WHAT MATTERS MOST: Seven years of poor Govt policy
IT IS REMARKABLE that the Government continues to tax Barbadians, even though there is compelling evidence that it is not working.
This madness started in 2008, continued in 2010 through 2014 and reached a crescendo in 2015.
The compelling evidence is that the Barbados economy is smaller in 2015 than it was in 2006. This simply means that Barbadians are spending less now than then. When this spending is classified according to households and Government, the growth in the latter has outstripped the former. This is largely because the national debt has more than doubled in the last seven years with the attendant debt servicing skyrocketing.
The increased debt was used for consumption purposes rather than investment. This is one of the reasons why the economy has not grown and is challenged to grow after years of fiscal cruelty.
Furthermore, the structural integrity of the economy has been compromised as public sector investment is an essential complement in an investment strategy.
These days, when one listens to the minister of finance, it is clear that his concern is really about satisfying the concerns of the International Monetary Fund (IMF). He is now pleased that the IMF is forecasting growth of 0.8 per cent for 2015.
If in the face of the highest tourist arrivals for a winter season and favourable oil prices, the economy is struggling to reach one per cent growth, then there are serious concerns for the other sectors. The economy is obviously on one leg, which is also experiencing some challenging structural changes that need to be monitored.
Just a few months ago, the same IMF was predicting growth of 0.5 per cent and was lambasted by the minister who was forecasting two to 2.5 per cent in 2015. The Government therefore has been forced to bring its forecast in line with the IMF.
There is a lot of massaging of numbers. The fiscal deficit worsened in the first quarter of the current fiscal year, but the reporting spoke to the entire year that is to come. The unemployment rate is rising but the issue of productivity and a dated unit cost of labour is highlighted. The national debt is troubling but the concern is whether or not to include the debt owed to the National Insurance Scheme (NIS). Of course, the fiscal deficit does not include a lot of unaccounted for expenditure.
The notion that a Government, which never understood the economic fundamentals confronting Barbados, could put in place a home-grown programme was always a joke. The programme is principally about increasing taxation, which is at variance with pursuing economic growth.
Once the Government put no emphasis on growth, increasing taxation on its own did not reduce the fiscal deficit in a declining economy. The policy focus then shifted to increasing taxation as a means of protecting the foreign reserves, using the threat of devaluation as a sales pitch. This was never true because our reserves were repeatedly described as adequate.
If the Government truly wanted to dampen spending, then interest rate policy was also available. However, this would have increased the cost of debt servicing to the Government and so it was not an option. The casualty of this shortsightedness was the Central Bank with its sustained losses and more recently the public with lower interest rates on deposits.
As far back as 2011, the commercial banks expressed little or no appetite for more Government securities. This forced the NIS to increase its financing of Government spending. Since this was unsustainable, the Central Bank increased its printing of money to purchase substantially more Government securities.
Typically, an increase in the demand for the securities would raise the interest rate, but this did not happen because the Central Bank was the agent doing the buying. Instead, a deliberate attempt was made to lower the interest rate on treasury bills. This hurt the ability of the bank to earn income that was already being affected by low returns on its foreign investments.
Once the treasury bill rate was forced downward, the Central Bank jumped at the opportunity of the commercial banks setting lower deposit rates. This was to the detriment of depositors. The Government once again benefited.
Throughout the last seven years, every policy was designed to protect the interest of the Government. This approach fails to accept that an economy is only as good as the condition of its productive agents, households and businesses. Just as no man is an island, no government is an economy.
Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party adviser on the economy. Email mascoll_clyde@ hotmail.com