Whenever?the International Monetary Fund team visits Barbados for consultations, it meets with the Opposition and private sector organizations. The same is true for the international credit rating agencies Moody’s and Standard & Poor’s.
Therefore all credible spokesmen on the economy are expected to read the various reports. The notion that any reputable economist would “wreck the economy” is absolute rubbish.
It is impossible for any economist, or even a professor, to evaluate a tax relief package to inspire much needed economic growth, address the cost of living and generate some employment that he/she has not seen. Such an evaluation requires the cost of the package to be known, the benefits of the measures to be analyzed and the threats and challenges to be weighed.
It is now evident that the authors of the tax relief have become the focus, not the efficacy of the policies. This conclusion is supported by the fact that in June 2012 Budget, the Minister of Finance confused himself and the public when he “. . . proposed that as of August 1st, 2012 . . . persons earning between $24 200 and $30 000 will pay 17.5 per cent on the amount between $24 200 and $30 000 and those earning more than $30 000 will pay 17.5 per cent on the assessable income up to $30 000 and will continue to pay the upper rate of 35 per cent on anything above 30,000 dollars”.
The minister really meant to say that the first $30 000 of taxable income would attract a marginal tax rate of 17.5 per cent and all taxable income over $30 000 would be charged a 35 per cent rate. In the end, the first tax band was raised to $35 000.
The feeble attempt to stimulate local spending came after years of rejecting such a strategy suggested as far back as 2008. It came at the end of a five-year period of decline where the Barbados economy was smaller in 2012 than it was in 2006. This is not acceptable.
There is some inconsistency in Professor Howard’s observations. Not too long ago, he argued for the restoration of the VAT rate to 15 per cent. This would suggest that he was not in favour of the excessive taxation.
Indeed, his fears were recently realized, when the Governor of the Central Bank reported that VAT receipts fell by 2 per cent notwithstanding the increase in the VAT rate to 17.5 per cent. The Barbados economy is suffering from a classic case of fiscal drag, where excessive taxation has reduced local spending.
Since VAT collections are very much related to spending, it is expected that for the receipts to fall, in the face of a higher rate, spending has been dragged down. This is taught to first year students at the university. That is why I am able to repeat it.
The notion that stimulating spending in the Barbados economy can only be done by tax relief is false. For example, Barbadians’ electricity bills have to be reduced by a combination of reducing the VAT rate and the fuel adjustment clause (FAC). Given the size of the FAC, the cost of bringing the VAT rate back to 15 per cent would be far less. A significant reduction is coming!
Research has shown that the sale of fuel oil to the Barbados Light & Power (BL&P) accounts for over 60 per cent of the total revenue of the Barbados National Oil Company (BNOC). However the BL&P’s customers pay the total cost of the fuel oil in the form of the FAC plus VAT, but this amount is simply passed through the books of BL&P, without the latter making any profit or deriving any benefit from the transactions. In short, BNOC and Government are the beneficiaries.
Over the past five years, Government policies have suffocated households and, by extension, the private sector. This is best reflected in individuals having to deplete their savings. It is also reflected in the fact that Barbadians have spent less on imports in 2011 and 2012 than in 2006 and 2007. As a result of less spending, the average foreign reserves have been better for the last five years than at any other five-year period since Independence.
In the circumstances, a $90 million stimulus, which in effect is about $62 million net, given what Government gets back from the boost to spending, cannot wreck an economy that has $1.46 billion in reserves at the Central Bank and almost $3.0 billion in reserves in the entire banking system.
Do the research, Professor!
• Clyde Mascoll is an economist and Opposition Barbados Labour Party spokesman on the economy.
