Fri | Sep 22, 2017

Briefing | Audley Shaw's Budget presentation ... Creative ways to generate government revenues lacking

Published:Friday | May 20, 2016 | 5:00 AMDr Andre Haughton
Audley Shaw

 

What was the PAYE reform? 

The eagerly anticipated Budget presentation was delivered by the minister of finance on Thursday, May 12, 2016. The Government announced that it would increase the income tax threshold to $1 million as of July 1, 2016, for everyone, further increasing it to $1.5 million by April 1, 2017. This, it believes, based on recommendations, is a better policy than the initial proposal to implement different thresholds for different income groups.

To help recover the shortfall in the Budget arising from partially fulfilling their election promise, while at the same time satisfying the budget target, which is to see to the continuation of the Extended Fund Facility (EFF) offered by the International Monetary Fund (IMF), the personal income tax rate for persons earning more than $6 million has been increased from 25 to 30 per cent. Other revenue measures to cover the remaining $12.5 billion shortfall are:

1. Increase in special consumption tax (SCT) on automotive fuel by $7 per litre.

2. Introduction of SCT on liquefied natural gas (LNG) and revision of the heavy fuel oil (HFO) rates to yield $1.415 billion.

3. Increase in SCT by $2 on cigarettes to fetch $0.574 billion.

4. Increase in the departure tax from approximately $15 to $35 to earn $5.3 billion.

 

What is the general reaction?

 

Everyone doubted the feasibility of the original plan. As a result, no one was surprised about the $1 million initial increase and then a gradual approach to further increases, depending on whether the Budget and socio-economic conditions across the island could accommodate it.

The sustainability of the tax relief might become questionable if the revenue measures are not robust in the long run.

Most people have no problem with the departure and cigarette taxes but are sceptical about the tax on gas, which was implemented with immediate effect the following morning after it was announced. Without hesitation, marketing companies opted to pass on more than the tax increase to consumers, increasing the price of retail gas by more than $7 dollars; some increased by more than $20 a litre. This, along with the tax on LNG and HFO, will have a negative impact on consumer demand as well as the cost of business production and transportation, which is counterproductive to their expansionary fiscal policy pursuits.

Last year, the former government imposed a $7 tax on gas and a $1.5 increase in tax on cigarettes on the premise that oil prices are trending downwards. On Monday, May 16, 2016, oil prices inched closer to $50 per barrel, the highest it has been for the year, while the exchange rate increases close to J$125 to US$1. If oil prices continue to increase and the dollar continues to depreciate, the Government's inflation target of 5.5 per cent for the 2016-2017 fiscal year may not materialise.

 

What other targets does the Government hope to achieve?

 

It hopes to see through the current Extended Fund Facility arrangement with the IMF and maintain the primary surplus target of 7 per cent of GDP. it is also very hopeful of achieving 1.8 per cent growth in real GDP. In an effort to do so, non-debt capital expenditure will include $11.2 billion to be spent by the Ministry of Economic Growth and Job Creation; $7 billion on major development projects, major bridges, and roads; $830 million on rural roads; $850 million for Jamaica Foundation for Competitiveness; $350 million to lend to SMEs; $660 million to construct the Ministry of Foreign Affairs and Foreign Trade building downtown; $292 million to finance irrigation projects in Clarendon; $2.4 billion for sugar-transformation programmes in sugar-dependent areas; $465 million for the agriculture competitiveness programme to help build new water infrastructure; and $2.6 billion for the Ministry of Education.

The National Housing Trust will complete 9,000 housing solutions and is expected to spend $23.6 billion in total. The National Water Commission will spend $8.7 billion. The Government has budgeted $28.6 billion for social safety-net programmes like PATH and school-feeding programmes. The Government intends to expand the South Coast Development Initiative; develop the logistics hub at Vernamfield, Clarendon; develop the Goat Island shipping project and the Caymanas Economic zone; expand the Kingston container terminal, and expand the east-to-west highway.

 

What is the verdict overall?

 

The debate has evolved into overall tax reform as to whether Jamaica should seek to abolish income tax in the foreseeable future. The argument is that consumption taxes are more efficient and equitable than income tax. This would be useful to Jamaica since many people employed to the underground economy avoid income tax. More creative ways to generate government revenues are still lacking.