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WHAT MATTERS MOST – Restraint, but no freeze

Clyde Mascoll

WHAT MATTERS MOST – Restraint, but no freeze

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FOR THE FIRST TIME in the post-Independence history of Barbados, the spending of Barbadians declined in 2010 and this appears to have continued into the year 2011.
This never happened during the quadrupling of oil prices in 1973, the international recession and high interest rates of the early 1980s and the impact of the Gulf War in the early 1990s.
So what is the difference? The answer is the response of the Government. On the previous occasions, the Government reacted by stimulating the economy through spending on capital projects, with the exception of the early 1990s when the country had little choice but to accept a major International Monetary Fund programme.
In 2008, the response was to spend excessively on the current account. The two approaches are fundamentally different, with the former being the essence of Keynesian economics and the latter being the essence of fiscal ignorance.
While Barbados has a self-imposed fiscal crisis, it still has more than 20 weeks of foreign exchange reserve cover.
It is always preferable for economic growth to be driven by tourism and other foreign exchange-earning sectors and it is being suggested that this is the case in 2011 so far. The big difference is that the growth has not been accompanied by an accumulation of foreign reserves because tourists are spending less.
If tourists are spending less and Barbadians are being taxed more, then Barbadians have less to spend. This simple logic is being reflected in the relevant economic indicators.
In a spell of magic or perhaps with the use of a magic bullet, the Central Bank has found a way to show that input prices in Barbados fell last year and continued to fall in 2011.
As is taught in mathematics, two negatives created a positive – that is, the fall in total spending collided with a fall in prices to produce real economic growth in Barbados for the last year and a half.
This is magical indeed!
The challenge is how to first of all restore total spending in the Barbados economy as the basis for restoring real growth.
While the private sector may be of the opinion that to increase wages is going to increase costs, it must recognize that increasing wages is the way to increase demand for goods and services. So there is need for balance.
The balance is to respect the reality that low-income workers are being hurt most by higher prices for food, electricity, water and other living costs. However, middle-income workers have not only experienced the same rising prices as low-income workers but have had to endure taxes on their allowances.
Therefore a policy of balance with respect to wage increases must be approached as follows: (1) workers earning less than $18 000 per year who qualify for the reverse tax credit must receive a wage increase;
(2) workers over $18 000 but less than $25 000 who neither pay taxes nor receive the reverse tax credit must receive a wage increase; and (3) those who earn $25 000 must receive a combination of income tax relief and wage increase.
The last recommendation eases the pressure on both private and public wage bills.
The ability to pay may differ across the public and private sectors and even within the private sector and so the negotiation process would determine the extent of wage increases. But the private sector must appreciate that the unusual decline in total spending in the Barbados economy in the last year and a half is itself a major cause for concern for businesses.
In the circumstances, please do not be sucked into the notion of wage freeze. There is always need for wage restraint, but this is implied in the wage negotiation process.
The best way forward is for tax relief to be accompanied by sensible and realistic wage increases in both the private and public sectors.
The medium-term issues confronting the Barbados economy are still structural in nature, except that they have been compounded by a self-imposed fiscal crisis which brings the ability of the country to deliver social entitlements into greater focus.  
 Clyde Mascoll is an economist and Opposition Barbados Labour Party spokesman on the economy. Email [email protected]