Chainsaw economics not good for growth agenda
The Budget Debate for 2015 having been concluded, analysts have been giving their reactions to the content and form of the presentations. In the main, the discourses can best be described as pedestrian. In most cases, nothing disruptive to make us feel a sense of hope for the future came to the fore. The content in most cases was mechanistic and mundane. Some of the speakers also went way off track with their proposals for achieving economic growth.
It's quite laughable to see some of the so-called strategies that have been proffered to stimulate economic growth over the short to medium term. A lot of what passes for critical engagement on strategic thinking about economic growth is nothing more than a laundry list of items that either have been tried already or are in progress in some shape or form.
If Jamaica is to achieve sustained economic growth, I strongly suggest the need for a critical discourse on economic growth and not the usual reductionist thinking that passes for scholarship and rigorous analysis. Below I will focus on two critical elements of the growth agenda that most commentators have applied reductionist thinking that can lead to bad economic outcomes. These are: public-sector transformation and tax reform.
The minister of finance, on March 12, laid in the House of Representatives a policy paper dubbed the 'Government of Jamaica Growth Agenda 2015-2016'. This agenda encompasses six major components, namely: fiscal consolidation, business environment competitiveness reforms, strategic investment projects, human capital development and protection, human and community security, environmental resilience. Included in each component is a number of specific reforms that will have to be completed in order to make economic growth a reality and not merely a theoretical construct.
Critical to this agenda, however, is the fiscal consolidation component. Sustained and high levels of economic growth have eluded Jamaica for more than four decades, mainly because of profligate management of our fiscal affairs. Fiscal indiscipline has resulted in high levels of instability in the macro economy. This erodes investor confidence and, by extension, investments into growth-inducing projects.
It is no surprise, therefore, that over the past half-decade, a lot of commentators have focused vigorously on the fiscal management of the country's resources. However, it is in this discourse that the reductionist thinking becomes pronounced. The most striking areas are public-sector transformation and taxation.
Those who watch the economic numbers closely will tell you that the wage bill of the Government is significantly large and is unsustainable if the economy does not grow. For example, wages account for almost 26% of the current Budget. That is, out of every dollar the Government collects in revenue, a little over 25 cents will be used to pay wages. When wages are twinned with interest and amortisation payment for debt, this takes up about 74% of the Budget. This is big, although it has been reduced somewhat over the past few years.
The International Monetary Fund has set a target over the medium term for the wage bill to be 9% of GDP. The preoccupation with this target has, therefore, led a number of commentators to offering what I refer to as the chainsaw thinking on the matter. For them, the only way to get to the 9% of GDP is for the Government to cut the size of the public sector by making persons redundant. This thinking does not show any serious analysis of the implications of a massive layoff in the public sector.
While in the interim there is a reduction in the wage bill when persons are laid off, the social dislocation from joblessness can be quite tumultuous. We have seen exemplars in places such as Yorkshire in the United Kingdom under the Thatcher regime in the 1980s.
The big question is: Does transformation mean redundancies? Or does it mean reforming the system to drive greater efficiency and productivity? Some critical questions that should be engaged before the chainsaw is used are: What is the optimum number of persons that we need to deliver the services of Government? What are the things that Government should be delivering on? Or, put differently, what is the role of Government? Until we critically engage with these issues, it is both wrong and dangerous to be dogmatic and suggest that transformation means cutting staff.
We should be careful about this approach to public discourse that is so reductionist and does not take a systematic view of economic and social phenomena. An economy is not a listed company on a stock exchange and so using the reductionist lens to analyse economic policy can lead to many misleading conclusions.
Similarly, the chainsaw approach to economic thinking finds its way into the debate on tax reform. The argument goes something like this; if we cut the tax rate, more persons will pay their taxes and the Government's revenue problems will be solved. While there is some logic that a lower tax rate might stimulate greater compliance and tax intake, there is nothing to suggest that the tax rate is, indeed, the most critical variable that prevents increased intake of tax revenues.
I am sure some will point out the tax elasticity argument to buttress their point about reduced rates. However, there are exemplars of economies with that more rigid and complex tax structure and higher rates than Jamaica and yet they are still collecting their taxes quite efficiently. Great Britain and the United States are examples of countries with complex tax structure and also high tax rates, yet they have put in credible growth performance over the years.
So, is the rate and tax structure the real problem?
A more critical engagement is required to better understand why persons do not pay their taxes. Does the Government have a systematic method for collecting taxes from non-compliant companies and individuals? What are the consequences for non-compliance? Is the correct mix of taxes in place to capture the non-compliant individuals and corporations? Simply put, the discussion about tax reform cannot be built on the grounds of reduction in the tax rate; it has to be based on an efficient and equitable tax system.
As we grapple with finding solutions to deal with the pressing issue of growth for an economy that has been struggling to generate long-term increase in its output for the last 40 years, it is critical that calm and rational thinking guide our discourses on the subject.
The macroeconomy is not a firm that is listed on a stock exchange and has a narrow set of stakeholders and shareholders to deal with. The economic actors and agents are far more complex and interlinked in the macroeconomy than any single company. As such, public policymaking has to bear in mind the political economy that will be impacted by economic policy choices. The chainsaw approach, which says, 'Look at the problematic variable and delete it from the equation and the problem will be solved' should not be tolerated in the public policymaking arena. This approach is both wrong and dangerous.
Jamaica cannot afford too many policy mistakes at this time and so, caution has to be taken in designing policies that will facilitate the growth agenda. Public-sector transformation and taxation reforms will have to be approached with caution.