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Will Imbert follow Sinckler in raising taxes...again?
On Tuesday afternoon, the Barbadian Minister of Finance and Economic Affairs, Christopher Sinckler, presented the island’s 2017 budget to the Barbados House of Assembly.
That presentation is important, not only because there is a great deal of T&T money invested in Barbados (including ANSA McAL, the Massy Group and the Mouttet family) but also because a large number of T&T citizens visit the island for the long vacation every year and several of the hotels in Barbados are owned by local interests.
But Mr Sinckler’s 2017 budget is also important for T&T consumption because Barbados is a significant export for T&T manufacturers and the policies implemented by Barbados may foreshadow fiscal developments here when T&T’s Finance Minister, Colm Imbert rises to deliver the 2018 budget in September.
The economies of Barbados and T&T are similar in some respects and they are different in other ways.
On the one hand, Barbados has a debt problem that is much more severe than T&T’s (144 per cent of GDP vs 61 per cent) and the servicing of debt absorbs a much larger percentage of Barbados’ total expenditure than T&T’s (41 per cent vs 15 per cent). As well, Barbados is much closer to running out of foreign exchange than T&T (just under three months import cover vs just over ten months import cover).
On the other hand, both countries are heavily dependent on one industry to generate a significant percentage of their foreign exchange revenue and the governments of both islands have faced recent difficulties in attempting to bring their total expenditure in line with total revenue.
In fact, the fiscal deficit in both islands was estimated at six per cent of gross domestic product (GDP): in the case of Barbados for the period ending March 2017 and for T&T for the period ending September 2017.
What is most interesting about Mr Sinckler’s 2017 budget presentation is that it envisages a small surplus, which means that Barbados proposes to achieve fiscal adjustment of about six per cent of GDP in the current fiscal year, which runs from April 1, 2017 to March 31, 2018. It is also useful to note that the five-year term of office of the ruling party comes to an end in February 2018.
How does a party facing a general election propose to balance its budget in the current fiscal period, when it could not do so for eight consecutive fiscal years?
• Huge increase in the National Social Responsibility Levy:
The levy is effectively an import tax that was introduced in September at two per cent. The levy was increased on Tuesday to ten per cent on all taxable imports and domestic production. The increase becomes effective on July 1 and it is anticipated that the measures will yield B$291 million over the full fiscal year. The measure will effectively raise an additional B$186 million from the increase in the NSR and an additional B$32 million from VAT.
Of the levy, Mr Sinckler said: “Like the VAT, it has become an efficient tool for gathering tax revenue, but without many of the administrative and process challenges of the VAT.
It is also a preferred method of revenue generation because it exempts critical sectors as per its original design, is charged predominantly at the port on imports and compounds the VAT for additional coverage.
“It can also have a dampening effect on imports, hence reducing the demand for foreign exchange, shifting the consumption patterns more towards domestic consumption and production.”
By my estimate, about half of the fiscal adjustment that the ruling party in Barbados has imposed on the people is coming from the five-fold increase in this import levy. Because most of what is consumed in Barbados is imported, that policy measure is likely to mean a significant increase in the island’s cost of living with the burden falling hardest on the middle-income households, which have seen their standard of living deteriorate every year of the last eight.
• New commission on foreign exchange transactions:
Effective July 1, a broad-based foreign exchange commission be charged on all sales of foreign currency at a rate of two per cent, extending all wire transfers, credit card transactions and over-the-counter sales of foreign currencies. The measure is expected to raise B$140 million over a full fiscal year. In introducing the new commission on foreign exchange transactions, Mr Sinckler made it clear that the measure was “in an effort to signal the need to reduce the demand for consumption goods,” adding that “more has to be done to stem the demand for foreign exchange, particularly the demand for consumer durables.”
• Increase excise on gasoline and diesel: Effective June 1 (today), Barbadians will have to pay an additional B$0.25 per litre, which takes the excise from B$0.74 to B$0.99 and on diesel by B$0.24 from B40.20 to B$0.44. The Barbadian finance minister said of the fuel excise: Given the continued relatively subdued levels of price increases for both the world oil and imported refined products, we have determined that an increased excise would be useful in assisting government to meet its deficit reduction targets without placing undue burden on Barbadians;
• Debt reprofiling:
The minister of finance envisages that the government would save in the region of B$70 million in interest expense if the Central Bank of Barbados and the island’s National Insurance Scheme engaged in “discussions for a possible swap programme where they and government can reissue some existing securities in their portfolios at lower interest rates agreed by the parties.”
• Increasing the tax net:
The Barbados Revenue Authority (BRA) will establish a special task force to establish a national tax administration registration initiative, aimed at ensuring that all of those persons who are operating businesses, are self-employed, sole trader or professionals and artisans are registered with the BRA.
• Divestment of the Hilton Hotel at Needham’s Point which is currently held under the portfolio of the Needham’s Point Holdings Ltd, which has been valued at US$100 million (B$200 million) with the minister hoping to receive US$50 million net of debt.
Why has the Barbadian minister of finance adopted such a hostile approach to the cost of living in the country, by increasing an import tariff by a factor of five, imposing a new foreign exchange tax and increasing the duty on gasoline and diesel?
My own view is that these measures are meant to reduce the demand for foreign exchange, while raising some revenue, which would help Barbados close the gap between expenditure and revenue.
On the other hand, if everything becomes more expensive, it probably means that fewer goods would be traded in Barbados and there would be a reduction in the amount of goods the island imports.
But most of all, the 2017 budget measures are meant to ensure that Mr Sinckler can keep his promise to the Barbadian people not to interfere with the value of their currency, even though by the new taxes achieve the same end of reducing the value of workers’ salaries and savings.
Will Mr Imbert be tempted to go in the direction of sharply increasing consumption taxes on the T&T population as a means of avoiding correcting this country’s grossly overvalued exchange rate?
As Mr Imbert made clear in his mid-term budget presentation last month, he is just as stout in his defense of the exchange rate as the Barbadians: “With respect to the exchange rate, we have also made it clear that we will work in tandem with the Central Bank to ensure that there is an orderly and stable exchange rate regime, based on foreign exchange inflows and the demand for foreign exchange, with a suitable focus on the facilitation of exports. There will be no drastic or sudden depreciation of the currency.”
If he is defending the currency, does he have any choice but to ensure there is no fiscal deficit?