Ministry of FinanceDIALOGUE IS important for partnership. We believe it is imperative that the nation enters into dialogue about the challenges which face us all. An appropriate place to start is to identify the challenges, list the menu of options for addressing these challenges, openly discuss the pros and cons of each option and allow an honest airing of varying opinions. To this end, we present our understanding of the challenges and some options. This list is not exhaustive. We know there are many other options and therefore there is a need for a forum in which to debate them. We invite all Jamaicans to enter into the dialogue in a spirit of co-operation and a desire to find solutions. The decisions the government made to spend beyond the budgeted amount and its failure to implement its own proposed legislations to enhance revenues resulted in missing the fiscal deficit target and a breach of confidence. Now the challenge is to restore confidence in the government's commitment and ability to return to the programmed path of macro-economic stability and economic growth.
RESTORING CONFIDENCE IN GOVERNMENT'S COMMITMENT TO MACRO ECONOMIC STABILITY
A credible and achievable budget plan means strong commitment to fiscal discipline. It means every dollar spent must be accounted for and value attributed to expenditures. This requires the enactment of structures and systems to monitor and control needed expenditures to reduce the incidence of overspending and mismanagement of public resources. These systems should be independent of government and manned by persons of demonstrated integrity to ensure greater accountability.
RESTORING CONFIDENCE IN GOVERNMENT'S ABILITY TO ACHIEVE THE BUDGET TARGETS
The government should make every effort to communicate clearly the path to achieving the (likely) targeted budget deficit for fiscal 2003/04 of 5-6 per cent of GDP. This would make a significant contribution to the restoration of confidence from the local and international markets in the Government of Jamaica and in Jamaica's financial markets. Further, our ability to access capital at a lower cost from the international financial market would be improved. To achieve the targeted budget deficit of 5-6 per cent of GDP for fiscal 2003/04 will require an estimated $14-16 billion in increased revenues and some likely reduced expenses. One possible way of increasing revenues in a modest growth economy is to increase taxes, which is a painful process.
For that reason, it is important that all Jamaicans and investors in Jamaica have the facts and dialogue around the options ahead of the fiscal budget announcements in early April 2003.
WHAT ARE THE OPTIONS?
SOME REVENUE ENHANCING MEASURES
The five items listed below were proposed actions by the government to increase revenues last year which they failed to implement.
1. Cancellation of tax exemption for government enterprises
$2.6 billion
2. Linking of tax compliance to granting of licenses and fees
$2.0 billion
3. Reduction in tax waivers and fees $1.5 billion
4. Amendments to the GCT to close loopholes $915 million
5. Implementation of amendments to Customs Acts $400 million
Total $7.4 billion
Source: Jamaica Staff Monitored Programme
OTHER REVENUE OPTIONS:
6. Auditing of financial institutions in the area of Eurobond derivatives. This has already begun.
7. Implementation of a progressive tax system in the form of staggered tax rates for different tax brackets. Pro: The tax burden is spread more evenly. Con: Possible incentives for tax evasion.
8. Increasing GCT by 1.5 to 2 percentage points, while simultaneously reducing income tax by 1.5 to 2 percentage points (or some such combination) while keeping zero rated products tax-free. Pro: Reduced tax burden on Pay as You Earn (PAYE) individuals, wider proportion of the informal economy captured through the tax on consumption. Con: This may increase the tax burden on the poorer class if there are no appropriate adjustments for zero rated products.
9. Enhancing the efficiency of taxing imports at source while continuing exemptions for raw material for value added activity and tourism inputs. Pro: More of the activities in the informal sector captured. Con: Negative impact on businesses in the formal economy if not allowed to write off taxes paid against corporate taxes.
10. Exploring other creative ways to capture taxes from the informal sector such as entertainment tax and licensing of all service providers. Pro: More GCT captured. Con: May cause the price of some services to adjust upwards. Of note, every time we buy goods or service and not pay GCT, we are supporting the informal economy, undermining the revenue base of the country and increasing the burden on persons who pay PAYE.
SOME EXPENDITURE
REDUCTION MEASURES
1. Implementation of proper processes, structures and system to monitor and control government spending can reduce overspending and mismanagement, thereby reducing expenditures.
2. Link any future salary increases for civil servants to performance standards. Postponing the "80 per cent of market adjustments." The pros and cons of this option should be explored through dialogue.
3. Eliminating the practice of re-employing retired senior civil servants on contract. Options to be explored.
As demonstrated above there are options to increase revenues, reduce expenditures and meet the targeted budget objectives. This commentary is aimed at stimulating the debate so that we can, in partnership, choose responsibly the best options to allow us to meet our targets. More importantly, it takes courage and political will to implement the best policies to facilitate the growth and development of our nation.
THE ECONOMY CONTINUES
TO BE RESILIENT
Surprisingly, despite the challenges (which have been repeated many times over), we have failed to note that the economy continued on its recovery path in 2002. The calendar year 2002 GDP growth is estimated to be 1.8 per cent according to the Planning Institute of Jamaica estimates. This was buoyed by a strong 4.1 per cent economic growth for the quarter ended December. The sector which contributed the most to GDP growth was Mining & Quarrying which grew 25.6 per cent. In fact it was a record year for mining, as Jamaica experienced the highest level of bauxite production (13,119 KT) in 24 years.
Miscellaneous services, of which tourism activity accounts for 80 per cent, grew by 12.6 per cent. The transport, storage & communication sector grew 11.5 per cent led by growth in cellular telephone service and recovery in tourism and mining. Private remittances remained resilient, up 20 per cent for the calendar year 2002.
Looking forward, agriculture should be expected to recover from the flood affected levels of 2002. Hotel occupancy rates were 82 per cent in February and may be expected to fully recover this year. Tourism revenues may also be expected to improve by US$50 - US$100 million this year given the scenario of a quick US/Iraqi war. Beyond the war (if one), we may expect oil prices to decline to more normal levels during the latter half of 2003. There is also hope for some recovery in alumina prices on the global market given a quick war scenario. We believe confidence in the government to continue on the path to economic stability can be restored and sustainable growth can occur provided there is not an extended war. We can work our way out of these challenging times, but it will require everyone pulling together. In fact, we could have more robust growth if the private sector was bolder, more creative, innovative and courageous in utilising our abundant resources to create employment, wealth and sustainable growth for Jamaica.
We know that Jamaica and its people are resilient despite severe economic challenges. If the government wants to engage in dialogue around potential increased taxes, it must demonstrate how it is going to minimise all overspending and mismanagement. To further facilitate the conversation, the government should take the lead in belt tightening by rolling back the present parliamentary wage increases. The government should actively have forums for dialogue with the nation around the options before the upcoming budget so that we as a nation together can choose responsibly the best option to achieve and avoid potential social unrest. This could result in a smoother implementation process for policies in the upcoming 2003/04 fiscal year.
Investment Research Group. Jamaica Money Market Brokers Limited
