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WHAT MATTERS MOST: No money, more problems


DR CLYDE MASCOLL, [email protected]

WHAT MATTERS MOST: No money, more problems

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THERE IS A SIMPLE REASON why Barbados is experiencing difficulties with garbage collection, water shortages and health care delivery.

The lack of money also explains the deteriorating roads, depreciating buildings and deprived workers. The Government lacks money because the economy lacks money. There is liquidity in the banking system because of the absence of economic growth.

There are two fundamental issues affecting Barbados, Government and governance. There is an obsession with the size of Government, which comes from a lack of understanding of the role of economic growth in determining its size.

The absence of economic growth over the last nine years has denied the Government of significant revenue to maintain its size. The alternative to pursuing economic growth has been excess taxation, which goes contrary to the pursuit of growth itself. In fact, the Barbados economy is smaller in 2016 than it was at $9 000 million in 2008.

In the previous nine years between 1999 and2007, the economy grew by 50 per cent or $3 000 million, in nominal terms. Resulting from the growth, Government revenue increased by well over $800 million over the period.

Notwithstanding the excessive taxation, Government revenue has not increased by onedollar over the last nine years. This performanceought to have informed the Government that it has been and still is doing something very wrong. “It is the economy, stupid.”

The notion that the previous Government hada lot of money comes from the presence of growth in the economy. It is an inescapable fact that the size of Government depends largely on the performance of the economy. Furthermore, the relative size of Government matters more than the absolute, when it comes to the issue of sustainability. Let me explain.

If the optimal relative size of the Government is 20 per cent of the national income, then as the economy grows the absolute size of the Government grows, but the relative size remains. Therefore, the best way to guarantee that the absolute size of Government increases is to grow the economy.

Over the last nine years, the lack of economic growth forced the Government to attempt maintaining its absolute size via increasing the level of taxation. However, in the absence of growth, Government expenditure was still increasing. This increased the fiscal deficit, especially on the current account, forcing up the debt and raising Government expenditure.The strategy of ignoring growth was ignorance from the start.

It is self-evident that raising taxes, especially persistently, compromises the ability of the economy to grow. This is because taxation reduces the capacity of the people to consume.

The father of economics, Adam Smith, puts it best when he wrote that “consumption is the sole end and purpose of all production”. If a country, especially the private sector, produces all kinds of goods and services and no one consumes them, then it is a waste of time. For an economy to grow, there must be consumption. Since 2008, the policies of the Government have more than dampened consumption.

More so than Government failure, there has been governance failure. The process of decision-making and implementation has been poor. Several tax measures have been ill-conceived. This started with lack of clarity as to why the taxes are being imposed. Truth be told, there is one reason why the current Government imposes taxes. It is to raise revenue. Unfortunately, the taxes have succeeded in lowering consumption, which in turn reduced the ability of the Government to achieve its objective.

It is not surprising to hear that the soft drink tax is failing. The stated purpose for its implementation was never believable. If a tax is to deter the drinking of sweet drinks, why would the Government be projecting increased revenue from the sale of the drinks?

Governance begins with ideas. There must be a clearly defined path between the idea and its implementation. If the path is unclear, then the cost of implementation rises. No one should be surprised by the implementation deficit that has characterised the tenure of the current Government.

If there is one major lesson that we have learntfrom the recent economic management of Barbados,it is that we neglect our past experiences to the detriment of our present and future circumstances.The Barbados economy is being [seen] as a plaything, when there is a track record that shows how to govern in difficult times.

Along with the issues of Government, there is a disturbing shroud of secrecy that is engulfing the governance of Barbados.

• Dr Clyde Mascoll is an economist and Opposition Barbados Labour Party advisor on the economy. Email: [email protected]

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