Colin Steele and Keith Collister, Financial Analysts
The Ministry of Finance, National Heroes Circle, Kingston, from where Finance Minister Dr. Omar Davies keeps guard on the treasury and oversees the economy. File
The beginning of the election campaign would seem an appropriate time for Jamaicans to consider whether our current economic policies and budget priorities can move Jamaica from a third world to first-world country, as Prime Minister Portia Simpson Miller has arguedthat she wants to achieve.
This goal will require a much higher rate of economic growth of at least treble the current 2.0 per cent.
With growth of around 6.0 per cent or higher, in the words of top IDB economist Vito Tanzi at a recent seminar in Jamaica, our debt "would just melt away."
Policymakers are working with a target of 2030 to reach developed status. Chief economist Dr. Wesley Hughes, of the lead agency on the project, the Planning Institute of Jamaica, has said the country needs to grow an average of 7.0 per cent per annum to reach its goal.
Much lower interest rates are a necessar not sufficient condition in getting the faster rate of growth that we need.
However, Jamaica's very high debt and the consequent heavy demand on private sector savings makes it essential that we eliminate the fiscal deficit if we want to reduce interest rates significantly further.
The Government has continued to miss its fiscal deficit targets by a wide margin depriving the country of the benefits of lower interest rates and faster growth.
EVER-INCREASING DEBT
The dollar value of the total public debt at the end of March 2007 rose to $923.1 billion from $847.3 billion.
This increase of just under $76 billion means that over the last fiscal year the debt grew at more than twice the central Government deficit of $37.5 billion, which was itself more than twice the budgeted deficit of $18.4 billion for 2006/2007.
In the May, the debt climbed even higher to $947 billion.
It has continued to increase at a much faster rate than even the already very high official central government deficit due to continued heavy off budget expenditure, which does not receive sufficient scrutiny.
The central fiscal deficit is projected to be just over $35 billion this year, so that a similar sized overrun in off-budget spending would bring the debt to $1 trillion by the end of the fiscal year, even if the fiscal target was met.
BREACHED MOU
The memorandum of understanding with theunions (MOU) speaks to the importance of balancing the budget, but even with the pact, the government has agreed a 40 per cent increase in the wage bill for the two-year period ending March 2008.
Under the MOU, wages were to have been held at about 20 per cent.
The agreement was made between government and the unions. The private sector, therefore, had no role in determining the allocation of limited public resources.
The vast majority of tax revenues are in fact consumed by interest and wages, leaving very little to fund discretionary expenditure in areas such as education and health.
Jamaica has scarce resources, but the deployment of what is available is not correctly prioritised, either with respect to the necessary work of improving the business environment or the social services available to all Jamaicans.
A significant misallocation of resources exists.
This should be remedied before the government even thinks about increasing the load on taxpayers. Some of the necessary changes require consensus, but none is rocket science.
In this analysis no distinction is made between the central government and the public sector bodies as at the end of the day the overall public sector deficit is what is important.
A better allocation of resources would allow lower tax rates (encouraging growth), better social services and lower fiscal deficits.
The government could earn $$23 billion from asset sales, and derive another $3.22 billion in annual savings from the disposals.
Proposed asset sales
| Montego Freeport | $1.5 billion |
| Jamaica Pegasus | $1 billion |
| 50% Grand Lido | $1 billion |
| Mobay Free Zone | $1.5 billion |
Beaches Whitehouse and land | $9 billion |
Factories Corporation | $2 billion |
| Jamaica Mortgage Bank | $1.7 billion |
| 20% JPS | $4.8 billion |
| Caymanas Park | $5 billion |
| Total proceeds | $23 billion |
Another $28 billion of savings can be derived as follows: Interest savings from asset sales | $3.22 billion |
| Outsource management of NHT | $1.5 billion |
Reallocate NHT employer contribution to Central Government $5 billion Sell/restructure Air Jamaica | $5 billion |
Public sector workers pension contribution $4.5 billion Use PetroCaribe funds to pay down debt (interes savings) $3 billion Effect of lower rates due to reduced deficit | $6 billion |
| Total annual inflows/savings | $28.22 billion |
Interest savings on asset sales assumes we use the proceeds to pay down debt with an average cost of 14 per cent.
Outsourcing the management of the NHT portfolio to the private sector is assumed to save half the current wage bill of the NHT.
The employer contribution currently paid to the NHT would simply be paid to central government.
Air Jamaica
Jamaica has watched without significant protest as Air Jamaica lost approximately $55 billion dollars over the past 12 years, an amount which is greater than all the savings of the National Insurance Fund.
The airline should be sold or radically restructured and any losses should be borne by those who received the benefit.
The cost of public sector pensions is out of control moving from $5.4 billion in 2002 to an estimated $11 billion this financial year.
Unlike almost every other pension scheme, our public sector employees contribute nothing to the scheme.
The full burden therefore falls on the employer (in this case the Government) who collects it from the taxpayer.
This is unsustainable and prudent policy would dictate that employees of the Government should contribute to their pension plan. The assumption is that a 5.0 per cent contribution would be appropriate.
Under the PetroCaribe agreement the Venezuelan Government converts a percentage of our oil purchases to a loan at 1 per cent.
The IMF estimates the savings (if the money is used to pay down debt) at $3 billion for this year growing at $1.5 billion every year.
It is assumed that as a result of these measures and their projected positive impact on confidence, interest rates will fall further.
Here are some of the priority areas for incremental expenditure:
\Remove school fees $1.2 billion
Reduce hospital fees $1 billion
Increase the income tax threshold $4.7 billion
Additional Expenditure on security $1.5 billion
Education transformation $4 billion
Reduce stamp duty and transfer tax $3 billion
Remove taxation on dividends (for profits already taxed) $230 million
Total outflows $15.63 billion
Balance available to help balance budget $12.59 billion
The reduction in school and hospital fees will benefit the most needy.
The latter reduction should occur in a planned fashion as part of the implementation of a national health scheme.
The increase in the individual income tax threshold is in accordance with the Matalon report to raise the tax threshold to $275,000 and benefits PAYE workers, the net cost of which could be significantly reduced through further tax reform.
Security clearly needs additional resources.
There is no question that a reduction of crime and violence will have significant positive effects on the Jamaican economy.
Education, especially early childhood education, needs to be funded. On the other hand, those who receive tertiary education should be asked to contribute more, which has not been included in this estimate.
The reduction of stamp duty and transfer tax on real estate will encourage much more investment in this area.
If the transaction costs are reduced significantly, more investors, both local and international, will invest in Jamaican real estate benefiting the construction sector and job creation.
And, the reduction of stamp duty and transfer tax on bonds (including mortgage bonds) debentures and promissory notes will serve to increase lending competition.
Borrowers will be able to borrow from the wider market forcing the commercial banks to lower rates and to lend to smaller businesses.
The double taxation of dividends on all companies (not just listed companies) should be removed.
This measure could actually improve revenue as corporations which are domiciled outside of Jamaica relocate here to take advantage of lower tax rates.
There is no reason these things cannot be done over a 12 to 18 month period.
The failure to take these measures would show that the Governments and its Ministers prefer to hold on to assets because of the power it gives them than to provide the social services Jamaica needs, and create the conditions for rapid economic growth.
This path to first world status requires lower interest rates to spark higher growth, leading to a virtuous circle of lower debt and falling interest costs.
Taking these measures, akin to a private sector manifesto for economic development, would be a major step towards running the country as a business. In any case, these assets do not belong to the political parties or the Government of the day.
The full affects of such measures on growth would not be seen in the first year, but in subsequent years.
Email: csteele@cwjamaica.com, keithcollister@cwjamaica.com
