Wed | Aug 16, 2017

Editorial | What Messrs Holness, Shaw must do

Published:Sunday | May 22, 2016 | 5:00 AM

With the near J$14-billion tax package to offset this fiscal year's J$12.5-billion giveback in personal income tax, the Holness administration removed an immediate threat to Jamaica's fiscal stability and its International Monetary Fund-supported economic reform programme.

The new taxes mean that the Government should meet the programme's most critical target: a primary balance of seven per cent of gross domestic product. Maintaining such a surplus is necessary to maintain an accelerated paydown of Jamaica's huge, unsustainable debt.

But the Government is not yet out of the woods. For barring an exceptional run of good luck and astounding performance in the economy, the tax package unveiled last week by Finance Minister Audley Shaw won't sustain the income-tax relief beyond the current financial year and the additional amounts required for the next.

That is why Prime Minister Andrew Holness, when he makes his intervention in the Budget Debate this week, and Mr Shaw, when he wraps it up afterwards, must signal clear strategies, beyond ephemeral declarations of intent, for maintaining fiscal discipline in the post-IMF period, given that the current agreement with the Fund expires in March 2017. Messrs Holness and Shaw are aware that this important underpinning of macroeconomic stability is not only crucial for growth, but critical to investor confidence.

The background to this is the Jamaica Labour Party's election promise to remove income tax for people who earned up to J$1.5 million, but people earning above J$5 million would pay the tax rate of 25 per cent, without any exemption.

 

NO NEW TAXES

 

The party, then in Opposition, said that it would not have to raise new taxes to fund its proposal. It, however, appeared not to have calculated the anomalies inherent in the plan and the high marginal rates to which many people would be subjected. In the end, the party abandoned that idea, for a two-phase, across-the-board application of the $1.5-million threshold. It also instituted a tax package to pay for the first tranche, the movement of the threshold to J$1 million from this July, thereby covering nine months of the fiscal year.

The potential positives of this development are the greater certainty that the application of the taxes to consumption, rather than income, brings to their collection, while widening the tax base. There is, however, a significant political difficulty the administration may be tempted to dodge, hence our call for clarity from the PM and Mr Shaw.

The second tranche of the tax proposal is scheduled for April 2017. Its cost for the full fiscal year is estimated at J$16.6 billion, which, on the face of it, will require a new tax package to cover all, or most, of that amount. This does not include what might be required in social-support transfers to cushion the most vulnerable.

At the same time, the amendment to the National Housing Trust (NHT) law to allow the Government's annual withdrawal, over four years, of J$11.4 billion from the shelter agency comes to an end this fiscal year. This, on the face of it, suggests that in the next fiscal year, the Government will face a finance gap of at least $28 billion.

The NHT is flush with cash. So, it is conceivable that it can be tapped for continued budgetary support. But the administration must have an honest conversation with Jamaicans about the fiscal trade-offs, including, we suggest, a new programme with the IMF when the current one concludes.

Candy-coating realities will make it hard to maintain support for difficult reforms.