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WHAT MATTERS MOST: Govt doing the sucking

Clyde Mascoll

WHAT MATTERS MOST: Govt doing the sucking

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The Governor of the Central Bank of Barbados recently reported that “the Barbados economy remains stable, and we may be witnessing the beginnings of a slow recovery, but there is some distance further to the resumption of sustained economic growth”.
Two days later at a church service, Minister of Finance Chris Sinckler suggested that the economy would grow by two or more per cent, not this year but in 2013.
To put the bank’s diagnosis in context, let us recall that the vital signs of growth, unemployment, inflation and fiscal position in the economy were all healthy just prior to the chronic illness.
The Barbados economy is smaller now than it was in 2007; it has lost weight. The weight loss is significant in both nominal and real terms. But of equal importance is that the loss occurred across the entire body/economy, with one noticeable exception, the Government sector has gained weight.
Since the Government sector feeds off the rest of the body, it is important to understand how the sector grew when the rest of the body was, and still is, sick. The Government truly sucked on the nipples of the households and businesses with telling effect since 2008. And one is left to wonder, not of whose nipples Prime Minister Freundel Stuart is referring, but who is doing the sucking?
Quite frankly, it is the Government.
In an effort to satisfy its insatiable appetite for spending in pursuit of its misguided political strategies, the Government continues to milk the anemic proverbial cow. In 2011, the economy was almost $200 million smaller than in 2007; yet the Government extracted $952 million in VAT in 2011 when compared to $790 million in 2007.
These simple statistics demonstrate a wrong policy emphasis. It is indeed important to have the foreign exchange to put goods in the supermarkets, but it is also critical to leave money in the pockets of Barbadians to allow them to purchase goods and services and create jobs.
The only way in which a Government could grow while the rest of the economy is losing weight is through raising the dosage of taxation. The economy experienced its largest ever real weight loss in 2009 and continued its controversial nominal weight loss in 2010.
In the face of both real and nominal weight loss, the Government poisoned the economy with a heavier dose of taxation in 2010 that delayed its recovery and further complicated its condition. The timing of the heavy dose was put in context by the Central Bank: “The fiscal initiative came at a critical time since Barbados’ sovereign credit rating was downgraded by Standards & Poor’s to just above speculative grade bonds, otherwise known as junk bonds.”
So contrary to what the Minister of Finance recently suggested, the heavy taxation was designed to correct a fiscal crisis not to protect the country’s foreign reserves which remained stable over the last four years.
The history shows clearly that Barbados’ economic recessions are characterized by fears of loss of foreign reserves. At no stage since 2008 has the Central Bank expressed fears of not having adequate foreign exchange cover. It has, however, feared that the Government has been unable to make some payments on schedule.
This fear prompted the Central Bank to increase its printing of money by $130 million at the end of September 2011, which was supposed to be a temporary increase until March 31, 2012. Has the limit of primary issues held by the Central Bank reverted to $120 million?
This is the kind of question that the governor of the bank should have been answering in his most recent Press conference. The issue of whether or not the economy will grow by less than half of one per cent is irrelevant in the circumstances, especially when going to a fortune teller is better.
It appears that the Government, in a broad sense, has now come to the view that growing the economy is the only sustainable way to address the issues of unemployment and the fiscal crisis. The misguided view that heavy taxation is a viable option must by now be recognized as a huge mistake.
In the circumstances, an alternative diagnosis of the Barbados economy is that it remains critically stable. It is critical that real and visible economic growth becomes the source of any perceived stability.