An economy is ultimately the interplay between the Government, the private sector and households. The objective of the interplay is to create wealth which is predominantly measured by the country’s national income or gross domestic product (GDP). The GDP is the value of goods and services produced domestically within a given time period, usually a quarter or a year.
The intention is for the economy to grow from year to year to reflect boom, but it may decline to reflect bust or recession. When the economy is growing all three economic agents are happy, in the sense that the Government collects more revenue, the private sector makes more profit and the households are employed and therefore take home more income.
When the economy is not growing or is in decline, the role of the Government is to assist in helping out the private sector and/or households. This requires timely and effective action on the part of the Government to stop the decline initially and eventually to restore growth in the economy.
The view that the Government steps to the plate in times of recession was born out of the unorthodox approach, at the time, to the depression of the 1930s. The centrepiece of this approach is the injection of money by the Government in the economy which is at variance with the classical view that the markets would adjust on their own to solve all economic problems.
Once Caribbean countries attained political independence in the 1960s, the model of government intervention in the economy was the accepted standard. This meant that fiscal deficits became the order of the day to accompany the existing balance of payments deficits. The latter means that the country is buying more from the rest of the world than it is selling and the former means that the government is spending more than it is earning.
The major consequence of these twin deficits is that Caribbean countries have experienced significant growth in their national debt which could become crippling or manageable, depending on the size and, of equal importance, the structure of the debt.
As these deficits persist and grow in tandem with the national debt, it becomes more imperative to manage the country’s fiscal affairs more prudently. This is why the fiscal crisis in Barbados is unforgiveable.
There is no justification for the Government’s current account moving from a surplus of $115 million in 2007 to deficits of -$121 million in 2008 and – $449 million in 2009. The deficit will exceed -$500 million in 2010.
The anticipated imposition of more taxation in Monday’s Budget on Barbadian households and businesses would do more damage to the economy. The best way to solve the fiscal crisis, which is going to take at least five years, is through growth in the economy. It is therefore outrageous to suggest that the country’s economy has to await growth in the United States and Britain to grow.
Just over three quarters of the Barbados economy depends on the spending of locals, it is unrealistic to expect one quarter to pull three quarters up in its existing weak condition. Everyone understands the importance of earning foreign exchange to the Barbados economy, but accumulating reserves is not a sufficient condition for restoring the economy’s health.
It is said that Barbados is not an economy and an economy is not about numbers but people, so why are the people going to be asked to bear more taxation in Monday’s Budget? Furthermore the economy is still in recession and the lessons of 2008 taxation must be heeded.
The country has reached a new low in its fiscal affairs and at some time the analysis has to be done to find the truth. The dramatic increase in the country’s national debt over the last two years
is a direct consequence of poor fiscal management.
The greatest fear in this economic madness is that Barbados may still be seen as only a society.
• Clyde Mascoll is a professional economist and former Government minister in the last Barbados Labour Party administration.
