Wednesday, December 31, 2008

'Stimulative' economics

Screaming headlines in both the Daily News and The Island proclaim a number of price cuts in fuel and other items. The Daily News describes this as a "stimulative economic package to the consumers to ensure best performance in the commercial, agriculture, industrial and service sectors."

When dealing with a downturn, one would expect the Government to admit to that fact when announcing a package but the announcement only talks of "best performance" and "new year bonanza". Perhaps talk of a downturn would be a bit embarrassing since the statistics point in the opposite direction.

Most of the relief measures involved reduced prices of fuel plus a soft loan to tea factories. Any relief will be welcome by beleaguered consumers and industrialists but the unanswered question is the means by which this will be funded.

A Government that runs a budget surplus and/or has low levels of debt will have no trouble financing a stimulus but thanks to the profligacy of this regime there is no room to fund anything. Some small cuts have been announced in the expenditure of ministers but whether this will suffice is a question.

In addition to this problem the country is facing a potential banking crisis and if a bailout of the financial sector becomes necessary there is going to be an additional burden on the public purse.

A slowing economy means lower tax collection as sales and profits slump. There will also be fewer imports and therefore less collection in the form of customs duties and associated levies.

Historically, budgets have overestimated revenues and underestimated expenditure; the last budget saw a big increase in expenditure, so going by past form we should be heading for a mammoth deficit. Expect the printing presses to roll.

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