The Middle Class

The Middle Class under attact

The country’s Prime Minister announced in a national address recently that the income tax threshold will be lowered from $60,000 to $36,000 per annum come January 2014.
This policy reversal comes in the wake of a proposed Structural Adjustment Programme which the government will implement for the next three years. Dr.Mitchell stated that the existing tax regime is the most liberal in the Caribbean if not the world. He went on to say that it needs to be rolled back if we want the international community to provide assistance for the Structural Adjustment Programme.

The implications of this measure has not yet been internalized by many as the government is yet to  define what this programme is intended to achieve. The Committee of Social Partners has held a series of public discussions in an attempt to promote public education on this thorny issue. However, one senses an underlying state of despair as the soon to be affected wage earners do the math.

In 1996, the government delivered its election promise to raise the income tax threshold to$60,000 per annum. At that time Grenada had been restored to credit worthy status as a result of the Structural Adjustment Programme implemented during the period 1992-95. Government fiscal stability was also restored and the public debt was stated as $372 million .The measure did not have significant negative effects on government revenue.

The emerging middle class used the opportunity to contract mortgages for home construction, buy cars and other electro-domestic appliances. As a result, when mortgage and other living expenses are deducted, disposable income per month approximates 20% of their gross income or $1000. This is the context that one should internalize the impact of the Prime Minister’s announcement.  Therefore a person who earns $5000 per month and was not paying income tax now has to face a $300 tax deduction which represents 30% of his disposable income.

Therein lie our problem.  The emerging middle class in developing countries is a critical economic and social actor because of its potential as an engine of growth and economic stability. If those in the middle class have precarious incomes and unstable employment, their consumption cannot be counted upon to drive national development. The truth is that middle income earners tend to be the keen investors in physical assets and education. They are the ones who generally send their children to the growing number of privately run schools on the island. If that sector cannot afford to send their kids to those schools, then private schools may have to close their doors.

The stark reality is that the lowering of the threshold and the drastic reduction of the disposable income can hardly be described as prudent. A country that impoverishes its middle class will surely suffer economic and social ruin.  Haiti and Guyana are two examples where the middle class has been almost wiped out. That experience must surely counsel Dr. Mitchell and his government that this is an ill-advised measure.
The nation has accepted that sacrifice is required to get the country out of this mess. Everyone should pay. To place the burden on the approximately 20% percent of the working population is discriminatory and unwise.  Dr. Mitchell must be made aware that consumption of that sector of wage earners is fundamental to our economic survival.

The social and economic consequences of foreclosures and repossession of assets will lead to increased social tension. Itinerant landscapers, hair dressing salons, restaurants, domestics, laundries etc will surely feel the effects of the reduction in disposable income of middle income persons. The country stands to lose some of its best brains as an intolerable economic situation may force many to seek their sustenance elsewhere.
The political calculation of the Prime Minister, seem to suggest that at $36,000 per annum, the vast majority of his supporters will not be directly affected.  In the National Address ,Dr. Mitchell was at pains to say that he intends to do what is right. Surely the lowering of the threshold and the application of 15% tax on income from $3000 to $5000 is not the way to go. The social and economic implications of wiping out the middle class could only redound to social and economic instability.

The Prime Minister and his Cabinet should do the right thing and institute a tax measure that widens the net. Economic policy in today’s world ought not to be influenced by the author of Robin Hood.