Fri | Jan 19, 2018

Briefing | The Budget has become a habit - People are sick and tired of redundant spending plans

Published:Wednesday | March 22, 2017 | 12:00 AMDr Andre Haughton

The heated debate on the Budget revenue measuresc ontinues and the Government appears to be firm on its decision to deliver on the promise to increase the income tax threshold from $1 million to $1.5 million as of the beginning of the next fiscal year - April 1, 2017. To satisfy this promise and to gradually transition the nation's economy from direct to indirect taxes, additional revenue measures were outlined to be introduced to raise the budget shortfall of $13.524 billion. Let us look at each of these and discuss their possible effects on the nation's standard of living and the Government's growth objectives.

 

The Government has planned to:

 

1. Increase excise on pure alcohol from $1,120 per litre to 1,230 to yield revenue of $409 million. The $110 increase in pure alcohol will push up the cost of alcohol and its by-products. If the demand for alcohol is less responsive to price, then sellers of pure alcohol will pass most of the tax burden to the consumer. If alcohol demand falls, then the firm might have to absorb the tax, which will reduce its output and the aggregate output of the country.

2. Increase excise on tobacco products from $14 per stick to $17 per stick to raise $826 million. The same principle explained above applies here as well. Additionally, a tax on cigarette and alcohol should be used to regulate the negative externalities associated with the consumption of these products and not to fill an unspecified gap in a centralised pool of funds.

3. Increase on special SCT on fuel to raise $7.459 billion. This type of tax has become redundant. For the 2016-2017 fiscal year, the Government added an extra $7 on each litre of gas which caused the same 'unpleased' reaction from the public. The year before that, fiscal year 2015/2016, the Government had increased the SCT on fuel, which did not go well with the public, either. An increase in fuel will increase electricity costs, increase the cost of production, of processes that rely on fuel and electricity, increase transportation costs, and other cost although the real effect is uncertain as the increase in SCT on fuel last year had small inflationary effect.

4. They have also reduced the threshold for application of GCT on the consumption of residential electricity, from 350 kWh per month to 150 kWh to raise $1.498 million. The cost of electricity remains high in Jamaica. the previous government increased the threshold two years ago, now this Government has reduced the threshold to raise funds. This fiddling with numbers with no real long-term aim is a joke. There are no real serious decisions being made about production and productivity on a grand scale. How else are we going to grow by five per cent per annum by such time?

5. They have also decided to increase the costs of motor vehicle licence and fees by 20 per cent to raise $464 million. Motorists believe that this will increase their expenses. The Government is banking on the premise that more people are receiving more from their income due to a higher threshold, and they can get those who don't pay income taxes to pay consumption taxes.

6. Apply GCT on group health insurance of 16.5 per cent, to raise funds of $1.884 billion. Most of these people with health insurance, once more, are employed and might receive the extra from the increased income tax threshold.

7. Reimpose withholding tax on general insurance premium paid by Jamaican residents to non-residents at a rate of 15 per cent which is estimated to raise $990 million. Once more they are hinging on the premise of increased income.

There is doubt everywhere. People are sick and tired of redundant budgets that do not have fully thought-through aims and objectives where fiscal and monetary policies meaningfully coordinate to achieve the long-run objectives of the country. Everyone doubted the feasibility of the original plan; the Budget and socioeconomic conditions across the island are in dire need of attention. The country needs output, the country needs production processes that move goods or services from primary stage to secondary to tertiary stages or levels of production where valued added is increased at each stage of the production process. We must produce goods or services which, in every way, make sure the value added is high. There is a lot of work to be done and everyone must work together; there is no use debating over old habits, the Budget has become a habit.