Fri | Jun 22, 2018

Jamaica's fiscal crisis

Published:Friday | January 11, 2013 | 12:00 AM
Wilberne Persaud, Financial Gleaner Columnist

Wilberne Persaud, Financial Gleaner Columnist

I ended
my first column of 2013 asking: "Whither Jamaica? We have no Bustamante or Manley tax cuts that we might allow to expire. We have a debilitating inequality fuelled by a tax base that woefully under-represents income levels of the society. The unvarnished truth is: Jamaica's fiscal deficit cannot be fixed without change to this situation. GCT can take us no further and default is a winding and tortuous route as events in New York's courts remind us about Argentina."

A correspondent, one of my readers engaged in investment and financial services primarily in Jamaica, sent me a message almost as soon as the column became available online. Some of his remarks with my comments follow.

"The last time I checked," he says, "Jamaica's taxation as a percentage of GDP was about 23 per cent. This could not be considered low for a country that has the profile that Jamaica does. There is always the argument that there is much uncollected tax to be collected in Jamaica. I do not really believe that this will be the source of our prosperity."

Supporting opinions

Actually, he is correct; and goes on to give reasons for some of his opinions.

"Because of relatively high taxes the underground economy is playing financial arbitrage thus robbing the formal sector from sales, profits and growth and robbing the GOJ from revenue. Yes, it is true that their activity is illegal, but I believe that it is growing. The secret to solving this problem is to set limits for what the maximum tax should be on any item including GCT and work backwards. This would give the formal sector a chance to compete thus enabling the GOJ to collect PAYE, GCT, and profit tax. In areas that are naturally high tax areas like alcohol and tobacco we must have specially trained and dedicated enforcement which ensures that the illegal activity is not tolerated. Also, all importation into Jamaica should be restricted to companies that are wholly owned by a Jamaican citizen. Non-citizens should not be allowed to import any item into Jamaica."

I really couldn't understand where the last idea came from, I said. Why restrict importation to Jamaican citizens only? He responded, not entirely persuasively, that government worries "about people not paying taxes and corruption at ports. If the person is a Jamaican citizen, it's very likely we can find them and they are definitely subject to our laws."

The next issue he raises should be abundantly clear to anyone taking but a brief moment for contemplation: "Government spending cannot be a driver for our financial recovery because of the GOJ's current debt profile".

Familiar error

Let me add both economic and social recovery of the stricken population. Let me also hasten to emphasise that in the past, to our severe detriment, we've been guilty of making this specific error - believing increased government spending could be a solution. Keynesian demand augmenting fiscal policy is not available to small open economies to the extent that it is to economies like the United States, which we may add, also has at its disposal, monetary easing.

His solution to this problem is for government to "relax its privatisation rules and rapidly privatise its 'non-core assets' within eight months, so that private-sector persons will be able to expand them. Currently in Jamaica the private-sector debt/GDP ratio has quite a bit of capacity left. It is true that we have had bad experiences in the past with some Jamaican investors. Failure is not a reason against trying to improve an outcome. There are very many successful Jamaican companies that did not benefit from the breaks that we could give the new opportunities to."

Yes, privatisation of some entities should be on the table. Existing financial and capital leverage in the sector may well be an enabling factor in such endeavours; but eight months? In the Jamaica that we know, this perhaps approaches the realm of fantasy.

Relative to fiscal restraint, he suggests "strategic decisions about the quantum ... and the quality of those services" that government provides. "It is better to reduce services and provide a higher more effective quality of service than throw away money each year providing poor and ineffective services. Education being a prime example."

"Our fiscal problem," he believes, "cannot be solved without aligning the fortunes and cash flows of the public service with that of the private sector ... an across the board cut of GOJ wages would immediately realign the problem. After this the civil service leaders should be given the leadership to allocate their wage resource to ensure effectiveness and productivity. This would give the GOJ immediate fiscal space. Jamaica is in a crisis right now and leaders must deliver this message squarely to our managers and workers so that they can focus their minds on the transformation."

This is the one that requires the dentist to call for morphine! It may not however, given interrelationships, lead to the expected outcomes.

Finally, the issues of crime and technology change warrant his attention: "Many do not agree, but I do think that significant reductions in our crime rate can be transformational for Jamaica. What type of return on investment do we get in this area? Will lower crime rates spur growth in our economy? Maybe we can get some economists to model this for us."

This goes without saying and is one of the aspects of policy failure this column has in the past lamented.

On technology and local business development, his ideas are sound and oft repeated in these pages: government should "immediately implement a policy of preference to local business. GOJ contracts must have local leadership and input at all times to ensure transfer of technology, training and local employment".

A bit extreme, you might say, particularly in face of concessionary arrangements with our 'donors' and trade partners.

Yes, Jamaica truly faces a fiscal crisis but its developmental elements are the abiding and underlying cause of the myriad symptoms. We need to look for those sometimes counter intuitive policy options that provide solution.

Last week, we mentioned Argentina's experience with debt default. We had a small trial run with the JDX. What are we contemplating now? Can the conversation be expanded and what does true, committed buy-in of all stakeholders entail?

Wilberne Persaud is an economist engaged in work on impacts on Caribbean SMEs.