Any ease in taxes to provide individuals and businesses relief from rising costs will require a careful balancing act on the part of Government.
This assessment from Central Bank Governor Cleviston Hayness, who indicated that while it was necessary that individuals and businesses were not burdened to the point they could no longer cope, it was equally important that Government continue to collect revenues.
Haynes was responding to questions from journalists on Wednesday as he presented his half-year economic review and outlook.
An outcry over rising fuel prices since the start of last month prompted Prime Minister Mia Mottley, who is also the Minister of Finance, to announce that she would explore the possibility of putting price control mechanisms in place, including capping the Value Added Tax (VAT) collected on fuel.
Asked about the impact such a move could have on Government’s fiscal position, Haynes explained there were several factors to consider.
“There are two things. One would be at what level you apply the cap. What you have to recognize is that in doing forecasts there would normally be a certain assumption as to what the price of the fuel would be. So if you, for example, tended to generate, let’s say, $50 million from a particular tax on the assumption that the price was $50 and the price rises to $60, if you collect that in a sense it would be considered a little windfall. So, if you cap at that $50 that you had built into your model then it should not really have any great impact on the overall revenue intake,” he explained.
“Now, in the context of a weak revenue base, every additional dollar counts, but as I said these things are about balance and so you may be able to get the revenue that you wanted but at the same time be able to provide some relief to those who are impacted by the fact that the prices are going up and we have no control over those international prices as they rise.
“So, it really comes down to the Minister of Finance to make a determination as to where that balance should be between providing relief and being able to get the revenue, which is needed to finance education, health, transportation and others,” he added.
There have also been increasing complaints about high water bills as a result of the Garbage and Sewage Contribution (GSC) levy, which individuals and some sector officials, especially those in agriculture, have said was an extreme burden for them at this time.
The GSC, which was implemented in 2018, was set at a rate of $1.50 per day for households and 50 per cent of existing water bills for commercial customers, and is used to fund the Sanitation Services Authority and the Barbados Water Authority.
Haynes said while Government would look at the possibility of providing relief from time to time, it would have to be balanced against Government’s ability to plug any shortfall.
“If it is that the Government provides substantial relief on the one hand, that will presumably raise expenditure on the other, because at the end of the day the Sanitation Department still has services to be able to provide. So, if it loses revenue from one source, then the Government will have to step in and that is part of the management of the overall debt,” he explained.
“It is a balancing act because you want your sectors to be able to form and to grow. So if it is that those sectors are being so impacted that they are unable to perform then that is something Government will have to look at. Obviously, that is something for the Minister of Finance. I can’t tell how the Minister of Finance will resolve that potential conflict but as far as I am aware, so far the Sanitation Department still seems to be getting enough revenue to enable it to carry out its mandate.”
In his economic review, Haynes noted that as at May 2021, the 12-month moving average inflation rate was estimated at 1.5 per cent.
He said food prices, especially for vegetables, were responsible for an upward trend in inflation over the last half of 2020. However, this direction had slowed during the first half of this year.
The Central Bank Governor pointed out: “The sharp fall in oil prices in 2020 lowered electricity and transportation costs. However, in recent months, a resurgence in prices for imported oil has started to reverse this trend and prices are now returning to the pre-COVID level.”