Thu | Dec 3, 2020

Tax measures and the way forward

Published:Wednesday | April 10, 2013 | 12:00 AM
Dr André Haughton

What's the position now?

The fiscal year starts April 1 each year. As a result. Government must table and present a new budget outlining its planned expenditure and receipts for the upcoming year.

Last year, the Government budgeted initially, to spend approximately $612 billion. This figure was, however, revised after the NDX. It fell by about 1.6 per cent to approximately $602 billion.

The reduction came about primarily due to a decrease in interest payments obligations, given the decrease in average interest rates on domestic debt and a lengthening of the average debt maturity periods. This year, the Government has proposed to spend approximately $521 billion, a 13.5 per cent reduction in nominal spending, compared to last year, which is about a 23.7 per cent reduction in real spending, taking an average inflation rate of 10.2 per cent into consideration.

What does this mean?

Real changes are simply nominal changes adjusted to take the inflation rate into account. The inflation rate represents a general increase in average prices in a country over a given period of time, normally a month or a year (deflation is the opposite, general decrease in average prices over a given period).

The inflation rate in Jamaica for last year was estimated to be approximately 10.2 per cent. Proposed capital expenditure has increased from 38.4 billion last year to 44.7 billion this year, a nominal increase of 16.4 per cent but a real increase of only 6.2 (16.4 per cent minus 10.2 per cent inflation).

The real figures are a better indication of what is happening in the real economy and makes it easier to compare the budget figures from one year to the next.

The total budgetary expenditure for the fiscal year 2013-2014 is less than the revised budget for the fiscal year 2012-2013, but proposed capital expenditure has increased marginally, in real terms, over the same period.

What is the intent?

The intention is to achieve certain fiscal targets that the Government is mandated to meet by 2014. These include a lower debt to GDP ratio and higher primary surplus balance.

The overall reduction in expenditure means the Government will have to become more efficient in its operations.

At the same time, the marginal increases in capital expenditure, though not sufficient, is indicating that Government is making an effort to balance short-run fiscal expectations with a long-run growth objective.

The country is hoping that these contractions in overall government spending, from a public point of view, will divert expansionary efforts to the private sector, which must respond accordingly. The strategy, therefore, is to improve the business climate, the overall ability to do business in the country, and reduce energy cost.

Will it work?

Less government (public) expenditure should reduce the need for government borrowing for budgetary support, which will reduce further debt obligations in the future. Also, it will reduce government demand for loans, which should reduce the competition between the Government and private sector to borrow from domestic lending institutions.

This reduction in competition for funds should put less upward pressure on interest rates for loans, thereby making it easier for private borrowing for investment (less crowding out). However, this might not help since commercial banks in Jamaica have developed a culture to lend predominantly to private individuals for consumption (car loans, house loans, etc), instead of lending for investments in the form of business loans, start-up loans etc.

These, they claim, are too high-risk, which may become too costly. Since it is more difficult to monitor start-up firms which normally demand unsecured loans, banks opt to lend in the avenues that are less likely to non-perform.

How will the country proceed?

The Jamaican dollar has depreciated to an all-time low of about $100 to US$1 while the net international reserves (NIR) is at its lowest in 14 years. Notwithstanding this, it appears, as predicted, the IMF foreign-currency support will be ready by late April to early May, which should cushion the NIR and stabilise the exchange rate.

A rate of $100 to US$1 means that Jamaican goods and services will appear cheaper to the rest of the world. This should give Jamaica a competitive edge if it increases production of goods and services for export.

This depreciation of the dollar should be seen as an avenue for exploitation rather than a disadvantage to consumers.

It should reduce foreign consumption and force opportunistic business minds to find those goods and services that can be easily and cheaply produced for export. The country needs a collective national responsibility for growth at this time.

Dr André Haughton is a lecturer in the Department of Economics on the Mona campus of the University of the West Indies. Follow him on twitter @DrAndreHaughton; or email editorial@gleanerjm.com.

The Jamaican dollar has depreciated to an all-time low of about $100 to US$1 while the net international reserves (NIR) is at its lowest in 14 years. Notwithstanding this, it appears, as predicted, the IMF foreign-currency support will be ready by late April to early May, which should cushion the NIR and stabilise the exchange rate.