Home' Trinidad and Tobago Guardian : August 25th 2016 Contents AUGUST 25 • 2016 www.guardian.co.tt BUSINESS GUARDIAN
COMMENTARY | BG3
Chief editor-business: ANTHONY WILSON
Editing and design: NATASHA SAIDWAN
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Last week, in this space, under the headline,
"Why is Barbados continuing to punish public
workers?" the long-standing decision by Bar-
bados to use fiscal policies exclusively to
defend its exchange rate was sharply criticised
as decimating the incomes, savings and
investments of middle-income households.
It is certain that even the proponents of the policy---
such as its author DeLisle Worrell, the Governor of the
Central Bank of Barbados, and Chris Sinckler, the country's
Minister of Finance---would agree that the brunt of the
adjustment in small, open economies must fall on mid-
dle-income households. That's because, numerically and
in terms of income, the middle-income households are the
population cohort that consume the most and therefore
use the most foreign exchange.
The need to reduce the consumption by middle-income
households in Barbados accounts for the fact that in the
current 2016/17 fiscal year, Barbados expects to collect
B$1.175 million in revenue from VAT and excise duties,
which is about 43 per cent of the total recurrent revenue
the government there expects to collect.
On the other hand, taxes on income and profits are
expected to contribute 30 per cent of total recurrent revenue
and corporate taxes only 8.14 per cent.
Taxes on consumption in Barbados account for 43 per
cent of the country's total revenue, but corporation taxes
account for only 8.14 per cent. Is it equitable and fair to
seek an 8.14 per cent tax burden of Barbadian corporations,
while imposing a 43 per cent tax burden on spending,
which punishes middle-income households the most?
Since Barbados derives most of its foreign exchange earn-
ings from the tourism sector---as T&T derives from its
energy sector---logic should dictate that most of the gov-
ernment's revenue should come from the tourism sector
as most of T&T's revenue has come from its energy sec-
tor.Yet, with corporation taxes accounting for only 8.14 per
cent of the country's total recurrent revenue, it is clear the
owners of hotels, restaurants and villas have managed to
convince governments in Barbados that the competitive
position of the sector in the economy does not allow for
the payment of more taxes.
What's more is that the tourism lobby managed to con-
vince the Barbados government in the last fiscal year that
the VAT on hotels should be reduced to 7.5 per cent, while
the VAT on the goods and services consumed by middle-
income households remained at 17.5 per cent.
Barbados has decimated the incomes and savings of the
middle-income households without using any other measure
to reduce aggregate demand or increase revenue:
• no exchange rate depreciation, of course;
• no attempt to curb aggregate demand by monetary
policy by way of increasing the cost of borrowing;
• no attempt to raise revenue from the sale of assets
through a programme of privatisation;
• no attempt to raise revenue by non-traditional methods
(such as the sale of passports by OECS countries or taxing
casinos as the Bahamas has done.)
The Barbados government is also financing its deficits
by borrowing from the National Insurance Scheme and the
Central Bank, with about 51 per cent of the island's 2017
fiscal deficit being financed by the issue of debentures by
the Government. The overburdening of the Barbados Nation-
al Insurance Scheme imperils that institution's ability to
pay pension and other benefits down the road.
While there is no doubt that to reduce the demand for
foreign exchange, the focus has to be on middle-income
households, what is disagreeable is the exclusive reliance
on fiscal policies by Barbados administrations past and
present to reduce demand for foreign exchange which, in
the case of Barbados, has led to the absurd policy of pun-
ishing middle-income savings and investments.
By contrast, the current T&T Government has addressed
the need for adjustment---caused by the collapse of oil and
gas prices---by some reliance on fiscal measures, which
have resulted in the imposition of higher taxes on companies,
a reduction in the subsidy on fuels and a modest seven
per cent reduction in "operational expenditure."
The current PNM administration, on the other hand,
has opted to place some of the burden of adjustment on
the exchange rate, by capping the depreciation for the 2016
fiscal year at seven per cent.
And, in order to finance the 2016 deficit, Finance Minister
Colm Imbert also borrowed about $10 billion and drew
down on the country's savings, when he tapped the Heritage
and Stabilisation Fund for US$375 million.
Even though Mr Imbert attempted to spread the burden
of adjustment, it can be argued that he has not got the
balance right, as most people would agree that T&T needs
more fiscal consolidation, more exchange rate adjustment
and less borrowing and drawing down of savings.
But that judgment as to how much adjustment to impose
on a population is a political judgment and commentators
have the luxury of arguing about the amount and type of
adjustment because nobody voted for them.
It can also be argued that the PNM administration
is wasting the opportunity of the bust to engage
in a reduction of the size of the public sector by
a process of privatising state enterprises and deep
and lasting structural reforms of the economy that
would improve the ease of doing business here by
transforming the public service.
The problem with the missed opportunity for reform is
that T&T will go from bust to stability without reforming
the structure of expenditure in this country, in particular
the vast amount of the country's revenue that is spent on
transfers and subsidies: HUGE MISTAKE.
Mary King, an disciple of the Worrell/Sinckler school,
has argued, inter alia, that small, open economies "cannot
increase their exports or substitute for imports by local
production in a reasonable time frame."
She has made this argument on several occasions, but
has never specified what is a reasonable time frame.
Had Barbados devalued its currency in 2010, would the
country have increased exports and substituted imports
with local production by 2016?
Given a substantial devaluation in 2010, there is no
doubt in my mind that the island would have experienced
a considerable increase in exports and a substitution of
imports by 2016.
In fact, given the experience of T&T from April 1993,
the expansion of exports would have come by the second
year following the devaluation.
It can also be argued that it would be extremely difficult
for Barbados to increase non-tourism exports and substitute
imports WITHOUT a devaluation---as the economy's expe-
rience over the last six years proves.
This means that one of the results of the Sinckler/Wor-
rell/King policy is the economy continues to be undiversified
and almost completely dependent on tourism and new
investments in hotels to earn foreign exchange.
And those earnings are subject to rapid reversal based
on exogenous factors such as Brexit.
Will Barbados ever recover?
Governor of the Central Bank of Barbados
Prime Minister of Barbados
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