Controlling inflation

Whether the Government will actually follow through on any of these measures, however, is another question. Economists, business persons, and other commentators have been sounding warnings about an overheated economy since the $34 billion 2005-2006 Budget was delivered last September. Even the Governor of the Central Bank has repeatedly warned the Government about the need to curb expenditure. Increased costs of living, high demand for foreign exchange, and a shortage of skilled labour and materials to meet the Government’s construction plans have demonstrated that these persons’ concerns are valid. And all these effects can be traced back to Government overspending in one form or another.

Mr Enill, however, attempted to deny this. He instead blamed higher food prices, higher rents, higher costs of pharmaceuticals, leisure, and entertainment, and avaricious business people. But these are typical excuses used by politicians all around the world, and none of them is true. Prices, as Mr Enill well knows, only provide information about supply and demand. A rise in prices may reflect inflation, but it is not the cause. Persistent inflation has one root cause: a rapid growth in the money supply. When the supply of money increases rapidly compared to the supply of goods and services, the value of money declines and prices rise. Mr Enill, as a financial professional, must know this. But, as a politician, he feels constrained to put a spin on the fiscal irresponsibility of the administration he serves.

So how has the Government caused this increase in the money supply? It has used the additional revenue from higher oil and gas prices to fund construction projects and thus hire more persons in that sector. It has also sunk hundreds of millions of dollars into make-work projects like the URP and CEPEP, thus giving spending money to individuals who are not really adding value to the national economy.

And so, even as Mr Enill boasted about the country’s drop in unemployment to eight percent, he also admitted that the highest number of new jobs were in construction; community, social and personal services; and the distributive sector. But there were also significant job losses in the manufacturing and agricultural sectors, even though manufacturing saw an 8.6 percent increase in production. Energy sector output also increased by nearly 11 percent last year.

But these indicators do not reflect the skewed state of the economy, within which the market has not been allowed to perform its functions. As a result, the poorer sectors of the society are bearing the brunt of government-initiated distortions, while the richer sector has been squirrelling foreign exchange abroad and reducing its local investments. It would therefore be fiscally wise for the Government to slow down its construction projects, as well as cut back on public expenditure. However, we are well aware that a general election is due next year. So economic wisdom is in conflict with short-term political goals. We hope, however, that the present administration will not see increased expenditure as a key element for electoral success. If they do, they may win but the country will almost certainly lose.