Last week, in this space, under the headline, "Why is Barbados continuing to punish public workers?" the long-standing decision by Barbados 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 middle-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 earnings from the tourism sector–as T&T derives from its energy sector–logic should dictate that most of the government's revenue should come from the tourism sector as most of T&T's revenue has come from its energy sector.
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 convince 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:
�2 no exchange rate depreciation, of course;
�2 no attempt to curb aggregate demand by monetary policy by way of increasing the cost of borrowing;
�2 no attempt to raise revenue from the sale of assets through a programme of privatisation;
�2 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 National 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 punishing 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 experience over the last six years proves.
This means that one of the results of the Sinckler/Worrell/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.