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It’s stagflation!

rhondathompson, [email protected]

It’s stagflation!

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ACCORDING TO THE MOST RECENT PRESS RELEASE of the Central Bank of Barbados, the economy is in a classic state of stagflation and not stability, and is further paralyzed by a fiscal crisis for which economic solutions exist but political fears reign.
Stagflation is the simultaneous occurrence of rising inflation and unemployment.
Even though the economy has been described as stable, this stability may be seen in the same light as, in a medical context, the statement that a patient after a serious accident “is resting and in a stable condition”.
Notwithstanding the unhealthy state of the economy, the Medium-Term Fiscal Strategy document identified that medication has been administered over the last two fiscal years. It will not be administered in the fiscal year starting April 2012 and ending April 2013, but miraculously resumes the following year.
Imagine a medical doctor diagnosing a patient with a serious illness but taking a decision to postpone treatment for some personal gain.
Domestic policies have contributed to the state of stagflation. It is surprising how the inflation rate of 8.7 per cent in 2011, the highest rate since 1982, could be virtually ignored in the Central Bank report. Furthermore, it was suggested that “high oil and commodity prices continued to drive up inflation”, with no reference to the increase in the VAT rate from 15 to 17.5 per cent and the 50 per cent increase in the excise tax on gasoline.
High inflation rate VAT is imposed on most goods and services in Barbados. Therefore an increase of the rate by 16.7 per cent for a full year in 2011 compared to 2010 must have an inflationary effect.
But it is impossible to ignore the increase in the VAT rate on the highest inflation rate in Barbados since 1982.
Reported economic growth for the last two years has caused some trained minds to wonder. In 2010, the Barbados Statistical Service reported that nominal GDP fell, but the Central Bank of Barbados identified real growth of 0.2 per cent, which is mind-boggling when consumer prices rose by almost 6 per cent.
For the layman, trying to understand this mystery is like trying to make sense of an individual weighing more with his clothes off than with them on. The clothes would have to weigh a negative amount!
At the end of June 2011, the economy grew by an estimated 2.1 per cent; by the end of September the growth was 1 per cent; and now it is estimated that the economy grew by 0.5 per cent for the entire year of 2011.
The figures show clearly that the economy declined significantly in the second half of the year.
Economic growth is the key to restoring prosperity, and it must be led by the private sector. Unfortunately, the current administration has backed itself into a state where it has sucked resources from households and businesses.
This has gone contrary to what is required to inspire economic growth.
Tax relief needed
The question therefore is: how can fiscal consolidation be increased without further compromising economic growth? It is not possible to impose more taxation. In fact, there is need for tax relief. This relief allows for more spending and yields more expenditure taxes such as VAT.
The fact of the matter is that the Government chose itself over the taxpayers by raising income taxes, VAT, professional fees and all forms of taxation.
The result has been economic misery for all taxpayers, especially those in the middle class.
The political argument that public sector jobs are being protected ignores that it is being done at the expense of private sector jobs. Since 2008, over 5 000 private sector jobs have been lost and almost 6 500 more Barbadians are unemployed.
There are ways out of the current state of stagflation which must start with Government policies of: (1) tax relief; (2) alternative sources of Government revenue; (3) expenditure consolidation and (4) expenditure switching. In the short- to medium-term, the tax relief programme must be accompanied by the revitalization of the international business sector.
This alternative source of revenue is a counterpart to the benefits derived from expenditure consolidation.
The details of the various components of the fiscal relief, revival and restoration will be released strategically over the course of this year.       
It is time for the Government to change its mindset from one of recession to one of recovery. The patient needs to have confidence in the doctor.
• Clyde Mascoll is an economist and Opposition Barbados Labour Party spokesman on the economy. Email [email protected]