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one by one...
Golding must seek consensus on next budget
KEITH COLLISTER
Wednesday, January 06, 2010
IN his address to the nation on December 23, Prime Minister Bruce Golding noted that the tax package, announced the previous Thursday, had to raise $21.8 billion to satisfy the Medium Term Economic Programme that Jamaica had submitted to the IMF. As he put it starkly "Without that additional revenue, there will be no IMF programme."
He continued: "Without the money from the IMF, the exchange rate would come under severe pressure because with the fallout in bauxite and alumina earnings, remittances and other inflows, we would have difficulty in meeting the demand for foreign exchange. Without an IMF agreement, the additional funds from the World Bank and the Inter-American Development Bank which we need to support the budget would not be forthcoming."
The prime minister is clearly correct in his assessment of the gravity of the crisis. It should also be noted that the international financial crisis, combined with the so called 'great recession' has made the preparation of the national budget of virtually every country in 2009 infinitely more difficult than at any time in more than twenty-five years. A large number of countries are facing fiscal difficulties from plunging tax revenues, a significant number are running double-digit fiscal deficits (still the most likely outcome for Jamaica this fiscal year despite the recent tax package), and a smaller number (including even some of the developed countries of the European Union) are already facing fiscal and debt crises similar to that of Jamaica's.
What is not yet clear is the reason for the lack of consultation involved in preparing the first tax package. One should begin by noting that this lack of consultation is in no sense new. The most likely explanation is that the usual last- minute preparations involved in virtually every budget process (leaving neither the time nor it must be said the desire to consult stakeholders) of the past decade was accentuated by the perceived need for secrecy in negotiating with the IMF.
In their press release immediately following the prime minister's presentation, the Jamaica Chamber of Commerce, whilst agreeing that the revised tax measures represented a more equitable and practical package, noted :
"We remind the public that with both the previous and current administration, the JCC has been consistent in its call for structured dialogue which does not leave consultation to the discretion of the Government in general and the minister of finance in particular."
The need for dialogue was also identified, not for the first time, as recently as the PSOJ's annual economic seminar held on May 14th, 2009 in a speech by Pricewaterhouse partner Brian Denning.
Denning argued that the successful implementation of comprehensive tax policy reform measures requires fiscal space. In words that could equally describe the current tax package, the April budget, or the budget of 2005 (for further details on this missed opportunity see my article "Taxation must be part of the social contract to save Jamaica in the New Year" of January 1st) he notes it " is very difficult to undertake significant policy reforms in an environment where new tax measures are required annually to fund large fiscal deficits".
Denning argues that Public Education and Awareness programmes are critical to the success or failure of proposed tax reforms (and how they fit into the overall National Development Strategy) and that "negative public perception often results in the cherry-picking of discrete reform measures."
He observes "In the absence of such programmes, the public is more susceptible to misinformation and manipulation by political or sectoral interests."
Denning believes reform of the Budget Process must include:
a) the simultaneous laying of Revenue and Expenditure Estimates for debate and approval by Parliament;
b) pre-budget consultations with sectors likely to be affected; and
c) five-year rolling budgets which align specific revenue, expenditure and borrowing targets with medium and long-term National Development Plans.
In the same pre Christmas speech, the prime minister also outlined how the original tax package was conceived.
"In 2003, the then government appointed a Tax Policy Review Committee to recommend changes to the tax system. One of the recommendations of that committee was the broadening of the GCT to include as wide a range of goods and services as possible. "
The prime minister correctly quotes the Matalon report as saying:
"The revenue productivity and fairness of the GCT would be addressed by eliminating all non-export zero rates other than those required by international convention together with a significant amount of the exemption list."
The report recommends a portion of the additional revenue should then be allocated to expand the social safety net programmes to target assistance to those most in need. Not coincidentally, the IMF press release of December 17th specifically noted a planned 50 per cent increase in the budget of the PATH (Programme of Advancement through Health and Education) cash transfer programme.
It should first be noted, however, that the original proposal was part of an overall package, and that the Matalon report itself is over five years old, and has been ruthlessly cherry-picked over that period.
In remarks highly relevant to this issue, Denning argued in his PSOJ speech that a significant impediment to tax reform is the absence of an adequate social safety net in Jamaica, as this means that the tax system continues to be used to achieve various social welfare objectives.
He outlined the case for the removal of "the myriad of GCT exemptions designed to alleviate the poor from having to pay GCT on certain social goods and services. These exemptions are costly and poorly targeted as these goods and services are often consumed in greater amounts by the well-off.
Furthermore, a GCT exemption can do nothing to help our poorest members of society who cannot afford the goods in the first place. In contrast, targeted direct expenditure programmes accessed by the poorest individuals in our society can match welfare support with greatest need."
Denning noted, however, the continuing key concern with such a removal.
"This requires, however a reliable, transparent, impartial, and cost-effective means of administering such a social safety netl." The clear implication is that, like many others, he is not confident that we have such a safety net in place.
In April of this year, it may still have been possible to sell a reduction in GCT to 15 per cent in return for a broader base (the original National Planning Summit proposal), although even this more limited measure really required the trust generated by a genuine social partnership.
The combination of the pain of continued job losses, and the reduction in the flows of the real social safety, remittances, over the past nine months means a genuine social partnership approach is now absolutely essential to any plan to broaden the base that includes a further rise in GCT.
An example of such a partnership would be for the Government to calculate the impact of putting GCT on everything eg including basics, and putting all the money raised into a structured welfare programme for the poor, capturing only the compliance dividend (this could be large if it is combined with other administrative measures to target those not paying) to reduce the deficit.
In other words, the "tax the poor" political issue involved in broadening the GCT base means that it can no longer be treated as a last-minute revenue raising measure (if this was ever appropriate), but as a revenue neutral measure designed to strengthen the social safety net in an extremely transparent and structured fashion.
Denning argues that the next phase of tax reform must involve formulating and documenting a "Blueprint for Tax Reform" which outlines the desired tax regime (in terms of both policy and administration) and clearly supports the agreed goal.
Even when documented (a first draft of such a "Blueprint" was prepared in July 2009 as part of the national planning summit initiative), such a "Blueprint must be circulated and agreed with all the key stakeholders.
Once agreed, Denning notes that the implementation of comprehensive tax reform will require major institutional, technical and administrative capacity including project management and implementation resources, economic analysis, public policy and tax technical input, legislative drafting, design and modification of IT and other systems, training, public education etc.
Such a process cannot be an afterthought of an IMF negotiation, but requires its own dedicated team, which needs to be working on these issues independently, in parallel with the budget process. The team should include representatives of key stakeholders, and a minimum of one partner level expert from a leading accounting firm, as well as other dedicated economic and tax accounting experts, if it is to have any chance whatsoever of meeting the next budget deadline.
It seems appropriate to leave the last word to the Jamaica Chamber of Commerce, who in their press release, stated that the Government should "now move swiftly to settle and unveil a planned and concerted movement towards tax reform, complete with timetable for the introduction of agreed reforms and a timetable for the discussion of those reforms not yet agreed" in a process "underpinned by meaningful consultation with all stakeholders". We will review the actual measures in another article.
one by one...
Golding must seek consensus on next budget
KEITH COLLISTER
Wednesday, January 06, 2010
IN his address to the nation on December 23, Prime Minister Bruce Golding noted that the tax package, announced the previous Thursday, had to raise $21.8 billion to satisfy the Medium Term Economic Programme that Jamaica had submitted to the IMF. As he put it starkly "Without that additional revenue, there will be no IMF programme."
He continued: "Without the money from the IMF, the exchange rate would come under severe pressure because with the fallout in bauxite and alumina earnings, remittances and other inflows, we would have difficulty in meeting the demand for foreign exchange. Without an IMF agreement, the additional funds from the World Bank and the Inter-American Development Bank which we need to support the budget would not be forthcoming."
The prime minister is clearly correct in his assessment of the gravity of the crisis. It should also be noted that the international financial crisis, combined with the so called 'great recession' has made the preparation of the national budget of virtually every country in 2009 infinitely more difficult than at any time in more than twenty-five years. A large number of countries are facing fiscal difficulties from plunging tax revenues, a significant number are running double-digit fiscal deficits (still the most likely outcome for Jamaica this fiscal year despite the recent tax package), and a smaller number (including even some of the developed countries of the European Union) are already facing fiscal and debt crises similar to that of Jamaica's.
What is not yet clear is the reason for the lack of consultation involved in preparing the first tax package. One should begin by noting that this lack of consultation is in no sense new. The most likely explanation is that the usual last- minute preparations involved in virtually every budget process (leaving neither the time nor it must be said the desire to consult stakeholders) of the past decade was accentuated by the perceived need for secrecy in negotiating with the IMF.
In their press release immediately following the prime minister's presentation, the Jamaica Chamber of Commerce, whilst agreeing that the revised tax measures represented a more equitable and practical package, noted :
"We remind the public that with both the previous and current administration, the JCC has been consistent in its call for structured dialogue which does not leave consultation to the discretion of the Government in general and the minister of finance in particular."
The need for dialogue was also identified, not for the first time, as recently as the PSOJ's annual economic seminar held on May 14th, 2009 in a speech by Pricewaterhouse partner Brian Denning.
Denning argued that the successful implementation of comprehensive tax policy reform measures requires fiscal space. In words that could equally describe the current tax package, the April budget, or the budget of 2005 (for further details on this missed opportunity see my article "Taxation must be part of the social contract to save Jamaica in the New Year" of January 1st) he notes it " is very difficult to undertake significant policy reforms in an environment where new tax measures are required annually to fund large fiscal deficits".
Denning argues that Public Education and Awareness programmes are critical to the success or failure of proposed tax reforms (and how they fit into the overall National Development Strategy) and that "negative public perception often results in the cherry-picking of discrete reform measures."
He observes "In the absence of such programmes, the public is more susceptible to misinformation and manipulation by political or sectoral interests."
Denning believes reform of the Budget Process must include:
a) the simultaneous laying of Revenue and Expenditure Estimates for debate and approval by Parliament;
b) pre-budget consultations with sectors likely to be affected; and
c) five-year rolling budgets which align specific revenue, expenditure and borrowing targets with medium and long-term National Development Plans.
In the same pre Christmas speech, the prime minister also outlined how the original tax package was conceived.
"In 2003, the then government appointed a Tax Policy Review Committee to recommend changes to the tax system. One of the recommendations of that committee was the broadening of the GCT to include as wide a range of goods and services as possible. "
The prime minister correctly quotes the Matalon report as saying:
"The revenue productivity and fairness of the GCT would be addressed by eliminating all non-export zero rates other than those required by international convention together with a significant amount of the exemption list."
The report recommends a portion of the additional revenue should then be allocated to expand the social safety net programmes to target assistance to those most in need. Not coincidentally, the IMF press release of December 17th specifically noted a planned 50 per cent increase in the budget of the PATH (Programme of Advancement through Health and Education) cash transfer programme.
It should first be noted, however, that the original proposal was part of an overall package, and that the Matalon report itself is over five years old, and has been ruthlessly cherry-picked over that period.
In remarks highly relevant to this issue, Denning argued in his PSOJ speech that a significant impediment to tax reform is the absence of an adequate social safety net in Jamaica, as this means that the tax system continues to be used to achieve various social welfare objectives.
He outlined the case for the removal of "the myriad of GCT exemptions designed to alleviate the poor from having to pay GCT on certain social goods and services. These exemptions are costly and poorly targeted as these goods and services are often consumed in greater amounts by the well-off.
Furthermore, a GCT exemption can do nothing to help our poorest members of society who cannot afford the goods in the first place. In contrast, targeted direct expenditure programmes accessed by the poorest individuals in our society can match welfare support with greatest need."
Denning noted, however, the continuing key concern with such a removal.
"This requires, however a reliable, transparent, impartial, and cost-effective means of administering such a social safety netl." The clear implication is that, like many others, he is not confident that we have such a safety net in place.
In April of this year, it may still have been possible to sell a reduction in GCT to 15 per cent in return for a broader base (the original National Planning Summit proposal), although even this more limited measure really required the trust generated by a genuine social partnership.
The combination of the pain of continued job losses, and the reduction in the flows of the real social safety, remittances, over the past nine months means a genuine social partnership approach is now absolutely essential to any plan to broaden the base that includes a further rise in GCT.
An example of such a partnership would be for the Government to calculate the impact of putting GCT on everything eg including basics, and putting all the money raised into a structured welfare programme for the poor, capturing only the compliance dividend (this could be large if it is combined with other administrative measures to target those not paying) to reduce the deficit.
In other words, the "tax the poor" political issue involved in broadening the GCT base means that it can no longer be treated as a last-minute revenue raising measure (if this was ever appropriate), but as a revenue neutral measure designed to strengthen the social safety net in an extremely transparent and structured fashion.
Denning argues that the next phase of tax reform must involve formulating and documenting a "Blueprint for Tax Reform" which outlines the desired tax regime (in terms of both policy and administration) and clearly supports the agreed goal.
Even when documented (a first draft of such a "Blueprint" was prepared in July 2009 as part of the national planning summit initiative), such a "Blueprint must be circulated and agreed with all the key stakeholders.
Once agreed, Denning notes that the implementation of comprehensive tax reform will require major institutional, technical and administrative capacity including project management and implementation resources, economic analysis, public policy and tax technical input, legislative drafting, design and modification of IT and other systems, training, public education etc.
Such a process cannot be an afterthought of an IMF negotiation, but requires its own dedicated team, which needs to be working on these issues independently, in parallel with the budget process. The team should include representatives of key stakeholders, and a minimum of one partner level expert from a leading accounting firm, as well as other dedicated economic and tax accounting experts, if it is to have any chance whatsoever of meeting the next budget deadline.
It seems appropriate to leave the last word to the Jamaica Chamber of Commerce, who in their press release, stated that the Government should "now move swiftly to settle and unveil a planned and concerted movement towards tax reform, complete with timetable for the introduction of agreed reforms and a timetable for the discussion of those reforms not yet agreed" in a process "underpinned by meaningful consultation with all stakeholders". We will review the actual measures in another article.
