WHAT MATTERS MOST: Government size matters

By Clyde Mascoll | Thu, May 10, 2012 - 12:00 AM

Government’s wrong-headed response to the economic slowdown in 2008 is responsible for the serious setback facing Barbados. This setback has the potential to compromise both our economic and social fabric well into the future.

Over the last four years, I have given a lot of thought to the circumstances that could have led the current administration to betray the obvious lessons learnt from the early 1980s and 1990s economic crises. The most obvious lesson is that there is a limit to the size of government.

Governments do not create wealth; they facilitate its creation. The size of government is therefore limited by the country’s capacity to create wealth, which is best done by the private sector and households.

Some may argue that the optimum size of government is as much a political issue as it is economic. While this may be true, the issue still is one of affordability. It is okay to have champagne tastes with mauby pockets, but be prepared for the consequences of trying to satisfy the tastes.

In similar vein, it is okay for a government to dream of being the employer of last resort but does it have the resources to finance the dream?

The answer is: no. The only way to create sustainable jobs is through the creation of wealth, which is done most effectively by combining human capital with physical capital to produce more.

In 2008, Government policies were put in place to prevent the creation of wealth as the owners of human capital – households – and owners of physical capital – private sector – were forced to support the Government’s dream. In the circumstances, the dream became the others’ nightmare.

The problem is that the dream was conceived in the daylight hours, when it was clear that short-sighted political opportunism was its driving force.

While political opportunism is all that some politicians seem to consider in Opposition, in Government other factors such as tax incidence, financial integrity and social implications of policies have to be considered.

In the face of a slowdown in the economy, it was inappropriate for the Government to raise the highest amount of taxes ever, in absolute terms, in the 2008 budget. It was a case of tax whatever there was to be taxed – from bicycling to professional services.

Given the diagnosis of the fiscal issues at the time, it was not possible for the heavy taxation to solve the problems. This is why by 2010, Government was once again forced to impose additional taxation to solve a spending crisis.

One of the major problems with excessive taxation is that it changes relative prices in the economy. This in turn influences spending patterns which may persist long enough to influence new investment patterns.

Changes in relative prices may be impacted enough to restrict overall investment, which has been Barbados’ experience in the last four years. This experience was not confined to large investments only but also to the small man, in services especially.

A Government simply has to consider the impact of its policies on the cost of living, economic growth, employment, foreign reserves, national debt and its own finances. It is a case of extreme economic ignorance when the current Government throws its hands in the air and pleads the external environment.

If the Government has to wait on the external environment to turn around, then it is time to become a colony of Britain once again and await instructions from abroad.

Apparently, Prime Minister Stuart is awaiting instructions on CLICO since he suggested recently that “there is nothing in the [forensic audit] report, quite frankly”. What rubbish!

Is the Government serious about anything that has an economic or financial component in it? The spokesmen initially denied the fiscal crisis, the underperformance of tourism, the decline in the economy, the national debt numbers, the impact of VAT on gasoline prices, the unemployment rate and the cost of living, to name a few.

It is also being suggested that a committee of ministers was analyzing the situation at Almond Beach in the months leading to its closure, which must be a joke. I made a remark about offering financial assistance to Almond and the minister of tourism indicated that it was not GEMS.

In the approaching silly season, for obvious reasons, it is expected that all failing businesses, of large enough size, would be looked at favourably.

l Clyde Mascoll is an economist and Opposition Barbados Labour Party spokesman on the economy.