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The real politicians

Clyde Mascoll

The real politicians

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It is now politically correct for the Government’s economic advisers to argue that the use of excessive taxation on Barbadian households and businesses is designed to protect the country’s foreign reserves.
In 2008, when the Government imposed the heaviest dose of taxation ever, the foreign reserves stood at over 16 weeks of import cover. In 2010, when another dose of heavy taxation was administered, the import cover was better. And in 2012, the cover hovers around the level of 2008.
The taxation was always designed to narrow the gap between the spending of Government and the collection of revenue. In the 2008 Financial Statement And Budgetary Proposals, the then Prime Minister David Thompson made it quite clear when he said: “Mr Speaker, these net revenue gains will go some way to reducing the overall planned deficit of the country or to meet [an] increase in Government expenditure that may have arisen since the presentation of the Estimates in March this year.”
There was never any thought of increasing taxation to protect the foreign reserves, simply because there was and still is no foreign exchange crisis. However, the words of the late Prime Minister, “to meet an increase in Government expenditure that may have arisen . . . ”, were sending an early message of the fiscal crisis that was to come, and it did.
Since the 2008 Budget was the first after the change in Government, it was expected that the new Government would attribute blame to the previous Government, and it did not disappoint. Indeed, Thompson said: “But it is my duty to tell you in simple terms that my Government is still discovering cases of excessive spending and fiscal irresponsibility that can only be explained in terms of a regime that assumed that it would rule forever and that no one outside their Government would ever discover the mess they were creating.”
It is staggering that such an observation was made of a Government that realized an overall fiscal deficit of $300 million in 2007-2008, in the face of hosting the Cricket World Cup, when compared with the current Government’s fiscal deficit of $775 million in 2010-2011. Talk about fiscal irresponsibility! The country moved from a manageable fiscal position to a fiscal crisis in the space of two years.
The fiscal crisis was truly the result of excessive spending on the current account. This approach led to the Government having to borrow money to pay civil servants on a sustained basis for the first time in our history. The series of heavy taxation was therefore an attempt to stop this unprecedented occurrence.
In the same 2008 Budget, Thompson observed that “while the impact of the global slowdown on domestic output growth was limited, rising international commodity prices and higher inflation in Barbados’ major trading partners had a significant effect on domestic inflation”.
To understand the alternative policy position of other economists with respect to offering tax relief, it is best to juxtapose the quotation above with the following from the same 2008 Budget: “Average output in the non-traded sectors, the main engine of growth from 2005, grew by approximately 2.0 per cent, substantially below the average first-half expansion of 5.1 per cent recorded between 2005 and 2007.” The “average output” was for the first-half of 2008.
How come it is now being suggested by the Government’s economic advisers that growth in the non-traded sectors is not good for the Barbados economy? The other economists all know that the earning of foreign exchange is critical, but we also know that in the presence of adequate foreign reserves, the non-traded sectors have been the main sources of growth in the Barbados economy; the latter accounts for 76 per cent of the economy.
It is unfortunate that economic policy is now being designed to accommodate a false notion that Barbados’ major economic problems are the consequences of external factors. This notion is political and therefore suits the season, because it attributes the blame for the country’s major economic problem of a fiscal crisis to external factors.
Such a false perspective stops the Government from understanding that our economic growth is predominantly triggered by domestic spending (non-traded sectors), while our foreign-exchange earning is the result of international spending (traded sectors).
This basic understanding is at the heart of an alternative policy long proposed by those on the right side of common sense, irrespective of which side of the political aisle they stand.
• Clyde Mascoll is an economist and Opposition Barbados Labour Party spokesman on the economy. Email [email protected]