#BTSpeakingOut – Modify tax to scale back costs

Disclaimer: The views and opinions expressed by this author are their own and do not represent the official position of the Barbados Today Inc.

by Carlos Forte

In advanced economies in North America and Europe, economic recovery from the deep COVID recession begun in earnest, since the third quarter of last year. Despite second and third waves of COVID infections and lockdowns, employment and job growth have been steady and robust.

Record high household savings, together with very generous fiscal stimulus in the United States, Canada and Europe, that has overcompensated consumers for income lost from unemployment and business closures, have fueled a resurgence in consumer demand that has outpaced supply for many goods and services.

In addition, China which emerged from lockdown in mid-2020 with a sharp V-shaped economic recovery, has also been fueling global demand for oil and other commodities like copper, iron ore, lumber, canola, palladium and so forth. Supply has not been able to keep pace with rising demand, pushing prices higher.

Supply chain disruptions from COVID lockdown restrictions and high shipping costs have conspired to push prices higher across a range of products.

For example, extremely strong demand for lumber, resulting from a surge in home purchases and home renovation spending caused soaring lumber prices and other building product prices as sawmills were slow to reopen from lockdown closures.

Benchmark oil prices, which fell as low as – $38 per barrel in April last year have since risen to $71 per barrel. That’s
30 per cent higher than the pre-pandemic $54 a barrel in January 2020. According to TD Economics “a global semiconductor shortage has led to a slowdown in production in the automotive industry, and higher car prices.

Used vehicle prices, on the other hand, have shot up over 20 per cent since the pandemic, which has likely been influenced by the reduced availability of new dealer
supply, along with a desire to maintain a brand and model preference.” Price increases have also been seen in food
and household appliances.

Though many economists like myself, expect these upward pressures on the general price level to be temporary, the issue for Barbados is that prices of imported goods, including oil, car parts, appliances, food etc. will continue to rise, likely through to the end of the year.

Unlike advance economies, which are far more dynamic and resilient than Barbados, because of antiquated pricing policies of businesses, high indirect taxation and wage-push inflationary dynamics, prices in Barbados are not likely to fall when prices of imports normalised/fall as production capacity and supply catch up with demand in metropolitan countries later this year.

Against this background, policymakers in the Barbados Government should already be hard at work to temporarily reduce select customs duties and excise taxes in order to cushion the impact on Barbadians of rising prices of gasoline, food, building materials etc.

Let’s take gas prices as an example. Since the increase in international oil price, gas prices in Barbados have recently soared to $3.88 a litre. This compares to

• $3.09 a litre in 2017;

• $3.64 per litre in 2018 and

• $3.72 in 2019.

Yes, the price of gas in Barbados, which is regulated by government is one of the few product prices in the country, that go up and down as imported prices vary. Though the recent price increases are driven by factors outside of Barbados, Government can play a role to ease the pressure. Gas at the pump in Barbados is-heavily taxed.

The price at the pump is made up of excise tax of 99 cents a litre and the relatively new road tax levy of 40 cents a litre plus VAT, which at current prices works out to about 8 cents per litre. This means that at today’s prices taxes account for 38 per cent or $1.47 of Barbados’ gas prices.

Barbados’ high indirect tax regime gives the government elbow room to adjust tax policy to temporarily reduce prices of select products to ease the cost of living or mitigate sharp price increases driven by international price shocks.

This should not impair government revenues too much as it would not have anticipated imposition of its indirect tax regime on the high import prices coming Barbados’ way.

Public policy is about choices. There are often various policy options to marshal against economic challenges.

Carlos Forte is a Barbadian economist resident in Canada.

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