Thursday 23rd June 2005

 

Power to choose…or lose

 
 
 
 
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Problems at the Customs and Excise division, such as the work stoppage earlier this week because of a defective air conditioner, are contributing to higher cost of living as a result of inefficient processing of documents and poor work practices. Photo: Keith Matthews

As far as I am concerned, the rate of inflation is the most important economic issue facing this country at this point.

Rising prices throughout the economy (and it is not only food prices) have the potential to eat away at the gains that working people have made in the last five years as a result of the reduction in taxes and salary increases.

It is clear to me that the two issues are linked.

Here’s how.

In the last four years, the Government has lowered individual and corporate taxes and granted double digit salary increases to many public sector workers. The minimum wage has gone up twice in the period from $7 an hour to $9 an hour.

At the same time, the Central Bank has worked hard to drive down the cost of borrowing by lowering the reserve requirement.

This started in October 2003 when the Central Bank announced its intention to lower the reserve requirement applicable to the commercial banks from 18 per cent to nine per cent of prescribed disabilities on a phased basis over an 18-month period.

The first reduction from 18 to 14 per cent, took effect from October 22, 2003. The second from 14 per cent to 11 per cent took effect from September 15, 2004 and the third is now overdue.

So, many T&T working people are paying lower taxes, receiving higher salaries and are paying lower interest rates on their loans—all except their credit card loans which have remained stubbornly high.

All three factors are good and the Government and the Central Bank should be praised for measures which should redound to an improvement in living standards.

The three factors mentioned above combined with much higher prices of T&T’s exports contribute to a fourth factor which should lead to an improvement in living standards—a reduction in the rate of unemployment.

Higher energy revenues have allowed the Government to embark on a programme of state-sponsored construction which may be unprecedented in the region’s history.

While it is clear that much of this state-sponsored programme is unnecessary and extravagant, the fact is that it has created thousands of new jobs in the construction sector.

New jobs mean that people coming out of our education and training institutions get employed almost immediately. It also means that workers change jobs for higher salaries and returning nationals and skilled non-nationals have also been employed.

Higher salaries, lower taxes and interest rates and the creation of new jobs are a good thing and those responsible should take the credit.

But these factors of success have all contributed to increasing the demand for goods and services in T&T.

It would be possible to track the increased demand for new houses, cars and furniture in the period under examination. There has also been an increased demand for lawyers, accountants, property valuers, real estate agents and workers with construction skills.

As everyone knows, if there is increased demand for goods or services without a commensurate increase in supply of the goods and services, there is likely to be an adjustment in the prices.

This pricing power has contributed to the skyrocketing inflation rate—which seems to have peaked at 7.34 per cent in March. In April the rate was seven per cent and in May 6.48 per cent (both of which are above the Central Bank’s inflation target of between four and five per cent, by the way.)

And if there is a lot of money in an economy, businessmen can increase their prices at will because they are deemed to have pricing power.

That’s why the country’s bakers can afford to increase the price of bread when the cost of flour increases but maintain the high prices when flour costs come down.

The bakers form a judgment that people in the economy can afford to pay the higher price of bread because there are more people with jobs, receiving higher salaries, paying lower taxes and less interest on their loans.

While this line of thinking is reasonable, it ignores the thousands of citizens who, for one reason or another, have not been beneficiaries of the current good times.

The issue of why some people have not been able to grab hold of the golden ring is a whole different discussion.

 

 

 

 

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