There are many downside risks impacting on our outlook for the Barbados economy in 2018. Barbados is currently facing a number of economic challenges: it has one of the highest debt to GDP ratios in the world, it recently defaulted on its external debt obligations, the fiscal deficit remains stubbornly high and its stock of international reserves (in months of imports) is below international benchmarks. On the positive side, the island recently held an election that has been accepted by all stakeholders in the island as free and fair. This has provided significant energy it seems in the island’s Social Partnership (a framework for policymaking involving government, the private sector and workers’ representatives). The new also administration announced that it is currently in negotiations with the International Monetary Fund to obtain financial support and implemented a number measures (most starting from July 2018) aimed at closing the fiscal gap.
Many of the measures outlined were aimed at addressing the underlying fiscal weaknesses in the public-sector accounts in the short- to medium-term. These policies include:
- the introduction of new upper income tax band of 40% for individuals whose income is greater than $75,000;
- an increase in the income tax rate from 25% to 30%;
- a 2.5% health service contribution on insurable earnings;
- departure tax of US$70 per non-CARICOM visitor and US$35 for CARICOM visitors; and,
- a Room Levy as well as a 2.5% Product Levy on all Direct Tourism service.
It is anticipated that these measures will generate an additional $303 million in revenues.
While the new taxes should help to close the fiscal gap, the measures could have harmful effects on economic activity. The taxes on tourism, in particular, will make Barbados’ tourism product, already considered high-priced, even more out of reach of some travelers. Unless these new duties and taxes are absorbed in some way by the industry, travel agents in these countries could advise potential visitors to consider alternative destinations in the region. If the new taxes on tourism are passed on to visitors, pushing-up prices for visitors travelling to Barbados, there could be negative effects for the industry and by extension overall economic activity.
Over the last five years, the middle class has borne the brunt of the tax increases. The measures announced in the mini-budget will further increase taxes on wages and income on middle-income earners. While the measures will collect additional revenues from PAYE, other professionals might find other avenues to reduce their tax liabilities. For those individuals that cannot mediate the effects of these tax changes, there could be a significant reduction in consumer spending in the short- to medium-term. As a result, retailers might see their sales growth slow or decline, particularly for consumer durables, since individuals might find ways to delay the purchases of such bid-ticket items (e.g. refrigerators, stoves, etc.).
Offsetting the negative effects of the measures above on national spending include a 5%, across the board increase in wages and salaries for public sector workers for the period April 1, 2018 to March 31, 2019, increase in pensions, and capital expenditure related to the ongoing sewage issues on the south coast of the island. While the exact fiscal stimulus likely from these measures is unlikely to be clear given that consumers are uncertain about future developments, they could reduce the deflationary effects of the increased taxes mentioned above. Taken together, there are significant downside rise for the Barbados economy, and therefore our outlook for the Barbados economy in the short- to medium-run is negative.
