I WONDER why, despite all the evidence before it that the economy is downsizing, shrinking at the very time it needs to be expanding in order to absorb some of the shedding of Government workers, the Stuart administration is raising the cost of living.
Probably the two quickest ways to lower the cost of living would be to return VAT to 15 per cent and remove the 50 per cent increase in the Excise Tax put on in late 2010. Lowering both of these taxes should not cause Government to take in less money; in fact, the opposite might occur.
The economic result, assuming all of the tax reductions were passed on to the consumer, could hardly be worse than what we are seeing now, with lower revenue coming in despite the raising of both taxes.
Ignite
However, it could be a spark to help ignite our failing economy.
Let’s take a quick look at the numbers. According to the Central Bank of Barbados’ June Press release on the economy for the first two quarters of this calendar year and the first quarter of this fiscal year, Government revenue fell by about eight per cent. Contributing to that decline was a falloff in personal income tax collections by close to 20 per cent.
Some of this was caused, the bank noted, by the adjustment made by the administration for its own draconian policy of taxing personal allowances, and those changes were meant to put more money back into people’s pockets, although not up to the level previously enjoyed.
But the partial restoration of some their previously disposable income was not enough to cause consumers to purchase more. So, as noted here before, in the first full fiscal year after the VAT was increased from 15 per cent to 17.5 per cent there was a huge improvement in Government revenue from the tax, which brought in $765 million in the year of partial introduction to $940 million for fiscal 2011-12.
Alas, consumers adjusted their spending to suit their increasingly mauby pockets and VAT revenue fell to $878 million for the second full fiscal year at 17.5 per cent. For the April to June quarter this year it is estimated to be still sliding downward, from $230 million for the same period last year to $210 million.
That’s not all. The Excise Tax tells a similar tale of woe. Like VAT, it went up to $160m in its first full fiscal year from $146m, and for fiscal 2012-13 it went back down to almost that same amount. Of course, oil prices have been generally trending downward overall, so we must factor this in as well.
But the real reason why the administration won’t do the obvious and return these taxes to their former level is that they fear we would return to our consumer foreign exchange-guzzling ways.
In the last calendar year, imports have fallen by about $450 million from the previous year, and so far this year the first six months are another ten per cent below the amount for the same period last calendar year.
Remember, oil prices kept going up through most of 2010 and 2011, although nowhere near their peak at around $140 per barrel at the height of the fiscal meltdown in 2008 and reactionary slump to about $40 per barrel the following year. They began their climb back to where they have been for a while now, somewhere around $100.
Lower figures
In 2012 they were mostly falling, so that would have helped us lower our import figure.
In the last election campaign, the BLP called for a lowering of taxes in order to put more money in people’s pockets in order to boost the economy. Instead, the DLP has kept those taxes in place and now added new ones – mainly on land (the “Solid Waste” tax) and the “Consolidation” tax on the higher earners.
However, unless consumers go out and buy more, causing businesses to hire more, Government might be unable to soften the blow it is inflicting (and unfortunately must inflict) on the economy over the next few months by reducing the size of the public service. If doors close in Government, some need to open in the private sector, and for this reason, lowering VAT and Excise Tax seems to be worth pursuing anew.
Something to consider if Plan A fails.
• Pat Hoyos is a publisher and business writer.
