Editorial | A vindication of sacrifice
It will be a while yet before the jury determines whether Dr Nigel Clarke pulled the right levers. But if his J$14-billion tax giveback proves anything, it vindicates Jamaica’s hard economic slog of the last seven years, with its bipartisan commitment to fiscal prudence.
Now, the Government is in the circumstance to allow a measured loosening of the screws in an effort to stimulate faster economic growth.
It is worth recalling that at the end of the first decade of the new millennium, Jamaica teetered at the edge of a fiscal cliff. After more than four decades of bad policies and imprudent economic management, the island had a public debt of nearly one and a half times of national output, and rivalled Greece as a global basket case, without Athens’ potential insulation of wealthy partners.
Private lenders had turned off the spigots and our agreement with the International Monetary Fund (IMF) had run off the rails.
Indeed, as a precondition for the IMF to renew support in 2013, the new administration, in the previous year, was obligated to impose more than J$19 billion in taxes and programme a primary surplus of six per cent of gross domestic product (GDP), twice the level of Greece’s, where public protests threatened their reforms.
When the IMF inked a four-year standby facility with Jamaica, the primary surplus target, though snipped marginally since then, was set at 7.5 per cent of GDP. This demanded that the Government curb its appetite for debt, which also meant containing expenditure, whether on social services or maintaining infrastructure.
Across two administrations over the period, the Government has held the line and has success to show for it.
As Dr Clarke, the finance minister, noted last Thursday, the debt is now 96 per cent of GDP, a debt-to-GDP ratio of a bit more than half of what it was seven years ago and lowest since the financial sector collapse of the 1990s. Reduced debt-servicing costs freed resources for investment in other areas of the economy.
Further, growth has returned to the economy, with 15 consecutive quarters of gains, as Minister Clarke boasted in his Budget presentation last week. But frankly, despite strong employment gains recently, 1.8 per cent last year, and with nearly half attributed to the activities of a single alumina refinery, the growth performance has been sluggish, if not disappointing.
DR CLARKE’S GAMBLE
And this, on the face of it, is what Dr Clarke’s self-declared giveback is aimed at addressing.
The minister has pushed, from J$3 million to J$10 million, the reporting threshold for general consumption tax, which will likely positively impact the cash flow of 3,500 businesses.
He has also dropped the J$60,000 minimum business tax, of which many small and medium-sized businesses had complained.
The Government will also give up J$1 billion by dropping the asset tax on non-financial firms, as well as lower the taxes for transferring property and collateralising loans. Between the latter two efforts, the administration estimates that it will forgo around J$10 billion.
Dr Clarke’s gamble is that rather than putting these savings in their bank accounts or distributing them to owners and shareholders, firms and individuals will invest more, including stimulating the market for real estate.
If that happens, it should lead to economic growth and job creation. Indeed, the fiscal prudence of the economic reform project was always about giving Government this policy flexibility to help drive growth, without steering the country into a debt trap.
Of course, there is now likely to be a question of whether Dr Clarke got the balance right and whether more should have been allocated to resuscitating a worn-down social infrastructure.
Jamaica is in a good place, or far better than it used to be, when it can have that kind of debate.