As another general election approaches, the cost of living debate is being mentioned. It is reluctantly discussed on the political platforms. The Governor of the Central Bank speaks glowingly about improving macroeconomic conditions, BUT, at the household level, Barbadians continue to cry out. Tourism arrivals are up, unemployment and inflation are down. Somehow the man in the street is not feeling the benefit of macroeconomic improvement. Logically the state of the cost of living should have a bearing on general election results, however, voting behaviour is not always linear. Perhaps there is resignation that none of the political actors possess any silver bullet to improve the cost of living.
The political talking heads are quick to point out that Barbados is a net importer and therefore we are not immune from global inflation. VAT remains at 17.5% and a key input to the cost of living, fuel, is anchored to an indexing arrangement which moves up and down based on the price of oil on the world market.
For the average household food, utilities, transport, and housing are the key expenses on the household budget. Barbados depends significantly on imported food and this is compounded by a limited wholesale distribution network. It means the price margin is controlled by an elite few. Electricity price is not stable despite our flirtation with alternative energy to subsidise fossil fuel continues to be superficial. Transport costs is directly linked to electricity price. Housing, whether purchasing, building or renting are big ticket items too many cannot afford, or struggle with maintaining. These four drivers rarely decrease in price, in fact the opposite.
Recently the former Central Bank Governor Dr. Delisle Worrell published a perspective that piqued the interest of the blogmaster. Worrell posited that Barbados should import MORE. His novel perspective can be read on his website Imports Sustain the Quality of Life in the Caribbean. The blogmaster does not have the academic grounding to compare with Worrell but is qualified to know what he proposes smells like the brown stuff.
These academic theoretical constructs hinder discussions about reducing the cost of living. They complicate framing economic solutions for a small open developing country like Barbados. Instead of discussing how we can improve production in the domestic market and through strategic partnerships with neighbouring countries, we have a former governor suggesting we should concentrate on importing more.
On the campaign trail political parties have been signalling that should they win office – realistically this is the Democratic Labour Party (DLP, the others are not fielding a full slate of candidates – VAT will be reduced. The expectation is that it will bring immediate relieve to households.
VAT is a consumption tax applied at every stage of the supply chain, from production to final sale, based on the value added at each step – Source:Internet.
Businesses charge VAT on their sales and deduct VAT paid on their purchases, remitting only the difference to the government. Because VAT is added at each stage, it compounds into the final retail price. The consumer, who cannot file any claim for VAT, bears the full cost.This means a VAT reduction can lower prices immediately, especially in a high import country like Barbados.
But hold on – reducing VAT does not address stagnant wages, poor national productivity, high electricity costs etc. It does not change the fact that Barbados imports almost everything we consume. A VAT cut is a bandaid solution proposed by lazy and non creative politicians, it does not address the systemic problems, the fault lines we know exist and continue to ignore.
The upcoming general election should have been the vehicle to support robust national discussion on the best economic model we should be adopting to sustain a quality way of life. Instead, we are subjected to the usual rahrah frothing nightly. There appears to be no relationship between our significant investment in education and our ability to constructively address challenges facing the country.
The blogmaster invites you to join and add value to the discussion.