Balancing the Budget and moving forward

Published: Sunday | November 25, 2012 Comments 0
A customer prepares to do some shopping at a store. According to Don Wehby, too few carry the burden of taxation, cheating the Government out of billions of dollars to sustain the public sector. - File
A customer prepares to do some shopping at a store. According to Don Wehby, too few carry the burden of taxation, cheating the Government out of billions of dollars to sustain the public sector. - File

Below is an edited speech by Don Wehby, CEO of GraceKennedy, at the Jamaica Chamber of Commerce directors' luncheon forum at The Knutsford Court Hotel on Wednesday, November 21.

We all know that the country is in a poor economic state. The problem with the management of our economy is that we are living, and have been living, above our means for many years.

We are spending more than we're earning, and that has resulted in a fiscal deficit and huge debt. The only way to cover that deficit is to borrow or print money. None of these options is desirable for any economy that must grow. So how do we balance the Budget in the medium term to prevent us from borrowing more?

When we look specifically at our last 50 years, Jamaica has underperformed as a country in terms of economic development and developing a better standard of living for our people. One of the reasons is the political divide in our nation.

In his Throne Speech at the opening of Parliament in 2010, the governor general said, "The Government and the Opposition must set the example and be constantly engaged in a new dialogue, respectful of their differences, but deeply mindful that the Jamaica that unites us is infinitely greater than the political parties that divide us." We must work together as one towards the goal of a better Jamaica.

When you think about what's been happening in our country, it's not surprising that there has been no growth. Crime and corruption are at intolerable levels, there is large-scale unemployment and underemployment, and a debt-to-GDP ratio of 140 per cent.

According to the Economic Social Survey Jamaica 2011, the debt owed by each Jamaican is approximately J$629,000. We didn't spend it, but we owe it. Jamaica's economy has grown very little over the last couple of decades compared to our Caribbean partners.

Bureaucracy and the cost of efficiency in the public sector have hampered growth for a number of years, and now, what we are left with are huge debt-servicing costs which have rendered the Government unable to spend on infrastructure and social programmes.

What is the answer? Some may argue that it is an International Monetary Fund (IMF) deal. But that is only one answer to this huge, complex puzzle. The IMF has laid the conditions for receiving a loan on the table: a consolidation of public enterprises, including divestments, mergers and improvements to governance to reduce financial losses; formulation of a debt strategy for the medium term to relieve the high debt-service burden; and steps towards limiting the size of future deficits.

If this sounds familiar to you, it's because these are some of the same reform measures that we have spoken about for years, but which we have failed to execute.

The reform measures which have the most meaningful impact on our sustainable growth path are comprehensive tax policy and administrative reform, a more efficient public sector, including wages as a percentage of GDP, and pension reform.

So why have we been talking about these things and doing nothing? Here's the answer I've come up with: Any political party that implements these reform measures will lose political capital. But while there may be severe fallout in the short term, I believe the long-term benefits would outweigh that.

All of these reforms need a bipartisan approach, but after 50 years, do we have the political maturity to implement these measures so the country can grow?

Remove red tape

There are some other areas which we need to take a good, long look at which can help us grow as well. First, we've got to remove some of the red tape. Bureaucracy is a chokehold that Jamaica just can't seem to get loose from. Removing bureaucracy would make Jamaica a more attractive place to do business, and if we can make Jamaica a more attractive place to do business, we can attract more investments, both local and foreign.

I am recommending that the Government look seriously at the Ease of Doing Business Report, and any recommendations that have been made that can move us further up on that list. Someone needs to be placed in charge of that project, with a vision to getting us into the top 50, in a specified time. Jamaica is currently ranked at 90th out of 185 countries.

Another area that is crippling us is the high cost of operating a business here. Energy costs are literally putting people out of business. At US$0.40 per kilowatt-hour, it makes doing business extremely difficult. A change MUST be made in this area, or else operating a business in Jamaica will simply not be a viable venture.

The financial market is very nervous. Confidence is low. There's been a significant drop in the net international reserves over the last 12 months. We see evidence of that lost confidence in a devaluing dollar. Undoubtedly, stability and confidence would be restored with an IMF deal in place.

But there are some big-ticket items that I think can make a real difference to moving our nation forward. The first is tax reform.

Our tax-reform system continues to be a disincentive for growth in the economy, and so I want to congratulate the Government on the presentation of the tax reform White Paper, which I haven't had a chance to review, as it was only just tabled in Parliament by the finance minister.

Tax reform is a critical component of encouraging economic growth by lowering the government deficit and encouraging investment. A 2007 Inter-American Development Bank-commissioned report used filed-returns data to estimate that:

  • One per cent of corporations in Jamaica pay 71 per cent of corporate income tax (CIT).
  • One per cent of registered entities account for 60 per cent of PAYE collected.
  • One per cent of corporations pay 58 per cent of the GCT collected.

While these reports should be updated to track the progress made in the last five years, my calculations show that if we can improve these figures by 50 per cent, we will be able to reduce CIT, PAYE and import duty rates, providing a boost to economic activity.

I also want us to think outside the box. Why don't we think about using a flat-tax system? In Slovakia, a flat 19 per cent tax rate was applied on all personal income, corporate income and consumption with minimal deductions or exemptions. A case study done there has shown how robust tax reform can help spur economic growth.

I want to commend the minister and the Ministry of Finance on the implementation of the Central Treasury management system, which will ensure that the cash flow of the Government is being used in the most efficient manner. However, we also need efficient public-sector reform.

The Public Sector Transformation Unit has made a raft of recommendations for public-sector reform, all of which are to improve efficiency, effectiveness, transparency and accountability. The recommendations include mergers, transfers, privatisation, private-public-sector partnerships, shared corporate services, pension reform, strategic human resource management, leave arrangements, and a compensation policy.

Implement report

I am calling for the speedy implementation of the report. It can't just be an academic document; we have to action it, and time is of the essence.

Finally, the issue of pension reform looms large. The finance minister has said we will not achieve fiscal sustainability without it. Among a number of recommendations, a select committee has proposed that public-sector workers be required to make compulsory contributions of five per cent.

I support the recommendations being made, and look forward to hearing more about the plan when the pension reform White Paper is tabled next month.

We have a lot of work to do, and so the more hands on deck, the better. This has to be a collaborative approach - private sector, public sector. This is about Team Jamaica, and the chain is only as strong as its weakest link.

The private sector also has a significant role to play in moving Jamaica forward. We need to take the lead as it relates to a growth agenda. We need to stop being forecasters of doom, and start acting so as to avert any crises that lay down the road. We need to start investing as a private-sector group, and stop waiting on an IMF deal. Let's find a way to see what opportunities there are, even at this tough time.

As Rahm Emanuel said, "You never let a serious crisis go to waste. And what I mean by that is that it's an opportunity to do things you think you could not do before."

The finance minister yesterday indicated that an IMF agreement might not be possible before January. I really hope that there are no further delays and that we can have an IMF agreement in place very quickly. But that deal must be credible, and the targets need to be set so that they are able to be met! We also need to make sure that a deal is negotiated that is in the best interest of the country.

Any agreement signed should have a significant increase in social protection for the people of this nation, and we must also remember that while we have no choice but to sign an agreement, it must take into consideration the poor and most vulnerable.

This is our country, the country we want to be the "place of choice to live, work, raise families and do business". Where we can make a difference, we have got to get involved in shaping the future of our beloved country.

Email feedback to columns@gleanerjm.com.

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