One for the Middle Class

It should be of interest to us all that the latest results from the last Household Budgetary Survey have not been released, although multilateral agencies have already hinted at the increase in inequality.

It is very important that if it is true, there has been a deterioration in income inequality and attention must be paid to this issue in a timely manner.

One of the most influential economists of the 20th century, John Maynard Keynes argued so many years ago about the importance of the middle class in creating sufficient demand to stimulate growth. He pointed out that extremely unequal distributions of income depress demand and thus reduce growth. The simple point is that when incomes are stagnant or declining for most people, there isn’t enough demand in the economy to encourage productive investment—unless this demand is debt-fueled. But debt-driven consumption cannot last forever.

Eventually credit stops flowing. The lesson is clear. In order to encourage sustainable economic growth, the middle class needs to be able to consume, and to do that, they need to see their incomes rise. Therein lies a conundrum, the major challenge posed by the present economic conditions for the Minister of how to engage in fiscal consolidation without squeezing the middle class and ultimately stifling middle class consumption.

As we move forward it is important that the Minister is not seized with the view that inequality only refers to income inequality but to the cumulative effect of policy changes on the middle class. At its core the concept of inequality speaks to the situation in a society where some people have more opportunity, access to money or other means than do other people.

It is important to note that individual policies by themselves may not create a problem, for example the present tax policies for individuals.

A single tax bracket does not fall in either definition of regressive or progressive tax. However, when one adds the re-introduction of tax exemptions a year ago, a depreciating dollar, limited access to social programs and housing assistance, cost of health care, tertiary level education and transport, the effect on the middle class of policy changes which reduce disposable income will affect aggregate consumption.

Since the changes to the VAT system, has there been any assessment on the impact on consumption? Has the government evaluated the effects of the continued depreciation of the dollar on the disposable income of the middle class? It has to be emphasized that these policies cannot be assessed in isolation. It is the cumulative effect of changes to VAT, depreciation of the currency, introduction of say property tax, changes in cost of tertiary education and increases in fees for government services on disposable household income of the middle class that must be assessed holistically.

The middle class normally bears the burden of adjustment. If we are to grow the non-energy sector, we need a vibrant middle class with all their purchasing power that is engaged to help us grow out of this recession.No one should envy the choices the Minister has to make.