Budget is inflationary — Devon Barrett
Victoria Mutual Wealth Management (VMWM) boss Devon Barrett has given the Government’s new budget the thumbs down, labelling it as inflationary.
While noting that he would not "criticise the budget", but rather, "simply… tell you how to capitalise" on what was presented, the VMWM chief executive officer said: "Unfortunately, it’s going to be inflationary."
Like other presenters at the VMWM Post-Budget Forum at Terra Nova Hotel in St Andrew, Barrett commended the Government’s move from indirect to direct taxation. However, he lamented the fact that revenue from taxes would reduce rather than enhance spending power.
In addition to increasing the personal income tax threshold from $1 million to $1.5 million, Shaw announced new taxes in the amount $13.5 billion, which included an increase of the Special Consumption Tax (SCT) on fuel, increase in the excises on pure alcohol and tobacco products, as well as a reduction in the minimum kilowatt usage for residential electricity that is GCT applicable. Also announced was a 20 per cent increase in motor vehicle licence fees, and the imposition of GCT on group health insurance.
"When all is said and done, a lot of the goods and services related to growth are going to be moving up in prices: inflation," Barrett said.
He added that with "$14 billion dollars in new monies" being injected into the economy from increasing the threshold, there is no guarantee that it will be spent on local production or put to savings and investments, thus possibly triggering not only inflation, but negatively impacting exchange rate gains.
The chief investment officer also factored in external factors affecting both the inflation and exchange rate. He noted that while Jamaica’s inflation rate is going down — "which is something that we have always been trying to get, where our inflation is pretty much close to the inflation of our major competitor — inflation in the United States has been climbing.
"…if there is a large inflation differential between ours and our trading partners, then what is likely to happen is that our exchange rate will feel the effects of that... At some point in time if this continues, then we should have little or no exchange rate depreciation," Barrett argued.
He continued: "The US produced 230,000 jobs in the month of February, which puts the US in a place where they are operating at almost full employment — that’s 4.7 per cent unemployment. So what that is doing is that it’s forcing the [Federal Reserve] in the US to push interest rates up. If interest rates start to go up in the US, then that benefit (low interest rates) that we’ve had over the last eight years will start to decline… more than likely ours will go up."
Government Senator Aubyn Hill rebutted, however, saying that with global oil prices — a key contributor to Jamaica’s inflation rate — remaining low, both the inflation and the exchange rates will not move significantly. He also argued that if the Organisation of Petroleum Exporting Countries cuts supplies to drive prices up, drillers in the United States will begin to produce and create equilibrium.
Hill also pointed out that a review of property taxes would allow homeowners, especially those living in strata plan schemes, to pay less.
"We have changed the strata rules. Right now, when you are part of a strata, and say you build 10 equal-sized townhouses or apartments on a one-acre plot, and the one-acre plot is valued at $100 million. Today… you would pay the taxes for your entitlement area on the $100 million. What we have done in the revision is to say ‘no’, we’re going to split that undeveloped land value of $100 million into 10 pieces for your entitlement, so that you pay the taxes on a much smaller tax bracket of $10 million.
"Now that is going to encourage growth… that is going to be a major thing, because young professionals can buy more houses, more houses will be built, more people employed and growth happens."
Another panellist at the forum, Professor Densil Williams — pro vice-chancellor for academy industry partnerships and planning at The University of the West Indies — agreed with Hill that "it’s very unlikely that we will see significant movement in inflation.
"If you look at the package this year, actually it’s almost identical to last year’s … but if the environment changes in any way, you may see an increase in inflation, particularly if the Bank of Jamaica moves money supply," Williams reasoned.
"If you accept the notion of purchasing power parity, where you recognise that inflation is not running away and your international partners’ inflation is not running away, you’re not expecting to see significant movement in exchange rates."
The pro vice-chancellor however cautioned the Government of Jamaica against speculating about economic activities that are out of its control that could affect inflation. "We have to keep in mind that these things that are happening in the wolrd, particularly in the US market, could affect us, have affected us, and when we think about strategies going forward, we have to take them into consideration."