Budget: pain without gain

Claude Clarke, Contributor

This is the second and final instalment of a presentation made by Claude Clarke to the PwC 2012 post-Budget briefing on June 12.

The success of the Barbadian and Trinidadian economies, as well as Jamaica's in the late 1980s, was substantially caused by the willingness of political leaders to strategically cut the cost of government and restrain the growth of incomes which were weighing down the competitiveness of their economies.

Erskine Sandiford, George Chambers and Edward Seaga all knew that without action to reduce the dead weight of government and slow wage inflation, their economies and, consequently, their productive enterprises could not be competitive. They understood that without competitiveness, the capacity of their economies to generate wealth would be diminished.

These leaders also recognised that if the pattern of uncompetitiveness continued, the balance of trade would become increasingly adverse, and more and more debt would be required to finance the shortfall. That's what happened to Greece. Had they not acted then, Greece's problem would be theirs today.

Now, of the three Caribbean economies I mentioned, only Jamaica faces a Greece-like crisis. Why? Because, unlike Trinidad and Barbados, we abandoned the strategies that worked in the late 1980s to boost competitiveness; and have been pursuing macroeconomic policies since then that have driven up wage inflation, increased uncompetitiveness and built up massive negative trade balances that last year was equivalent to almost 40 per cent of GDP.

Uncompetitive economy

Our worsening trade balance is perhaps the best indicator of our economy's declining competitiveness. Not even among small economies of CARICOM can our economy compete.

We quite properly worry about the disadvantage to which Trinidad's abuse of its energy advantage has put us. But are we aware of the fact that we also have a deficit with those smaller CARICOM countries? We are running significant deficits with Guyana, Barbados, Dominica, Suriname and Belize: Our deficit with Guyana is more than 700 per cent.

Jamaica's economy is failing. And it cannot be rescued by continuing to do the same things that led us to that failure. The dilemma of the country's debt is not solvable by merely applying fiscal compression; or as The Gleaner recently put it, "borrowing less, spending less, and collecting more taxes". Rather, it substantially resides in compressing the cost of domestic inputs to production and attracting domestic and foreign capital to a more competitive productive environment.

This cost compression could have begun with this Budget if Government was prepared to lower the GCT rate to 10 or 12.5 per cent and ending exemptions; with appropriate arrangements to protect the poor.

It could have begun if Government was prepared to discontinue the excessively high import duties used to protect some local agricultural products and replacing them with direct subsidies to those affected, as is being proposed to protect the poor from GCT on basic foods.

Cost compression will be the key to our economic recovery. And while special government projects will stimulate a little economic activity, it cannot be a substitute for a competitive macroeconomic environment that encourages private investment in production within the economy. That is how real wealth and sustainable jobs are created in successful economies. And that should be Government's focus today.

In today's highly competitive and open global and regional marketplace, it is the reorganising of our economy for competitiveness that is our real challenge and our only salvation.

Much of the answer to this challenge lies in a production-focused tax-reform programme, many aspects of which were put before the Government. And according to the latest Article IV Report, most of the IMF's directors are now advocating the importance of more appropriate exchange-rate management to achieve this important goal of competitiveness. There was no indication in the Government's Budget of how this all important challenge for competitiveness will be met.

As others have said, the Government seems to have seen the tax-reform proposals put before it as a buffet table from which it could pick any dish that would satisfy its desperate desire for revenue.

One of the dishes accepted is the reduction of some corporate income tax rates to 25 per cent. But while providing a welcome relief for many firms, this will not be a sufficient inducement for any meaningful investment in production. This measure is likely to attract as much new investment to production as the removal of taxation on dividends a few years ago did: Nil, nada, nothing.

There would be a greater likelihood that firms would invest if the 33.33 per cent corporate rate had remained; and tax credits for investments representing due taxes above a 15 per cent rate were offered. This is the kind of device that would induce businesses to invest in production, particularly if the competitiveness of the economy can be improved.

More amenable IMF

The new, more flexible, post-Great Recession IMF is likely to be more amenable to a plan that combines a bankable commitment to meaningful public-sector cost reductions and production stimulating tax reforms, that are capable of achieving sustainable economic growth.

Because, ultimately the IMF is little different from any bank. Like a bank, acting on behalf of foreign creditors, it wants to be convinced that a country's foreign-debt portfolio is sound and will be serviced satisfactorily.

It would, therefore, be in the fund's own interest to work with the Government to expand the economy. And our Government, conscious of the IMF's objectives, should be equally prepared to work with the Fund to compress costs in the economy, and better enable the private economy to produce wealth.

Yet the Government has not demonstrated that it is prepared to back production. Its dithering over reducing the cost of the bureaucracy contrasts sharply with its alacrity in placing additional tax burdens on the means of production. It should know that imposing costs on any productive activity in our struggling economy is ultimately self-defeating.

Government needs revenue and should be able to tax the earnings (profits) of all businesses to provide it, but taxing the inputs to production is destructive, especially for businesses that face external competition.

The decision to tax productive businesses like those in the tourism sector is, therefore, inexplicable and betrays an inadequate understanding of the nature of the economic problem the country faces.

Before increasing the production costs of businesses, Government should look elsewhere for revenue. In this regard, it is hard to understand why it would ignore CARICOM.

Our trade with CARICOM has been a drain on our revenue, without reciprocal benefit, and could provide increased revenue to the Treasury of close to $10 billion and, at the same time, reduce our import bill and stimulate domestic production.

Tough choices will have to be made to stem our economic decline and put us on the road to recovery. But they all come with pain and will be offensive to many. Courageous leadership that is willing to risk political capital will be needed. In the three examples in recent Caribbean history where structural economic reform was successfully carried out, the political consequences were devastating.

This may explain why today's leadership seems to be stuck in neutral, unable to embrace new ideas that might disturb their political comfort zone. The enormous potential of our people to be creative, productive and strong has been crying out to be released for too long.

My hope is that there is still time for the programme now being discussed with the IMF to be moved towards production and lift Jamaica to the point where it is the growth of our economy that drives down relative size of our debt; not more pain and suffering.

Claude Clarke is a businessman and former minister of trade. Email feedback to columns@gleanerjm.com.