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AS I SEE THINGS: More analysis needed to find missing link


BRIAN FRANCIS

AS I SEE THINGS: More analysis needed to find missing link

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BASED ON ALL the discussions in the public domain in recent times, it is fair to conclude that most pundits have become convinced that the Barbados economy is under real economic stress and drastic action is needed to reverse the trends in the fiscal deficit and foreign reserves. And as would be expected, solutions to the challenges are as varied as can possibly be.

Up front, I am encouraged by the exchange of views on the way forward captured in the daily newspapers and on various talk shows. To date, we have heard suggestions that include going to the International Monetary Fund, reduction in the size of the public sector, cuts to the value added tax (VAT) rate, restructuring of the debt, reforming statutory bodies, and changes to the airport departure tax.

As I listen to these suggestions and reflect on what can be considered the missing link thus far in the discussions, a sense of nervousness is creeping into my heart because it seems logical to me that in our quest to solve a problem we may very well end up creating more distress.

This belief is not in any way a criticism of the suggestions being made but instead a call for us to take a step back and reflect carefully on precisely what is it we are proposing as solutions to the problems identified.

Let us be clear: an economy consists of several interconnected parts that include the public sector, private sector, banking or monetary sector, the real sectors and the external sector. Hence, any policy implemented in one of these sectors is likely to have implications for others. That recognition is important in the context of our trying to fix one problem in the economy and in the process creating further complications in other parts.

Take, for example, the suggestion to cut the size of the public sector. If workers are sent home, spending power in the economy would be reduced and imports are likely to fall because a huge amount of the things consumed locally are imported. Everything being equal, the foreign reserves are likely to improve but the real sector will be severely impacted.

Further, while there will be a reduction in Government’s expenditure, direct and indirect taxes will be affected because the base of both taxes would have been narrowed. What then will be the overall effect of this policy on the fiscal position?

The answer to goes to the heart of what I consider to be the missing link to date in our economic discourse. To put it bluntly, we must take some time to reflect carefully on the solutions we are putting forward to the economic crisis and ensure at the minimum that some analysis is conducted on all of the suggestions to give them the sort of economic teeth needed at this time.

If, for example, we are suggesting that the VAT should be reduced to between ten and 15 per cent, then, let us simultaneously give some ideas of how much revenue the government is likely to gain or lose and how the economy as a whole may be affected.

With limited time to find solutions detailed analysis may not be possible but at least some kind of quantification of the effect of each proposal is necessary. In the absence of such, our efforts may very well just be piecemeal and can potentially lead to more problems than solutions in the not too distant future. 

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