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ON THE SAME DAY that the Minister of Economic Affairs is calling for a national wage freeze, the Minister of Finance and Prime Minister is proposing that Barbadians establish small businesses as the major way of creating jobs in the short term. This is Houdini economics at its best!

Apparently the Government has not yet learnt that it takes consumer spending to truly generate economic activity. In the face of recent evidence that additional taxation reduced consumption expenditure which comprised the base of Government tax collection, the idea of a wage freeze still emerges from the lips of a minister.

Let me repeat, the Government has a crisis in its finances but the economy is in a recession not a crisis. Failure to appreciate this fact is going to lead to the wrong policy prescription which will do irreparable damage to the country's growth strategy; if there is one.

No amount of tinkering is going to solve the fiscal crisis overnight.

The current fiscal crisis is worse than the one in the early 1990s. The only way to begin a turnaround is through selective cuts in current expenditure and the major areas are wages and salaries and transfers and subsidies. The Government cannot send home any worker at this time. So what is the way forward?

The answer to this question is not at all straightforward if the wages and salaries bill cannot be reduced. Therefore outside of reducing subsidies and transfers, the Government has to start reallocating expenditure with two goals in mind, stabilisation and growth. This is tricky!

The temptation to freeze wages is an obvious call in the circumstances. But the freezing of wages is an anti-growth strategy which puts jobs under more severe pressure both in the private and public sectors. The strategy reduces spending power and so hurts the private sector. As a consequence, Government revenue will feel the blow from the VAT to Corporation Taxes eventually.

Since there is no balance of payments problem lurking, notwithstanding the due payment in June of a $200 million loan, the need to over-protect the country's foreign reserves is not yet imminent. Of course, central bankers do not like this kind of reasoning, as protecting the reserves is sacrosanct.

Since the 1980s, the mantra has been freeze wages. But having failed to address the cost of living and indeed having contributed to its continued rise, the Government is not in a position to justify imposing further hardship on Barbadian workers and households. The call is a call of desperation, if not panic.

It is unreasonable to expect workers to bear the brunt of rising food cost; a 60 per cent hike in water rates; a pending increase in electricity on top of the fuel clause adjustments; staggered increases in telephone rates; higher cost of insurance; more road taxes to name a few, and then call for a national wage freeze.

This freeze is to help the Government cope with an unprecedented fiscal crisis on its current account caused by unplanned spending under the guise of a social programme. For example, a free bus fare policy for school children was never part of the Government's manifesto, it was seen as an opportunity to stimulate the minds of the electorate and its timing was poor.

In a short two years, the damage has been done. It is time to look ahead. Looking ahead is however going to call for some innovation because this country has never experienced a fiscal crisis on its own; that is without an accompanying balance of payments problem. Therefore, the adjustment has to come from the Government side and must avoid pulling the private sector into the mess.

Whatever is done must not stifle the working poor anymore. The move is to offer the unions a combination of a small wage increase and a reduction in the lower income tax rate. There is only one problem with this proposal, it must be accompanied by expenditure cuts because of the fiscal crisis

Source: Weekend Nation, February 5, 2009.
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