WHAT MATTERS MOST: What Sinckler is right about
By Clyde Mascoll | Thu, April 26, 2012 - 12:00 AM
Just over a week ago, Minister of Finance Chris Sinckler admitted that the economic measures introduced by the Government since 2008 have dampened economic activity in Barbados. He said that the measures were designed to protect the country’s foreign exchange and by extension its exchange rate. He suggested that the only variable over which the Government has control is fiscal policy and therefore the heavy dose of taxation can be justified.
To justify the Government’s fiscal policy, he asked the question: what would you prefer to have, the restoration of allowances, reduction in VAT or food on the supermarket shelves? In essence, he suggested that the tax on allowances will not be removed; the VAT rate will not return to 15 per cent; the generation of excessive profits by the Barbados National Oil Company off the backs of Barbadians via higher than necessary gasoline and diesel prices is okay.
The observation that fiscal policy is the only thing available to Government is to ignore who or what is responsible for the current fiscal crisis in Barbados. Since 2008, the Government was advised that the choice to stimulate the economy using current expenditure and not capital expenditure would come back to haunt the country.
The admission by Minister Sinckler is tantamount to a man starting a fire and wanting praise for putting it out. Unfortunately, the fire is far from out; and it will take several more years to extinguish it. The admission exposes a fundamental lack of understanding by the minister of the way the Barbados economy ought to be managed.
In the post-Independence history of Barbados, fiscal policy always mattered most. This is why most governments prior to 2008 paid so much attention to their ability to meet current obligations. There were only four occasions on which the obligations were not met out of Government revenue. Fortunately, the largest shortfall was only $21 million in 1987.
This basic principle was ignored in 2008 and beyond and is responsible for the country’s economic paralysis. After years of surpluses, the shortfall reached $189 million in 2008/09; increased to almost $500 million the following and peaked in 2010/11.
The shortfall is now a major concern in fiscal policy.
If the international environment were the culprit, then the country would have a balance of payments crisis. This did not happen because the Government was able to borrow from domestic sources other than the Central Bank and, more so, to borrow from foreign sources.
The Government chose to create a fiscal crisis. It then chose to tax businesses and households as one of the solutions to the crisis. In doing so, it has dampened economic activity in Barbados. So the Minister of Finance is absolutely correct.
The irony is that the only sustainable way out of this fiscal crisis is to grow the economy. However, excessive taxation contradicts the desire to grow the economy. As a result, Government’s policies have contributed heavily to the current depressed state of the Barbados economy.
The International Monetary Fund and international credit rating agencies are now forcing the Government to address the self-inflicted fiscal crisis. This coercion is designed to prevent a foreign exchange crisis since the Government is technically unable to borrow on the private foreign market. A foreign exchange crisis is even more critical than a fiscal crisis as foreign trade is crippled and devaluation is inevitable.
In the absence of heavy foreign borrowing in 2009 and 2010, the fiscal crisis would have triggered a foreign exchange crisis. Perhaps, the avoidance of the latter thus far has caused some trained economists to seek to defend the former. The situation has to be managed but it cannot be defended.
The consequences of such misguided fiscal strategy are dampening economic growth, galloping inflation and reduced spending power of Barbadian households. This combination of consequences is a recipe for declining living standards, increasing poverty and loss of confidence in the economy.
The notion that the Government is to become the employer of first resort, especially during an economic downturn, is the basis for medium-term economic disaster, regardless of the state of the international economic environment.
It should come as no surprise to reasonable men that Barbados’ response to the international downturn in 2008 and beyond was wrong-headed and has compromised the capacity of our economy to rebound.
• Clyde Mascoll is an economist and Opposition Barbados Labour Party spokesman on the economy.
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