Barbados and other independent states in the region have been suffering from “fiscal illusion” over the years, says lecturer in economics at the University of the West Indies (UWI), Cave Hill Campus Dr Ankie Scott-Joseph.
She made the point today while delivering research findings at the university on the topic Fiscal Illusion: A Caribbean Perspective.
In her study, which started in July this year and is ongoing, Dr Scott-Joseph examines the impact on politics in creating fiscal illusion in the Caribbean; behaviour of consumers and how it impacts on the fiscal illusion in the Caribbean; and how forecasting has played a part in generating the fiscal illusion seen in the Caribbean.
“What [governments] want you to believe sometimes is what you believe because they have already generated that level of thought within you,” she said.
In describing fiscal illusion she said, “It is the failure for us as consumers to accurately perceive how government has been performing – what the expenditures and revenues really are – which would impact on what we are being taxed.
“An illusion simply means the true value of government’s expenditure is being hidden, and as a result we tend not to react accordingly. So the issue is our forecasting values create illusion. Fiscal illusion is also our beliefs of how the policy is actually playing out and it is due to lack of information,” she said.
The economist said during the time a policy is announced and the time it is implemented “consumers change their minds and they perceive what might happen”.
“In the interim what you also have is an illusion of what government is telling you how they are performing, and most times this is not the true case,” she said.
Dr Scott-Joseph said during her research she found that countries that are dependent have “less illusion” or people were better able to understand when their government was really acting.
“In the independent states, there are higher levels of illusion. We are more unaware of what the performance is,” she said, explaining that in many cases governments would announce measures but not adequately adjust their expenditure to address their fiscal problems.
“So what they are doing is generating more revenue by taxing us but not improving on their revenue side,” she said.
Also pointing to the gross domestic product (GDP) as another area where the illusion was created, Scott-Joseph said it was higher in independent states.
Drawing reference to Barbados, she explained that prior to the implementation of the Barbados Economic Recovery and Transformation (BERT) programme, consumers could feel that the economy was very depressed.
However, she said, with no adjustments made to address the country’s fiscal woes it created an illusion that things were not as bad as they actually were.
“The new Government took the stance and said it is time for us to wrestle with the economy, but over that period of about five years [prior] there was such an illusion that it created more tension in the economy where you have deeper recession simply because we weren’t totally aware of how badly the economy was performing,” she explained.
She said one of the main reasons governments in the region create fiscal illusion was because they are short-lived and wanted to be voted back into office.
“So they would not want to run and say we are not doing well, we need to cut jobs and so on. So an illusion is literally created about how the country is performing,” said Scott-Joseph.
She said she was currently examining how behavioural economics could be incorporated into forecasting, adding that she was aware that financial and economic experts often fail to give accurate predictions similar to a weather forecaster.
“Our behaviour will have an ultimate impact on how the policies perform all together,” she said, pointing out that
people’s behaviour was reflected through inflation, savings patterns, taxes and interest rates.
“So how can we integrate behavioural economics into forecasting to give us better outcomes on both sides – on government side who should present more accurate forecasting, and on the consumer side how do they have a better understanding of what to expect?” she said, while noting that “human behaviour forecasting” can determine how people make choices.
“Behaviour of consumers plays a very important role in how our economies perform and in how our governments deliberate their policies. As a consequence of this behavioural aspect, the study is trying to develop a financial programming approach which integrates the behaviours of consumers to see how best we can have a more accurate forecast in numbers.