been promised a review of the VAT rate and the tax on allowances, taxpayers were looking forward to some relief.
But having managed the country’s fiscal affairs so poorly, Government is really in no position to offer tax relief. However, expect that politics will play and in the June Budget, there will some kind of goodies given to the taxpayers. This will come via either a reduction in income tax rates, an increase in the income tax bands or adjustments to some of the allowances and deductions for income tax purposes.
It therefore came as no surprise on the heels of announcing the permanence of the 17.5 per cent VAT rate that Prime Minister Freundel Stuart commented that the general election was closer than the public expects. It has to be closer because the political strategy was always to come back to the public prior to the election to give some relief to the taxpayers.
Since the policies implemented in December 2010 have been sold to the Inter-American?Development Bank (IDB) for US$33 million, Government now has to look for alternative policies to avoid offending the IDB, the international Monetary?Fund (IMF) and the international credit rating agencies.
It is evident that Government is truly trapped between a rock and a very hard place. It needs the money from the IDB to avoid breaking the new limit for the printing money at the Central Bank.
In fact, it needs the IDB money to reduce its net borrowing from the Central Bank which will provide some elbow room for more borrowing. As at March 31, 2012, the Central Bank was supposed to reduce its capacity to print money by $130 million. It has not been able to do so.
The inability to reduce the printing of money limit makes the IDB’s money precious. Since Government does not have the elbow room to spend for the election, it has to spend before it becomes known. The best way to achieve this is to call the election sooner rather than later.
This is the same Government that publicly scoffed at the idea of a stimulus package in 2008/09. A stimulus package, in the context of Caribbean economies,
is usually a programme that uses capital expenditure to finance projects to spur economic activity.
For the better part of the latter half of 2009 and into 2010, the fiscal data for Barbados was months behind in terms of publication. Lo and behold, when fiscal information once again became available on a timely basis, it was discovered that Government was engaging in a stimulus package.
However, it was a stimulus of a kind never before seen in Barbados and for that matter any other Caribbean economy.
Fiscal situation
The stimulus was the beginning of deficits on Government’s current account. This is tantamount to a household having to borrow to buy food for the family. The Government continues to borrow over $40 million per month to pay civil servants. Unfortunately, the fiscal madness continues. The real test for Government comes in the third quarter, July to September.
The economic facts for the third quarter would not be truly known until sometime in the fourth quarter; availability of these facts will influence the calling of the election. Â
In this country’s worst economic period in the early 1990s, when unemployment was 24 per cent, the fiscal situation was manageable.
In the current environment, the fiscal crisis is only manageable if Government has access to new borrowing on a regular basis.
Foreign borrowing from the private international market is almost impossible and so the money from the IDB is a must.
It comes as no surprise that within the space of two weeks Prime Minister Stuart has switched from saying that he has until April next year to closer than the public thinks. He may be indecisive but in this case there is a logical reason for his indecision.
The Minister of Finance agreed to the Fiscal Consolidation Programme with the IDB without fully involving his colleagues. Once it became evident that the measures had to become permanent their impact on the middle class in particular had to be assessed from the perspective of votes.
Time will always be longer than twine!
• Clyde Mascoll is an economist and Opposition Barbados Labour Party spokesman on the economy.
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