By Dr Clive Thomas
To ease the growing burden of price increases on the population, especially the poor, the government has introduced, with much fanfare, a number of measures as part of a relief package. In this week’s article I shall begin to examine this against the backdrop of both the global and local factors leading to rapid price increases, discontent, disaffection and public agitation. Let us begin by carefully detailing the relief measures.
2007 measures
Government insists that its recently offered relief package be seen in context of efforts begun in 2007 to cope with a crisis it saw coming and, which it believes, is driven by global considerations. During 2007, the across-the-board salary increase of 9 per cent paid to public servants is considered part of the relief, even though the percentage increase was substantially less than the rate of inflation in that year.
Further, increases in old age pension (from $3,675 to $6,000 monthly) and public assistance to vulnerable persons (from $2,470 to $4,500) are also precursors to the present relief package. This measure, however, brought the old age pension to less than US$1 per day. It is also less than the amount of $253, which the Minister of Home Affairs had said during the budget debate, was the daily cost of feeding one prisoner! In addition, amidst the turmoil created by the VAT, government zero rated several basic food items during 2007. Inflation, nevertheless, persisted and in 2008 a new emergency package of further relief measures was introduced.
The 2008 relief package
The relief package provides a menu of measures, from income supplementation for public sector workers; relief sales of items at pre-inflation prices to vulnerable communities; forms of tax relief; provision of planting and pest-control materials to encourage people to grow more food and subsidies; to administrative measures supporting lower prices.
The details are as follows:1) for public sector workers, five per cent across-the-board wage/salary increase as of January 1, 2008; 2) in addition, for persons earning $50,000 per month or less a special payment of $4,000 per month to the end of 2008; 3) zero-rating and exemptions on some items subject to the VAT tax; 4) provision of flour subsidies to prevent bakers passing on flour price increases; 5) special sales of basic food items, such as cooking oil, rice and flour; 6) the provision of food production assistance, for example, seeds and plants to encourage persons to grow more food; 7) reduction of fuel taxes: (gasoline from 17 to 7 per cent, and zero taxes on diesel, kerosene and cooking gas); 8) a variety of administrative measures, such as monitoring of rice exports and liberalisation of flour imports; 9) continued subsidies to the power and water supply utilities; and 10) special assistance to the hinterland communities to support food production.
Reaction and rejection
The relief package, however, has been greeted with protests, demonstrations, marches and other visible signs of rejection. Why has this been the case? On the face of it, for persons earning $50,000 per month and under, this package represents a useful, if modest increase in disposable income. This is particularly true for income earners below the income tax threshold of $35,000 per month.
There are at least four reasons why this is the case. One is that while the provision for income supplementation is the key aspect of these measures it only applies to public sector workers.
Thus those in private sector employment and those who are unemployed have no entitlement.
Second, the increases are all taxable. And with income tax at one-third (33⅓ per cent), plus VAT, plus social security payments, more than half of the increase would end up in government coffers. As we shall see next week, this has been aggravated by the huge tax bonanza the government has reaped, mainly on account of the new VAT tax. Third, inflation in general, and the effects of the VAT tax in particular, continue to relentlessly erode the purchasing power of the poor, as it were, week by week.
A living income for all
Above and beyond all these considerations, however, is the reality that $50,000 per month does not provide a living income for any public sector worker. Wages and salaries are so depressed in real terms in the country, and the public sector in particular, that people need a substantial not a marginal absolute increase in their disposable income to be able to cope. Thus the wage and salary supplement offered by a 5 per cent across-the-broad increase plus $4,000 per month, as a one-off payment to year end, would after tax yield disposable income of about $3,000 per month. In absolute terms and at current inflation rates, this will not go far. Furthermore, the lack of prior meaningful consultations with public servants and their representative bodies is a sure recipe for rejection. The days when governments could treat their employees’ pay as a favour or gift from them have long gone. Poor pay means poor productivity and therefore higher cost, this is the painful lesson modern economics has taught us.
Diagnosis
What is the economic diagnosis behind the relief plan? As far as the government is concerned the burden of price increases is being driven by external factors. From public statements one can discern three main sources of this external inflation, namely, 1) rapidly increasing crude oil prices; 2) a surge in global food demand; and 3) a reduction in global food supply on account of man-made decisions (the switch to bio-fuels), and bad environmental effects (mainly climate change)
It is true that crude oil prices have been rapidly rising, but the more important questions are why, and will this persist? Food prices are certainly affected by the pass-through effects of rising oil prices, but so far the global supply-demand imbalances seem heavily concentrated on two grains: wheat and rice.
Next week I shall continue the examination of the several vexing issues raised here.
