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Jamaica's budget debate reveals huge fiscal challenges
By Keith Collister
Friday, May 01, 2009
Jamaica's Budget Debate is taking place, in the words of Finance Minister Audley Shaw, "in the most challenging global economy in our nation's history" with the world "experiencing a severe economic contraction not seen since the great depression only 75 years ago".
Whilst admitting the global economic headwinds may have triggered "some of the most immediate issues", Minister Shaw's sombre presentation noted Jamaica's "fundamental economic problems were not caused by external events", but reflect "core structural deficiencies in our economy" that "have existed for decades and are homegrown, using the quote from billionaire investor Warren Buffet that "you only find out who is swimming naked when the tide goes out".
He argued that the global crisis has laid bare Jamaica's large imbalances that "remain unaddressed for too long", which include "a high debt burden" and "an inefficient and inequitable" tax system.
Shaw's macroeconomic programme assumes global economic growth will not recover until the second quarter of 2010 and that commodity prices remain depressed for the duration of the downturn, with real GDP expected to contract between 2.5 per cent and 3.5 per cent. Despite "declining demand for exports, lower capital flows and a reduction in remittance flows", he expects a narrowing of the current account deficit to 14.2 per cent, with inflation expected to be between 11 to 14 per cent.
His key point was that "we have limited tools at our disposal to tackle the many problems that we face. In the last decade, Jamaica was left behind as the rest of the world boomed. Now, with the world economy at a standstill, we find ourselves with limited resources to counteract the downturn. When we should have been growing and producing surpluses, we borrowed. Now we find ourselves with scarce resources and a massive debt burden."
The core element, however, of his presentation was tax-reform measures to "address the issues of equity, efficiency, effectiveness and revenue adequacy" - namely an increase in taxes on fuel, a broadening of the GCT base and a phased increase in the minimum income tax threshold to $440,000. Over half, or just over $13.3 billion of an overall $24.1 billion in new taxes represented an increase in special consumption tax (SCT), on petrol and an increase in customs user fee on finished petroleum products, whilst this years cost of raising the threshold represented $5.2 billion of the nearly $6 billion in tax "give backs", for a net tax package of just over $18.1 billion.
In a largely sober and restrained response, perhaps reflecting his role as the former Minister of Finance, Opposition Spokesman on Finance Omar Davies appeared to agree on the severity of the budget challenge. In reviewing the fiscal year just ended, he correctly noted that virtually all Jamaica's macroeconomic targets - interest rates, net international reserves, the exchange rate, inflation, and growth - had been missed.
Summarising Jamaica's fiscal performance, Dr. Davies noted "The original deficit target of 4.5 per cent of GDP was revised to 5.8 per cent in the Supplementary Estimates but the out-turn was 6.8 per cent. The primary surplus out - turn was 4.5 per cent of GDP compared to the target of 8.4 per cent. Revenues/grants were 10 per cent below target; GCT was 19 per cent below target; we borrowed $28.6 billion more than originally budgeted, not surprisingly almost equal to the fall - off in Revenues/grants."
He argued that the Government was slow to recognise the serious negative implications for the country from the international crisis, and take "immediate remedial action", with the result that the Central Bank took "draconian measures to increase interest rates in an attempt to stabilise the foreign exchange market".
As someone who should know, he argued that the minister of finance "should grab the opportunity of the crisis, domestically and internationally, to put on the table the full extent of the State's indebtedness, arguing that "the deficit as presented understates the true picture" due to contingent liabilities that must be assumed by the Government in the medium term. Most importantly, Davies noted that "creditors at home and abroad have done their own analysis and know the true state-of-affairs".
Echoing the IMF Managing Director's argument that Jamaica was unable to afford a stimulus package, Dr Davies noted that "the Opposition accepts that a combination of factors, most notably the country's high level of indebtedness, eliminates from our active consideration, some of the initiatives used in other countries."
In what he termed an "alternative budget", he provided a number of familiar suggestions (familiar in that many of them are already under consideration), namely the consolidation of statutory deductions, increased resources for health care and education (with benchmarking) as well as a suggestion for improving efficiency of providing health insurance for public sector workers. He argued for additional expenditure in repairing drainage infrastructure of $3 billion, an expansion of NHT, a $3-billion "reinvigoration" of operation PRIDE aimed at regularising squatters, the revitalisation of agriculture (using unused land) and exploring the access of cheaper energy sources for the beleaguered bauxite industry.
He seemed to provide lukewarm support for a gas tax when he said that "in a search for a significant additional revenue inflow a tax on gasoline was a logical consideration", and that "seldom has any government been brave enough to impose one the equivalent of over 1 per cent of GDP".
In the financing section of his so called alternative budget however, Dr. Davies suggested a one year increase in the tax on interest to 30 per cent or 33 1/3 per cent, to raise additional revenue of $6 to $8 billion. This "could facilitate a reduction of the SCT on gasoline and/or allow for adequate resources to be provided to areas of need which have been underfunded in the budget as presented." He further proposes a transfer from the Universal Access Fund and the Tourism Enhancement Fund of a combined $3 billion.
However, the idea that a higher withholding tax would raise more money seems very unlikely as investors are interested in their after tax return, not pre-tax return. The Government's huge need for funds means it cannot afford to do without the savings of investors for even a short period of time. Coupled with Jamaica's perceived high risk, this means investors are likely to demand a higher rate of interest to compensate for an increased withholding tax, which would potentially cost three to four times more in interest costs than any increased tax revenue. The other suggestion to access the two special funds also presents difficulties, as the Government's projected fiscal deficit is already very high at 5.5 per cent of GDP or roughly $65 billion, and as Dr Davies noted, creditors at home and abroad know our true state of affairs. If Jamaica's main hope is borrow cheaper money from the multilaterals, including particularly the IMF, the assessment of our eligibility would be based on our entire fiscal programme and not just on the central government budget, with the possibility that increased spending from special funds would lead to reduced access to badly needed external funding. Indeed, as Dr Davies would know, this is no sense a new problem as in the past Jamaica has been unable to access much cheaper multilateral funding due to lack of fiscal space in the budget.
http://www.jamaicaobserver.com/magaz...HALLENGES_.asp
By Keith Collister
Friday, May 01, 2009
Jamaica's Budget Debate is taking place, in the words of Finance Minister Audley Shaw, "in the most challenging global economy in our nation's history" with the world "experiencing a severe economic contraction not seen since the great depression only 75 years ago".
Whilst admitting the global economic headwinds may have triggered "some of the most immediate issues", Minister Shaw's sombre presentation noted Jamaica's "fundamental economic problems were not caused by external events", but reflect "core structural deficiencies in our economy" that "have existed for decades and are homegrown, using the quote from billionaire investor Warren Buffet that "you only find out who is swimming naked when the tide goes out".
He argued that the global crisis has laid bare Jamaica's large imbalances that "remain unaddressed for too long", which include "a high debt burden" and "an inefficient and inequitable" tax system.
Shaw's macroeconomic programme assumes global economic growth will not recover until the second quarter of 2010 and that commodity prices remain depressed for the duration of the downturn, with real GDP expected to contract between 2.5 per cent and 3.5 per cent. Despite "declining demand for exports, lower capital flows and a reduction in remittance flows", he expects a narrowing of the current account deficit to 14.2 per cent, with inflation expected to be between 11 to 14 per cent.
His key point was that "we have limited tools at our disposal to tackle the many problems that we face. In the last decade, Jamaica was left behind as the rest of the world boomed. Now, with the world economy at a standstill, we find ourselves with limited resources to counteract the downturn. When we should have been growing and producing surpluses, we borrowed. Now we find ourselves with scarce resources and a massive debt burden."
The core element, however, of his presentation was tax-reform measures to "address the issues of equity, efficiency, effectiveness and revenue adequacy" - namely an increase in taxes on fuel, a broadening of the GCT base and a phased increase in the minimum income tax threshold to $440,000. Over half, or just over $13.3 billion of an overall $24.1 billion in new taxes represented an increase in special consumption tax (SCT), on petrol and an increase in customs user fee on finished petroleum products, whilst this years cost of raising the threshold represented $5.2 billion of the nearly $6 billion in tax "give backs", for a net tax package of just over $18.1 billion.
In a largely sober and restrained response, perhaps reflecting his role as the former Minister of Finance, Opposition Spokesman on Finance Omar Davies appeared to agree on the severity of the budget challenge. In reviewing the fiscal year just ended, he correctly noted that virtually all Jamaica's macroeconomic targets - interest rates, net international reserves, the exchange rate, inflation, and growth - had been missed.
Summarising Jamaica's fiscal performance, Dr. Davies noted "The original deficit target of 4.5 per cent of GDP was revised to 5.8 per cent in the Supplementary Estimates but the out-turn was 6.8 per cent. The primary surplus out - turn was 4.5 per cent of GDP compared to the target of 8.4 per cent. Revenues/grants were 10 per cent below target; GCT was 19 per cent below target; we borrowed $28.6 billion more than originally budgeted, not surprisingly almost equal to the fall - off in Revenues/grants."
He argued that the Government was slow to recognise the serious negative implications for the country from the international crisis, and take "immediate remedial action", with the result that the Central Bank took "draconian measures to increase interest rates in an attempt to stabilise the foreign exchange market".
As someone who should know, he argued that the minister of finance "should grab the opportunity of the crisis, domestically and internationally, to put on the table the full extent of the State's indebtedness, arguing that "the deficit as presented understates the true picture" due to contingent liabilities that must be assumed by the Government in the medium term. Most importantly, Davies noted that "creditors at home and abroad have done their own analysis and know the true state-of-affairs".
Echoing the IMF Managing Director's argument that Jamaica was unable to afford a stimulus package, Dr Davies noted that "the Opposition accepts that a combination of factors, most notably the country's high level of indebtedness, eliminates from our active consideration, some of the initiatives used in other countries."
In what he termed an "alternative budget", he provided a number of familiar suggestions (familiar in that many of them are already under consideration), namely the consolidation of statutory deductions, increased resources for health care and education (with benchmarking) as well as a suggestion for improving efficiency of providing health insurance for public sector workers. He argued for additional expenditure in repairing drainage infrastructure of $3 billion, an expansion of NHT, a $3-billion "reinvigoration" of operation PRIDE aimed at regularising squatters, the revitalisation of agriculture (using unused land) and exploring the access of cheaper energy sources for the beleaguered bauxite industry.
He seemed to provide lukewarm support for a gas tax when he said that "in a search for a significant additional revenue inflow a tax on gasoline was a logical consideration", and that "seldom has any government been brave enough to impose one the equivalent of over 1 per cent of GDP".
In the financing section of his so called alternative budget however, Dr. Davies suggested a one year increase in the tax on interest to 30 per cent or 33 1/3 per cent, to raise additional revenue of $6 to $8 billion. This "could facilitate a reduction of the SCT on gasoline and/or allow for adequate resources to be provided to areas of need which have been underfunded in the budget as presented." He further proposes a transfer from the Universal Access Fund and the Tourism Enhancement Fund of a combined $3 billion.
However, the idea that a higher withholding tax would raise more money seems very unlikely as investors are interested in their after tax return, not pre-tax return. The Government's huge need for funds means it cannot afford to do without the savings of investors for even a short period of time. Coupled with Jamaica's perceived high risk, this means investors are likely to demand a higher rate of interest to compensate for an increased withholding tax, which would potentially cost three to four times more in interest costs than any increased tax revenue. The other suggestion to access the two special funds also presents difficulties, as the Government's projected fiscal deficit is already very high at 5.5 per cent of GDP or roughly $65 billion, and as Dr Davies noted, creditors at home and abroad know our true state of affairs. If Jamaica's main hope is borrow cheaper money from the multilaterals, including particularly the IMF, the assessment of our eligibility would be based on our entire fiscal programme and not just on the central government budget, with the possibility that increased spending from special funds would lead to reduced access to badly needed external funding. Indeed, as Dr Davies would know, this is no sense a new problem as in the past Jamaica has been unable to access much cheaper multilateral funding due to lack of fiscal space in the budget.
http://www.jamaicaobserver.com/magaz...HALLENGES_.asp