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FAILURE to adequately diagnose the fiscal position of the Government could lead to the wrong prescription of policies. Such an act would certainly retard any recovery of the economy in early 2011.

The evidence clearly shows that excessive spending is the root cause of the current fiscal position and not the slowdown in Government revenue collection.

To demonstrate the point, I have to go as far back as 1980. It took the entire decade of the 1980s for the Government's tax take - the amount of cents in every dollar of national income that Government takes as tax revenue - to move from 20 cents to just over 26 cents.

It would take another eight years for the figure to reach 30 cents in 1997, when the value added tax (VAT) was introduced.

The introduction of VAT coincided with a spike of inflation, which is typical and expected. There is no doubt that VAT improved Government's tax take as it was responsible for an increase of $261 million in Government tax revenue in 1997.

Another decade passed before the tax take again rose significantly, and this happened in 2006. This was the year that oil prices picked up internationally, fuelling a return to a moderately high rate of inflation by Barbadian standards. The tax take reached an unprecedented 34 cents out of the dollar.

This was out of line with the previous ten years when the average was around 31 cents.

It was never expected that the high tax take of 2006 would continue as there is a limit to which Government revenue as a percentage of national income could go. As early as 2007, the signs of economic recession had been revealed internationally and it was admitted during the election campaign that by sometime during 2008 recession would be in evidence locally.

The forecast proved to be on target as the Barbados economy went into recession by the second half of the year. This did not stop the Government from imposing heavy taxation at the beginning of the recession and it therefore compromised its tax revenue base. This has been mentioned ad nauseam in this column because it was a senseless move.

If it is now believed that the way out of this fiscal crisis is to impose more taxation, then it would be difficult to find words to describe such an action.

The marginal decline in tax revenue in 2009 is in no way responsible for the almost $300 million deficit on the Government current account. This also has to be repeated ad nauseam for the sake of protecting Barbadians.

The economy cannot take more taxation unless the policymakers are planning its death. The only way to truly address the fiscal crisis is through structured expenditure cuts which have to be planned over a three-to-five-year period. The timing depends on the speed of economic recovery, but recovery alone cannot rectify the horrible state of Government finances.

Put simply, the stock of foreign reserves being held by the monetary authorities is what is keeping the International Monetary Fund (IMF) from the shores of Barbados. I repeat: Barbados' fiscal position is much worse than it was in the early 1990s; but unlike that period, the country has international reserves.

It is precisely because of the stock of reserves that there is elbow room and so the discussion on wage freeze is useless. It is useless because it is as wrong a policy prescription as the heavy taxation in 2008. The growing working poor, who characterise this recession, are simply incapable of coping with rising prices of all kinds on a fixed income.

To compound the plight of Barbadians by freezing their wages is unnecessary and certainly at variance with what is required to help pull the economy out of recession. Stop the talk of stimulus. It is time to freeze the past and focus on the future.

Source: Weekend Nation, February 12, 2010.
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