Wed | Aug 16, 2017

Expect new taxes, but it might not be so bad

Published:Friday | April 22, 2016 | 4:00 AMCamilo Thame
Budget document.
Finance Minister Audley Shaw heads for Gordon House for the ceremonial opening of Parliament on April 12, 2016.
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On the face of it, the Government seems likely to implement new tax measures this fiscal year.

The current Budget calls for a $33.5-billion, or 8.2 per cent, increase in tax revenue.

That would hardly be considered a major feat if it weren't for the $12-billion expected cost, by conservative estimates, of the pending tax relief to income earners who make up to $1.5 million a year.

Yet, projections in revenue estimates tabled in Parliament last week show a $1.8-billion increase in revenue for PAYE this fiscal year, which began on April 1.

To be fair, the finance ministry says it will outline changes to the structure of the personal income tax "as well as the adjustments that will be made to ensure the primary surplus and debt targets are adhered to" on May 12.

Those "adjustments" could well target some $14 billion in newly sourced income for the government coffers as the other revenue streams appear to be tapped out.

Existing taxes stretched

The revenue estimates show that higher interest payments are expected to yield an additional $1.8 billion in tax on interest (totalling $12.9 billion), while travel tax is expected to increase by $780 million from year-earlier levels to $10.8 billion this year.

The finance ministry is optimistic about corporate profits. It hopes to see corporate tax income grow from $42.6 billion in FY2015-16 to $45.7 billion this year.

The reinstatement of the tax concession to companies listed on the junior market of the Jamaica Stock Exchange after 2013 (eight companies have listed since it was changed) won't have an immediate negative impact on tax intake, given that five years, the period over which each listed company gets tax-free status, would not yet have passed.

The telephone call tax (TCT) has been declining since implementation as mobile users change their usage patterns, such as shifting from calling to texting and social media messaging. This year, TCT is expected to fall by more than $600 million to $5.2 billion.

The bulk of the increase in tax revenue is expected from GCT and special consumption tax (SCT). Intake from these taxes is projected to grow by $18.3 billion or 13 per cent, and by $5.5 billion or 11 per cent, respectively.

That's well above the projected 5.8 per cent growth in nominal income projected for FY2016-17 by the finance ministry, according to the Fiscal Policy Paper tabled last week.

Transfers from Petrojam to the Government, in relation to tax on fuel and oil, are expected to account for a large part of the increase in SCT. The state-run oil refinery is budgeted to pay over US$211 million ($26.4 billion; using the $125 to US$1 average implied by the Budget) to the Government this year, up from US$192 million ($23.5 billion) in FY2015-16.

Apparently, higher collections of the rate-based portion of the SCT from increased fuel consumption is expected to offset a reduction in tax intake from the percentage-based value-added tax stemming from lower average oil price this year.

For GCT, the high growth projection might not be unreasonable given that revenue from this tax item increased by 13 per cent last fiscal year. It even exceeded budget by two whole percentage points.

But to say that projections for GCT have historically been reliable is a bit

of an overstatement. Over the past five years, the variance on collections to projections ranged from seven per cent below budget (in 2014-15) to the two per cent reported last year.

New taxes might not be harsh

New tax measures might not be so dramatic after all.

In an odd accounting of interest cost associated with the US$1.35-billion bond issued last year to help finance a discounted buy-back of PetroCaribe debt, the finance ministry tacked on an additional $3 billion to the budget by apparently using an average exchange rate of $157 to US$1. The exchange rate now is $122.50 to US$1.

Put another way, the US$91 million in interest payments due this year for the bond that carries a 6.75 per cent coupon rate was estimated at $14.3 billion.

Based on the interest cost projected for the other US$4 billion in market issues, the average exchange rate used was $125 to US$1, so the line item should look more like $11.4 billion, according to Financial Gleaner calculations.

Moreover, the PetroCaribe Development Fund (PDF), which handles the cash inflows and outflows for the oil-for-debt agreement, was supposed to service the international bonds as it continues to earn on its remaining assets and receive inflows from the energy accord.

Yet, interest cost for the entity is projected to be $2.3 billion for $116 billion in average debt owed to the Government and $25 billion owed to Venezuela's PDVSA. That hardly compares to the near $18 billion needed to service the US$2 billion in bonds issued last year.

PDF is also expected to generate a $10.4-billion surplus, but transfer to the Government is expected to be $600 million in the form of a dividend, down from $1.4 billion last fiscal year.

That's outside of the $960 million in grant funding from the fund that will go towards financing the construction of 1,200 houses under the Jamaica Emergency Employment Programme (JEEP) and support the implementations of solar energy in high schools, among other things.

Gov't returns to

deficit spending

The Government has decided to return to deficit spending. It plans to spend $18 billion (one per cent of GDP) more than it expects to bring in from taxes and other revenue.

Up to last year, the government planned to run fiscal surpluses of one per cent of GDP or more, starting in FY2016-17 and going forward, having achieved a balanced budget in 2013-14 and managed to keep the fiscal deficit below 0.5 per cent of GDP.

This year's deficit means the Government will have to borrow nearly $30 billion more than it would have if it ran the intended surplus this year.

Still, the primary balance - government revenue minus non-debt expenditure has more been the focus of government budgets and the International Monetary Fund these past few years.

The target for this year is $121 billion, the same as last year.

To achieve this, and in light of a $29-billion increase in non-debt expenditure, the Government will need the increased revenue, even though it made a few cuts to the Budget, such as a $500-million reduction to the police department, largely reflecting a decrease in spending on "stores and armoury".

For the most part, however, increases to budgetary line items were kept modest, with a few notable exceptions.

Few budget items saw

sharp increase

Despite several pronouncements by the Government, including from Education Minister Ruel Reid this week, the budget for tuition assistance to secondary schools increased from $2.7 billion to $2.84 billion.

This translates into an increase of $700 per student to $13,800 for each of the 204,700 currently enrolled in secondary school.

Increasing that amount to $19,000 per student, as announced by Reid, requires a little more than $1 billion in addition to what has already been budgeted.

On the other hand, the education ministry's budget for compensation of employees at the primary level was boosted from $14.3 billion to $17 billion, reflecting almost all of the education ministry's entire budgetary increase this year.

The additional sums needed to eliminate auxiliary fees could come from this line item, unless the Government has plans to increase the number of teachers employed to primary schools by 15 per cent or give the existing ones a special salary increase not afforded to instructors in other education levels.

The Government has also increased the Constituency Development Fund by $315 million, such that each member of parliament (MP) will have an additional $5 million in discretionary spending in their seats, bringing the total to some $20 million per MP.

JEEP keeps on rolling

Planned spending on overseas marketing of tourism has been increased from $2.4 billion to $2.9 billion this year, and while the recurrent expenditure for JEEP has been reduced from $850 million last year to $768 million this year, the capital budget for the Major Infrastructure Development Programme (MIDP), which also has a JEEP component, has been increased from $3.6 billion to $7 billion.

Roads throughout St Thomas, St Andrew and St Catherine are to be the focus of MIDP this fiscal year.

Some $300 million is being put towards upgrading the Jamaica Conference Centre, including repairs to the chilled water pipelines, air-conditioning units, audio and translating system, roof and other building repairs.

The Government has set aside $1.9 billion to lend to the Port Authority of Jamaica to support expanded investment in the business process outsourcing (BPO) sector in Montego Bay and Portmore, including the construction of a 63,000-square-foot facility in the Montego Bay Free Zone. Another $2.4 billion is earmarked for BPO support next year.

The sugar transformation programme, which was supposed to be wound up by 2018-19, has been given new life. The line item has $2.4 billion budgeted this year, down from $2.6 billion last year, but the Government plans to continue spending $2 billion a year after 2016-17, increasing it to $3 billion by 2020-21, rather than cutting the expenditure altogether within two years.

The long-promised southern coastal highway is scheduled to commence next fiscal year, with $6 billion earmarked for spending on the project in 2017-18 and a further $51 billion over the following three years.

camilo.thame@gleanerjm.com