Tue | Jun 22, 2021

It doesn't have to be this way!

Published:Sunday | April 1, 2012 | 12:00 AM

Jamaica has not reached the point of financial abyss. Our situation is solvable if we make informed decisions, have broad and committed stakeholder involvement, and strong actions are taken immediately to address the problems. Like every sick patient that enters a doctor's office, the prognosis is likely to deteriorate the longer it takes to do the right thing.

So what exactly is the right thing to do? Let us first dispel a myth that Jamaica should implement a large fiscal-stimulus programme, that is, government measures normally involving increased public spending and lower taxation, aimed at giving a positive nudge to economic activity.

It is true that policies that are targeted to change the matrix can work under certain conditions to stimulate the economy and improve tax revenue for the government's coffers.

Counterproductive

This works especially well when the economy is in a 'liquidity trap', where lower interest rates and growth does not occur when the money in circulation is increased, and nominal interest rates are unaffected by the size of the fiscal deficit.

It also works well when investors are willing to lend long term while demanding or expecting no real interest rates. The United States gives a good example of conditions that would support fiscal stimulus.

In Jamaica, on the other hand, a sizeable fiscal-stimulus programme would be counterproductive. Aside from adding to an already very high debt burden, Jamaica's problems are compounded because we import much of our raw material in production and rely too heavily on other countries to send us food they produce.


Possible solution

In this section, we want to begin sketching the size of the adjustment the Government will have to implement to have a fiscal programme that has credibility. Of course, the International Monetary Fund will be an important arbiter of what is considered credible.

For this exercise, we are going to assume that the Government implements a far-reaching tax-reform package that is revenue positive and growth enabling.

To be specific:

We assume that the Government receives J$7 billion from the tax-reform package starting in the 2012-13 financial year.

Economic growth falls to one per cent in 2012-13 before rising to two per cent in the subsequent year and then increasing by an additional 0.5 per cent every year until 2015-16.

We assume that the public-sector wage bill grows at three per cent per annum and that the Government saves J$12 billion over a four-year period from public-sector reforms.

We also assume that interest rates fall by one per cent over the four-year period of the analysis in line with the closing of the fiscal deficit.

With these assumptions, the primary surplus rises to 6.3 per cent in 2015-16.

The fiscal deficit falls to 1.2 per cent in 2015-16

The debt-to-GDP ratio falls to 109 per cent in 2015-16.

We have intentionally not, at this stage, analysed the reform measures that would lead to a revenue-positive tax package. Nor have we discussed measures that would lead to an increase in economic growth and development.