Dennis Chung, Contributor
CHUNG
RECENTLY THERE were announcements of an impending increase in the tax allowance by approximately $4,000 until the announcement that the government would instead sign a tax remission order for workers at the minimum wage instead.
This change was obviously made because the across the board tax relief would not have been prudent, given the fact that the government is behind the fiscal targets and must balance the budget in 2005/6. The general tax relief would mean giving up $1.2 billion in tax
revenues per annum (1.2 million labour force x $4,000 x 0.25), which we cannot afford at this time, given that up to November 2004 we were running a fiscal deficit of $2 billion more than projected.
Then again, the increase in the minimum wage, in my opinion, would have been made more for political and social reasons as there were no strong economic arguments for it. The fact of the matter is that people who cannot afford it will either find some creative way to cut back on labour expenses or use it as an excuse to increase prices. In the long run the workers will not be better off.
PRODUCTIVITY EFFECT
The only true way to increase wages relative to prices is to increase productivity. The individual increase in wages may not be significant, but when accumulated for those persons with a large labour force who want to keep ahead of minimum wage then it can add up. The more important factor, however, is understanding the effect on competitiveness from increased prices (including wages), especially in light of the impending CARICOM Single Market and Economy (CSME).
If one is producing 100 units of a product ($100 revenue) and has $10 labour cost then a 20 per cent labour cost increase, without a corresponding increase in productivity, means the profit decreases (or loss increases) by $2. On the other hand, if productivity increased by 10 per cent (to 110 units) this results in revenue of $110 and labour could increase by up to 100 per cent and still maintain the same profit margin.
This is the difference between cost and productivity increases. Obviously, the desire should be for productivity increases but it seems as if we are always preoccupied with increasing our share of the same pie rather than growing the pie. Maybe when the CSME is in force, and greater options exist for entrepreneurs and workers, we will learn from it.
The lesson to be learnt, however, is that although we are experiencing greater economic buoyancy this is no time for us to go out and spend. This is a time for restraint in our expenditures and careful monitoring to ensure that we meet the revised fiscal targets set. We have just experienced the fact that shocks such as 'Ivan' can occur and so we must be prepared to even exceed the target expectations so that when natural disasters occur we can absorb some of the effect.
REVISED FISCAL TARGETS
The minister of finance recently presented revised fiscal targets at the Mayberry Investor Forum, which is extracted in the table. These revised targets shows the main revision in fiscal year 2004/5 but that by 2005/6 we should be within the original projections overall.
The important 2005/6 projection is the balanced fiscal target, which must be met if we are to maintain credit integrity with external funding agencies. I do not really see that as a major challenge as the budget, as presented, does allow for some form of creative reporting as there are off budget occurrences, such as certain expenditures and interest capitalisation that would not be reported. So we can actually meet a balanced budget by juggling some numbers.
DEBT/GDP
The important factor, which is a more critical indicator, is how we are going to move the debt/GDP ratio to 125.2 per cent. If we can do this then we would have made much progress. As at November 2004 the debt stood at $761 billion. As at March 2004 the debt was at $692 billion and debt/GDP at around 145 - 150 per cent. If GDP increases by 2 per cent in 2004/5 then it means that in order for us to achieve a 138 per cent target we would have to decrease the debt by some $80 billion from its November 2004 position. Further, this implies that the government cannot do so by replacing debt, as this would mean the same levels of debt to contend with.
Further in 2005/6 the government projects debt/GDP of 125.2 per cent. If GDP grows by 3 per cent, as projected, then this means debt should be around $630 billion at that time. This implies paying off additional debt of $40 billion over the 2005/6 fiscal year.
PRIMARY SURPLUS
If this is to be achieved then it means government must realise other forms of financing in order to pay down the debt. Of course the first source is the primary surplus. The government has to ensure the primary surplus is enough to cover interest cost and leave an amount that will reduce total debt. The only way for this to happen is to
