Budget Straight Talk, No Chaser

The proposed budget for the next fiscal year has been delivered and it is a lengthy one. In addition to illustrating the current ailing state of Barbados’ economy, several economic objectives were also outlined for the next year along with a proposed plan for their achievement. 

Make no mistake, we the consumers will have to continue with our belt-tightening and making hard spending decisions over the next year. Let’s take a closer look at some of the key points of the proposed plan, how it impacts us and whether the plan will indeed steer us in the right direction.

Micheal Jordan 3

National Social Responsibility Levy (NSRL) Increased from 2% to 10%

The original purpose of this levy was to provide funding to assist in the offset of Barbados’ health care and overall clean environment costs. It came into existence September 2016 and has reportedly been largely effective.

The increase of this levy means that goods imported will be more expensive for the importers. At the 2% level, some importers were absorbing the cost and the burden was not fully felt by consumers. At the 10% level, this will not likely be possible; consumers will feel the pinch of increased prices.

For example, some businesses may have been selling an item for $10, when based on the 2% NSRL, it should have been sold at $10.20. This represents the 2% being absorbed by the business. At 10% however, it no longer is viable to absorb the NSRL so that item will be sold for $11, as the full tax is passed on to the consumer.

The goal of the overall tax increase is to raise a further $218 million over the rest of the year. This is a revenue earning measure and is meant to try to close the gap between what government has been earning and what it has been spending.

Commission of 2% on Foreign Exchange Transactions

The purpose of the initiation of this commission is two-fold: to limit the demand for changing Barbados’ dollars into other currencies (foreign exchange); and to generate much needed government revenue. Barbados’ reserve of other currencies is measured in the length of time it can maintain the level of import spending, assuming no new money is coming in. That length of time is now 11 weeks; for perspective, the minimum level used by countries as a benchmark is 12 weeks.

This commission charge makes it more expensive to conduct business in other currencies. Wire transfers, currency purchases and credit card transactions fall under this charge. In addition to directly impacting consumers, this is also an additional cost to businesses that may be reliant on other currencies to conduct business. These costs will likely be passed on to consumers and may also make Barbados less attractive as a place to conduct business.

Excise Tax on Gasoline and Diesel Fuels

Fuel prices will be increased nominally as government increases its tax on both gasoline and diesel.

Even though the increase is small (gasoline increases by 5 cents and diesel increases 10 cents from current prices), the indirect impact for consumers will be larger. This excise represents another increase in costs for businesses which will likely be passed on to consumers.

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Tax Amnesty

Government will allow taxpayers who owe select taxes to benefit from the ability to make payments with penalties waived. This will occur between June 1 2017 and November 30 2017.

The amnesty should provide taxpayers with outstanding liabilities an incentive to settle their obligations without additional penalties.

Divestment of State Assets

Government will sell the Hilton Hotel as a part of revenue generating activities. While many details are unavailable, the sale is expected to generate BDS $100 million.

In total, the proposed plan is expected to generate $542 million in the next year; not only closing Barbados’ gap between revenue and expenditure but creating a surplus.

The Road Ahead

The motive behind the proposed plan and the objectives it seeks to achieve are noble and key in Barbados’ economic recovery. The acknowledgements of the need to reduce expenditure, reduce the debt burden and improve tax collection efficiency are very positive signs. However there are also some points which will require further clarity, such as the proposed debt re-profiling and the mechanics behind capturing the proposed foreign exchange transaction commission.

As focused as the objectives of the proposed plan are, the fact remains that the main side effect will be an intensification of the challenging environment consumers and businesses alike are currently experiencing. The key components of the proposed plan will result in increased prices or an inflationary effect. In a low growth environment, this will likely have a stifling effect, rather than the growth inducing effect that is much needed. It can also be argued that the plan creates a pseudo-devaluation effect for Barbados’ currency; effectively changing the fixed rate between the Barbados dollar and the US dollar or “peg”, that is ‘officially’ being defended rigorously.

The proposed plan is based on some solid objectives but is still a work in progress, further focus is needed on key structural changes such as revenue generation and improved business facilitation. Once key pillars of growth are addressed, then Barbados will be able to get back on track.

Micheal Jordan 2

Michael Jordan, MSc.

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