So bread prices will rise by some 12 percent percent, with a basic loaf rising from B$4.55 to B$5.05 from April 28 (see report in The Nation). No surprise after local flour prices rose 30 percent two weeks ago (and it's the basic ingredient) and diesel prices were increased 76 percent last week (and the fuel is used in baking and transporting baked goods). The price of various goods will increase between 10-25 cents.
The debates will rage on about who will feel the pain and whether that could have been distributued better. One commentary yesterday, by Ezra Alleyne (see The Nation report), takes the current Democratic Labour Party (DLP) government to task for keeping its balanced budget commitment and with that raising diesel prices by 76 percent and gasolene prices by 25 percent, and reducing substantially the difference in favour of diesel between the costs of the fuels. The increases will affect many consumers with higher costs imposed on fishermen, food producers and distributors, operators of public transport vehicles. We all eat and we all need to move around, he contends. The previous Barbados Labour Party (BLP) government had absorbed more of the cost increase and not passed these on to the population, he contended. He also goes on to mention how the previous government had paid some B$20 million to civil servants as a one-off in 2005 when the cost of living rose over 5 percent; the government got back B$7 million in taxes. If the DLP had been prepared to follow its predecessor of running a budget deficit (that is having more spending than revenue) then life would be better for all, is the implication.
Political commentary is interesting. It is not neutral, like many arguments. Someone commented to me last week that Mr. Alleyne is a BLP supporter (actually the comment used a different noun, and it's interesting what comes up as the first article on a Google search--an unflattering commentary on that 2005 episode and Mr. Alleyne's commentary). Now that "support" comes out in the "analysis" and implications of fairness/unfairness. When the DLP aims to balance the budget, all you get is pain--no gain. BLP absorbs the costs, and that is seen as gain with little pain.
Interestingly, the IMF reports on the Barbadian economy showed that it had a balanced budget in 2006 and was looking to increase the deficit to 4 percent in 2007 (see IMF Public Information Notice). One economic commentator, Patrick Hoyos, however, has reminded us what the IMF said Barbados needed to do (see Broad Street Journal report) . In its 2007 annual consultation with Barbados it said that the pass-through of petroleum prices needed to take full effect:
“The mission also encouraged the authorities to increase the prices charged by major public enterprises, some of which have not been raised for several years. ... In particular, oil price increases would have to be fully passed on to consumers.” (Staff Report for the 2007 Article IV Consultation, page 11).
The report also states that:
“The January 2006 increase in domestic fuel prices implied almost a full pass-through of international oil price increases. However, the further increase in international prices since then has only partially been passed on.”
The IMF continued its call for Barbados to rein in its overall debt by exercising other options that would also raise, not lower, the cost of living:
“Fiscal consolidation is needed to bolster international reserves and reduce public debt. Announced policies are unlikely to achieve the government’s debt objective. ... The government has a range of options to achieve such savings, including reining in future projects, improving tax administration, raising VAT rates and reducing tax exemptions, and adjusting selected utility tariffs.” (Staff Report for the 2007 Article IV Consultation, page 14).
Changing the application of VAT remains an option to the government. So does targetting rebates to specific needy cases (the poor, or small business, or farmers), rather than taking the VAT off that much wider basket of goods as promised during the elections. So, to my mind the petrol price increases are dealing with but one important element of getting public finances onto a different footing. So, the jury is still out about what the overall budget picture will look like.
But packaging is important. Clearly, facing the budget realities of a country is something that has to be done with the levers of power in hand not from the luxury of oppostion. Also, economic circumstances change and how the government manages its budget is one of the keys to economic success. Deficits, surpluses, or balances in budgets have consequences. If you only think about today you will come to one impression but there is always something ahead. Without going into an economics tutorial, we can ask if everything seeming hunky-dory today means hunky-dory forever. It is legitimate to ask the question, if you spend more than you earn, and plan to borrow to cover the gap, who is going to pay that price and when? What happens if you cannot borrow? Tomorrow's generations do not necessarily want to be carrying the debt created today. In that sense, Mr. Alleyne's commentary is interesting in what it decides to leave unsaid.
The IMF's Regional Economic Outlook for the Western Hemisphere (see report) indicates that in 2007 "Caribbean countries' public sector debt burdens [were] very high". Barbados has in recent years had a better budget balance than Caribbean average, compared with Jamaica which has consistently been worse than average in recent years. That difference in budget performance has economic consequences that some would say are clear in terms of slower growth and higher inflation in Jamaica than in Barbados. The IMF goes on to say that the "region continues to stress its commitment to reducing debt levels further over the medium term". So, in that regard, the latest announcements by Barbados' PM suggest he is acting in a manner consistent with that commitment.
I have no political favourites with regard to Barbados' government but try to see things with a neutral's eye. I have no remit to be an economic commentator in Barbados and will leave that to others including Partick Hoyos. But I do wonder again what are Barbados' economists doing when these discussions are taking place. I again hear their silence and wonder why it is so deafening.
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