The Government of Barbados continues to “absorb the cost” of gasoline price increase
A price ceiling on gasoline and diesel is now in effect in Barbados. As of 19 August 2022, the price of gasoline has been capped at 2.24 USD per liter ($8.48 per gallon), and the price of diesel at 2.01 USD per liter ($7.61 per gallon). The Barbados National Oil Company, which is wholly owned by the government, is the only entity authorized to import gasoline and diesel products into the island, giving the administration ample room to take action. The cap is expected to remain in place for the next six months, expiring on 31 January 2023. For the duration of the policy, the company is expected to pass savings along to consumers if international gas prices fall below these marks and absorb the cost should prices rise above these figures. Though the country’s cost of living crisis long predates the current energy crunch, the Prime Minister has described this measure as necessary for shielding consumers from the current “volatility” in the oil and gas sector.
This isn’t the first policy move the administration has taken with this goal in mind. The Government of Barbados recently capped the value-added tax on gasoline at 47 cents per liter ($1.80 per gallon) and the VAT on diesel at 37 cents per liter. Deloitte estimated that the measure would cost the government nearly $12.5 million (USD) in lost revenues, over its first six months in effect. The government has acknowledged that the National Oil Company will likely require financial support in order to abide by the price ceiling and has committed to making those transfers periodically. Both policies come against a backdrop of other tax reductions in Barbados, including the April expansion of the “zero-rated items” list, the capping of customs duties at their pre-pandemic rate, the raising of the land tax threshold, and the VAT suspension during the Christmas season last year.
Though widely celebrated, locally, the gas relief measures have drawn mixed opinions from the wider Caribbean. Economists, like Dr. Andre Haughton have suggested that the VAT cap provides Barbadians needed relief on a severely overtaxed commodity, and further urged that the Jamaican Government to follow suit. Ryan Strachan, the president of Generation 2000 supported a more skeptical perspective – questioning the ever-increasing financial commitments of the Bajan government as it tries to cushion the blow to its local consumers.
To the government’s credit, these recent concessions are partially balanced by the Pandemic Contribution levies they enacted in the most recent budget bill. This levy imposes a 1 per cent income tax on individuals earning more 3,100 USD a month, or more than 37,000 USD per year. This is in addition to workers’ standard income tax liability, though the budget bill only authorized the personal income levy for a single year. By contrast, businesses with a net income greater than 247,000 USD in the previous fiscal year, face a 15 per cent net income tax for the foreseeable future. This measure is estimated to generate almost 50mm USD for the treasury, over the next two fiscal years.
Still, the distaste isn’t entirely unfounded. Textbook economic theory typically frowns on the imposition of price ceilings, like the one now in effect in Barbados. Price ceilings can lead to shortages, as more people than would be willing to pay the original market rate, choose to consume the goods, at the lower, capped rate. A shortage can result in precisely the result that policymakers are trying to avoid – even higher prices. Nonetheless, this hasn’t stopped governments from trying price control policies.
For example, the State of Hawaii established a cap on wholesale gas prices in 2005, choosing to peg the maximum price of unleaded at an average of gas prices in New York, Los Angeles, and the Gulf Coast. Given the concentration of fuel supply to the islands in just two refining companies, and one importer, lawmakers hoped that this would function similarly to the regulation of a natural monopoly. However, gas prices continued to increase in Hawaii throughout the following year, even as they declined across the continental United States. Critics have suggested that the price cap inadvertently became a price target. The cap was generally considered a failure, and the measure was lifted by the governor less than one year later. The cap has not been reinstated since, despite subsequent governors’ ability to do so.
This is simply one case, however, and it does not condemn the Bajan’s policy to failure. For one, Mottley’s goal for this policy is far more measured than Hawaii’s. The intent of this cap is not to bring fuel prices in line with the continent; it is merely to carry Bajan’s through the worst of the current energy crisis. Further, when the measure is lifted in six months, it will not be perceived as a failure – it will have been phased out largely according to plan. Provided that the Government of Barbados can maintain the fiscal balance necessary, this may become an emblematic example of what a progressive Caribbean government can accomplish.
Shua McLean (@shuakym) is a Master of Public Affairs student at Princeton University, concentrating in International Development. He writes regularly on issues of public finance, budgeting, and public-sector reform. He is an intern at the Jamaica Monitor.
