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The Voice

More taxes likely says Ross
published: Friday | November 5, 2004


Ross and Gregory

Dennise Williams, Staff Reporter

THE GOVERNMENT can forgo its planned 2005/2006 balanced budget and maintain the current taxation levels or it can go ahead with its plans and be forced to raise an additional $10-12 billion in taxation. This is the possibility raised by Charles Ross, chief executive officer of Sterling Asset Management, during a presentation held in Mandeville in late October.

"Because of the fiscal slippage and because of the objective of the balance budget for the next fiscal year, the Government will have to find two per cent of gross domestic product (GDG) in new taxes. If current projections are borne out, that's translates to an extra $10 -12 billion in taxes," he told the Financial Gleaner in an interview.

Mr. Ross said that general consumption taxes and income taxes are the largest sources of funds for the Government but "I don't really think that the Government will go there. There is a strong feeling in the financial community that when you increase income taxes you end up with less revenue.

"The income tax system is successful as is. So that leaves GCT as the likely area. It was the Government's intention to increase GCT last year, but it didn't, so I guess it could go there."

TAX REVIEW COMMITTEE

Currently, a government sponsored tax review committee has been set up to review the entire tax code in Jamaica and make recommendations, and Mr. Ross believes that the findings of this committee is key to the direction the Government will take in regards to where to increase taxes. Another option available to the Government, according to Mr. Ross, is indirect taxation. "Increased user fees and the like are a good potential for raising additional monies to fund the upcoming budget."

Yet, Errol Gregory, noted economist, disagrees totally. "I don't agree that the Government will implement such a massive tax increase come April. Look at the position ­ the Government has already raised their external borrowing requirements for the year and actually raised addition funds in the form of euros in what can be considered a pre-emptive strike for next year, plus the Net International Reserves (NIR) are at a comfortable level."

Mr. Gregory also states that beyond fiscal management, it is the social repercussions that will force the Government to hold strain come next April. "A significant increase in taxation is the Government's last option. Right now the social fabric is very fragile and it will not want to disrupt things further.

"Two years ago, the massive $14 billion tax package had such a negative impact on the economy; the Government would not want to repeat that."

BALANCED BUDGET

However, the budget does not have to be balanced. Mr. Ross said the reason to pursue a balanced budget is "to reassure investors, particularly foreign investors, that the Government will make a dent in its debt burden and honour its obligations."

Again, Mr. Gregory disagrees. "The Government has said that they will balance the budget and despite Hurricane Ivan, they will go forward with their plans. Now I am not suggesting that managing the economy will be a stroll in the park, but with continued growth and profitability of the bauxite and tourism sectors, I think the Government would be loath to raise taxes and forgo balancing the budget."

Mr. Ross asserts, "If the budget is not balanced in 2005/2006, the country would not be technically worse off because tax revenue is growing faster than the rate of inflation. This is due to the growth in the costs of domestic goods and services plus improved revenue collection; the Government will pick up extra revenue by these means. However, there will still be a gap in the budget between income and expenditure."

This occurrence brings up an interesting observation. Mr. Ross states, "The unfortunate situation is that the Government is borrowing more than is needed to fund the budget.

EXCESS LIQUIDITY

"In my humble opinion, the Bank of Jamaica (BOJ) is creating too much money and so they are forced to mop up that excess liquidity by borrowing that money back. That is what the open market operations are about. BOJ does not have an income source so they have to create money to pay the interest on the money they take up. In essence, it chases its tail." Yet again, Mr. Gregory sees things differently. "Funding the BOJ is part of the Government's drive to meet its targets of holding the exchange rate steady and containing inflation."

Tony Morrison, protocol officer of the BOJ, is even more dismissive of Mr. Ross's sentiments. "Mr. Ross is being ridiculous. No central bank needs any government to fund them. It is the other way around. In fact, the central bank can get all the money it needs by printing money. The only reason we don't is because we are in a globalised economy and we don't want to be out of sync with other countries."

However, according to Mr. Ross, the additional borrowing means that "the debt grows at a much faster rate than what is needed." Hence, the spectre of increased taxation.

In order to plan accordingly, Mr. Ross advises investors to keep a close eye on the Government's tax committee and their recommen-dations, because, "there is no guarantee that the Government will follow the recommendations, but it is a clue as to what can happen."

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