The government continues to baffle us all with its approach to public and tax policy.
The society was deemed to be more important than the economy. A home-grown fiscal crisis was to be addressed predominantly by expenditure cuts but raising revenue is really what is being emphasised. Middle class Barbados is increasingly being turned into the working poor.
Notwithstanding the recent rhetoric about the society, the reality is that Barbados’ high ranking in the Human Development Index was always driven by the strength of its social indicators. Ironically, the real casualties of the current economic fallout are declining access to quality health care, university level education and secure adequately valued pensions. The first two issues are obvious but the latter has more serious implications in the future.
In essence, a persistently poorly performing economy lays the foundation for social decay. So far, seven years of economic decline are reflected in the major macro indicators of growth, unemployment, debt, foreign exchange and fiscal deficits, but indicators such as the dissavings of households, lower profitability of businesses and reduced economic wealth are not as obvious yet are equally critical to any recovery.
There is no doubt in the minds of economists that the Barbados economy has actually contracted by more than the official numbers are suggesting. This is not to reflect on the institutions but moreso on the methodologies that have been allowed to prevail for decades without serious consideration of revision. The current crisis brings everything into focus, including the way the real gross domestic product (GDP) is measured.
A revised methodology was used to measure Barbados’ nominal GDP figures since 1995. The main revision had to do with including estimates for international business corporations and imputed rent on owner-occupied dwellings. These issues are too technical to be treated comprehensively in this article, but suffice to say that the economy was about 20 per cent larger with the revision.
In layman’s terms, the consequence of not including the imputed rent is that the more Barbadians increased their ownership of dwellings/houses, the poorer the country was becoming, which is an obvious conundrum. The revision was an absolute necessity.
In acquiring a mortgage to own a home, the house carries equity that over time may increase. This permits the owner to borrow more because of the accumulated equity. Financial institutions therefore encourage the owners to borrow more.
In an economy where incomes have remained virtually fixed for several years, households have had to dissave, that is, use up their savings in order to maintain an accustomed lifestyle of consumption. In addition to digging into their savings accounts, some funds might have come from credit cards and for bigger ticket items, home equity.
When an economy runs into difficulty, property values are bound to fall. Mortgage owners find themselves with less wealth and less access to credit. These circumstances lead to increased burden especially for the middle class who are the majority property owners. Â
The burden was compounded when the Government removed the allowances for individuals converting bonuses into bonds, debentures, stock of the Government of Barbados and mutual funds. In addition, there was the removal of the allowance for investment in the shares of credit unions, new public companies and mutual funds. Not only was tax policy used to suppress private consumption, but the ability to save was tarnished in Government’s efforts to rake in as much revenue as possible in 2010. Some four years later, the story is the same except that the magnitude of the problem is much bigger.
So rather than improve, the fiscal crisis which started at the end of 2009 has worsened significantly. This is consistent with what has transpired since August last year, when measures were announced to improve the fiscal deficit and by the March 2014 Estimates debate, the deficit was larger.
What is happening now did not start last year. The issues have been permitted to morph into severe structural fiscal issues characterised by the excessive printing of money.
• Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy.
