Experts warn wage hikes, tax measures risk fuelling inflation

A combination of minimum wage increases, tax adjustments, and public sector wage hikes could propel the country towards economic instability, economists and private sector officials warned on Tuesday in response to the government’s Budget .

Though the experts praised the social benefits of the Budget  and the potential short-term relief being offered, they are alerting that the measures could drive up business costs, fuel inflation, and create financial pressures that could ultimately hurt the very workers they aim to help.

Economist Professor Winston Moore, speaking at a post-Budget  discussion forum on Tuesday, warned that the minimum wage increase could trigger a structural rate of inflation twice as high as what the country has ever experienced before.

“The literature on minimum wage suggests that whenever you increase it, you’re going to see a significant increase in consumption expenditure—so there will be a fill-up in economic activity,” Moore said.

“But there’s also the downside—the potential impact on business costs. What you’re doing now is building in two per cent into the labour costs of businesses that employ low-income individuals.”

Acknowledging the government’s argument that the two per cent wage increase is below the long-term inflation rate, Moore cautioned that inflation in previous years was achieved without this additional cost baked in.

“So what you’re now doing is you’re going to have two per cent on top of two per cent, which would actually suggest you’re going to have a four per cent structural rate of inflation,” he cautioned..

The potential inflationary pressures have also raised red flags in the business community, with President of the Barbados Private Sector Association, Trisha Tannis, noting that while employers support fair wages, the conversation around minimum wage increases has failed to address the bigger issue—productivity.

“The issue is not whether workers should earn more. The issue is that we keep increasing wages without ensuring that productivity is rising alongside it,” she said.

In a well-functioning economy, according to Tannis, wage increases are driven by rising productivity, meaning businesses are earning more and can afford to pay workers more without passing the costs onto consumers.

But that has not been the case in Barbados, she noted, stating, “We wouldn’t be talking about the cost of a minimum wage if those wages historically translated to higher productivity—they have not.”

She recalled the 2021 shock, when the minimum wage jumped from $6.50 to $8.50 per hour, and businesses were forced to absorb the increase all at once.

“If the government takes the same approach now, businesses will feel the effects—hard,” she warned.

Tannis added that the private sector supports smaller, incremental wage increases, as recommended by the International Monetary Fund (IMF) and the United States Federal Reserve, rather than large sudden jumps that disrupt the economy.

Sharing similar concerns, top Economist Professor Antonio Alleyne noted that the real problem lies in the Budget’s long-term stability.

“If you look at the tax increases, the wage increases, and other budgetary measures, they will bring long-term implications,” Alleyne said, describing the move as shortsighted.

Though he said some relief would be immediate, he noted that without strategic economic adjustments, the country could see serious financial fallout.

“Unless the government is able to pivot and adjust as time passes, there will be serious challenges,” he said.

Alleyne also took aim at inflation management, noting that while most of Barbados’ inflation is imported, the country still has room to improve in areas like supply chain efficiency.

“Our supply chain and logistics are an issue,” he said, noting that while government reforms aim to improve customs procedures, such measures will not solve the larger efficiency problems plaguing the economy.

Alleyne further noted that while measures have been taken to buttress small businesses and help them focus more on local production, simply giving SMEs financial assistance is not enough.

“It still needs a driver,” he stressed. “And the driver will be labour participation and productivity. If productivity is not there, we’re just wasting money.” 

shannamoore@barbadostoday.bb