GCT amendment a good start
Claude Clarke, Columnist
There could have been no better outcome to the People's National Party leadership contest in 2008 than the political rapprochement that followed. The winner and loser settled their differences by, among other things, passing the finance portfolio to Dr Peter Phillips.
Like Edward Seaga, Phillips does not claim formal training in finance, but brings to the task of economic management a clear-headed resoluteness that has enabled him to succeed in meeting the objectives he has set for himself. Peter also seems to have the benefit of a prime ministerial fiat that allows him to execute the economic reforms needed to meet the targets agreed by the Government under the extended fund facility it has secured with the International Monetary Fund.
Though the terms the Government agreed with the Fund are far from what is required to stimulate growth and economic expansion, they must be viewed in the context of the uneven power relationship between a desperate borrower and its last available lender. The terms were consequently skewed more towards debt servicing than towards the country's economic development goals. Without the Fund's imprimatur, we would have had almost no chance of securing international financing or investments.
Beggars can't be choosers, and the agreement is what it is. We are left to construct a framework for growth within the little room left in the yet-to-be-completed aspects of the agreement. The ongoing tax reform represents our best opportunity to restructure the economy; and using it thoughtfully could help shape an economic environment conducive to production, growth and development.
This is why last week's passage of the General Consumption Tax (Amendment) Act, 2014, represents a significant first step which, if continued, may very well put us on the road to economic recovery. This amendment was long overdue. Its enactment has corrected an illogical charge on the cash resources of productive businesses that required them to pay a value-added tax on productive inputs before any value had been added. This burden was not borne by our foreign competitors and was, therefore, extremely harmful to Jamaican competitiveness. Additionally, microbusinesses have been relieved of the burden of absorbing irrecoverable GCT charges.
The world economic game is governed by the simple practice of rewarding the creation of value at lowest cost. Removing from production added costs that don't reflect added value must, therefore, be central to Government's strategy for economic growth. Government needs taxes, but it is counterproductive to pile them on top of production costs.
It should be possible for Government to free domestic productive effort of taxes without loss of revenue, by taxing production only at point of sale and ensuring that taxes imposed on Jamaican products are also paid by imported equivalent goods entering the domestic market.
The passage of the GCT Amendment Act is an important change in favour of Jamaican production. However, it is but a small part of the action needed to redesign the tax code to make it an instrument of economic enhancement, not the hindrance that in many ways it is today.
Government's power to tax is potentially one of its most effective tools of economic management: encouraging and discouraging to varying degrees activities that are more or less beneficial to the goal of economic growth and development. I have stated before, and will repeat here, that a flat income-tax regime has no place in a country as desperate as Jamaica to get capital investment in production and narrow its income gap.
A progressive taxation system at both the corporate and personal level is a prerequisite to creating the means of encouraging capital to move into productive and high employment investments. This is how tax incentives to influence investments in growth and employment can be best applied.
Instead of such policies on which broad-based economic growth can be based, Government waits to land an increasingly illusive mega project, while it cheers every isolated instance of quarterly growth as if it has won an economic race. The growth reported by STATIN for the second quarter of 2014 reflects little more than the agriculture industry's continuing recovery from Hurricane Sandy and extraordinary, one-time events in manufacturing.
One is always happy to see growth, but together these quarterly GDP gains are unlikely to result in more than 1.5% expansion for full year 2014. But the economy grew by 2.9% in 2006, 1.4% in 2007, and 1.4% in 2011, and yet the country has remained mired in economic stagnation.
Government should stop applauding itself for these economic blips and focus on a broad-based rise in productive output, which can provide sustainable growth and employment.
This must involve the dual approach of using tax policy to improve competitiveness in production and increased market opportunities for sales.
The changes to the GCT regime are a good start to the removal of taxes from the productive process and will assist competitiveness. But the sale of Jamaican products in our own market continues to suffer from a common external tariff that allows CARICOM imports, which already benefit from an enormous unfair energy subsidy from their government, to be even more competitive against Jamaican products by removing duty from them.
Production in Jamaica will not increase if there is no demand for Jamaican production. And it is production that will create the jobs needed to narrow the income gap and enhance social stability. I am at a loss to understand why Government continues to sacrifice import duties in order to subsidise the sale of CARICOM goods in Jamaica to the detriment of Jamaican producers when there is no corresponding benefit.
Surrendering the Jamaican market to CARICOM products in the name of Caribbean unity is a display of misplaced priorities and stubborn tone-deafness on the part of Government. In doing this, Government is sacrificing the interest of the Jamaican people for the faded hope of a regional nirvana.
With the tight fiscal box in which the IMF has placed the Government, it does not have the luxury of overlooking any opportunity to unburden production of taxes, attract capital to production, and open markets to Jamaican production.
Claude Clarke is a businessman and former minister of industry. Email feedback to email@example.com.