Positive side to 10% NSRL

We ought to stop thinking of the National Social Responsibility Levy (NSRL) as a thoughtless imposition aimed at causing widespread hardship. While it would seem that Government’s only objective with this tax is to collect enough revenue to afford our bloated public service, there is a much more vital role for the NSRL which is to spare the Barbados economy from a much worse encumbrance called runaway consumer price inflation – hyperinflation.

The approach might sound counterintuitive. How can an increase in taxation not cause higher prices and actually prevent inflation? To understand the logic of this argument, we have to agree that money (i.e. cash assets) can behave like any good or service. Its real worth in the marketplace is therefore just as much subject to the forces of supply and demand as mangoes : when there is too much cash circulating in the market, the value of cash will be depreciated just as the price of a mango will go down when there is a glut.

During the years that Government resorted to printing money in order to meet public expenditure, it was inundating the system with cash that was not supported by any new real productivity. It might well have been expedient for Government to pursue this policy of quantitative easing to meet its obligations, but the measure is known to have very deleterious consequences as it “dilutes” the real value of the dollar and therefore fueling inflation.

Inflation is not all bad. Asset inflation is a sign that the demand for the country’s real estate, businesses or shares and bonds has enough of an appeal to investors that they bid the prices upward. Prices will go on rising until the bubble bursts which is what has happened in several asset categories in Barbados – real estate being the most easily spotted; labour cost inflation similarly gets its stimulus from a scarcity of labour when an economy is vibrant; but consumer price inflation is a much more treacherous expansion for an economy because it will increasingly impoverish and destabilize the society and push the economy into failure. The ideal objective of all financial managers is to keep prices stable.

It is plain to see that there is too much “artificially fabricated” local cash circulating in Barbados. The Barbados economy simply does not have the dynamism to support the rampant overconsumption currently exhibited by certain sectors in the society, and this extravagance is contributing to the rapid depletion of the country’s foreign exchange reserves. The exhaustion of our foreign exchange reserves will then force devaluation and spawn the third nail: imported inflation. The NSRL is one measure that will contribute towards “soaking up” the overheated purchasing power in our midst.

John Maynard Keynes warned that inflation creates a community of winners and losers and this engenders social tension and an increase in crime: “While the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at the confidence in the equity of the existing distribution of wealth.” Certainly we can already see signs that the society is fracturing at its fault lines.

The only way to avoid the horror of ever creeping consumer price inflation is to “undistort” the economy by restricting spending while increasing productivity. The steep NSRL can therefore be seen as a fairly clever fiscal contrivance to help curtail spending and take off some of the inflationary pressure that has built up. Cutting transfers to statutory corporations, the university and the Queen Elizabeth Hospital are other examples of government’s effort to take back the build-up of “cheap value” in the system.

There will be price increases in the market no matter which strategy governments adopt, but self-control will be the least painful inflation. The best prescription I can offer to policymakers is to close the revenue shortfall by increasing the Excise Tax on petroleum products rather than on general goods. People with cars are typically better placed than the poor in the society to adjust their lifestyles. When we all use less gasoline, we will simultaneously reduce the import bill. I would also urge Barbadians to practice restraint – those that can afford it, travel less, consume more local goods, conserve energy and refuse unnecessary imports for the time being; to the average young person I would advise that you waste no time in finding ways that you can invest in yourselves so that you can protect your standard of living with the income earned from a special competency or profession that will keep you valuable anywhere.

Economic policies, like medications, have their specific purpose and, in their prescribed dosages are beneficial for a particular malaise, but all drugs have their contraindications and cautions. Once we are made aware of the side effects, we can prepare for them. The NSRL has never been sold properly as a remedy to help us cope with the adverse side effect of Government’s use of quantitative easing.

Source: (Lee Farnum-Badley is a retired development economist)

4 Responses to Positive side to 10% NSRL

  1. Sheldine Dyall
    Sheldine Dyall September 5, 2017 at 1:36 pm

    There us no positive side when our living have been devalued. Prices have gone up

    Reply
    • Carson C Cadogan September 6, 2017 at 12:11 pm

      Prices gone up is the fault of the merchants.

      Reply
  2. Star Wood
    Star Wood September 5, 2017 at 1:49 pm

    what could be positive about this?! stupseeeeeeeee

    Reply
    • Carson C Cadogan September 6, 2017 at 12:11 pm

      Only a BLP operative wont see the positive side.

      Reply

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