The Central Bank of Barbados has issued a stark warning against implementing sweeping reductions to the nation’s 17.5% Value Added Tax (VAT), cautioning that such untargeted fiscal measures could undermine economic stability while failing to deliver meaningful assistance to populations most severely impacted by rising living costs.
Governor Dr. Kevin Greenidge articulated the Bank’s position during a Wednesday press conference reviewing the country’s 2025 economic outlook. His comments directly addressed campaign promises from opposition parties contesting the February 11 general election, who have pledged significant VAT reductions as a primary mechanism for addressing cost-of-living pressures should they form the next government.
Dr. Greenidge, drawing upon his extensive experience from the International Monetary Fund, presented a detailed economic analysis questioning the wisdom of broad-based VAT cuts. He emphasized that such blanket reductions would provide financial benefits across all economic segments, including affluent demographics who don’t require assistance, rather than concentrating support where it’s most needed.
The Governor highlighted implementation challenges, particularly the uncertain ‘pass-through effect’ where merchants and wholesalers might not fully transfer tax savings to consumers. Using automotive taxation as an example, he explained how importers could retain savings rather than reducing consumer prices, especially in economic environments where prices demonstrate downward rigidity.
Dr. Greenidge advocated for precisely targeted policy measures instead of across-the-board reductions, stating: ‘If your objective is addressing cost of living, you must identify which specific groups you’re trying to impact. Well-designed, targeted measures for vulnerable populations deliver significantly more effective outcomes than broad fiscal changes.’
He noted that VAT reductions typically prove most effective when the tax system is performing optimally and the objective involves stimulating productive sectors, rather than addressing immediate cost-of-living concerns. The Governor concluded that implementing monitoring mechanisms to ensure merchants pass on tax savings would likely incur administrative costs exceeding the actual benefits delivered to consumers.