Business

Jamaica should use Mauritius as model for IMF agreement

By Keith Collister

Sunday, September 30, 2012    

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In 2006, the new Minister of Finance of Mauritius decided to undertake a comprehensive reform programme, doing all the tough reforms in his first year. In a dinner presentation (put on by CAPRI in conjunction with the World Bank) in June this year that included both Jamaica's current and former finance ministers, his financial secretary, Ali Mansoor, noted that when you have run out of money, there is no trade off between stimulus and austerity, with the only way forward being to unlock growth through reform.

Jamaica today, like Mauritius then, not only can't afford stimulus (no one will lend us the money) but is finally reaching the outer limits of its "muddle through" policy of the past 20 years. Its only alternative to the very negative downward economic spiral (in the absence of a new IMF agreement) outlined by Private Sector organisation of Jamaica President Christopher Zacca in his Rotary Club speech of September 25th is to also unlock growth through reform.

Mansoor stresses the need to communicate to the press and the wider population the benefits of aggressive reform in an economic crisis. In fact, he observed, in a globalised world, the costs of not reforming, and the benefits of reform, are seen much faster than before, even as early as 12 to 18 months.

In Mauritius case, "we did not raise taxes and did not cut services". In fact, Mauritius cut tax rates and got more revenue. This was because, unlike in the US, where for the most part people pay their taxes, in Mauritius only 30 per cent of doctors and lawyers were reporting income above the tax threshold.

Mauritius implemented a flat tax of 15 per cent on both personal income and corporate earnings, near zero import duties and a uniform rate of GCT of 15 per cent. They would have gone for an even lower 10 per cent corporate tax rate (like the Irish did in 1987), to attract more foreign investment, if their finances had allowed it. By having no differential between corporate and personal income tax, they avoided people setting up companies to reduce their taxes. Taxes became both reasonable and above all predictable.

On paper this was regressive, but in reality was mildly progressive, as a rising threshold took many of the poorest out of the tax net (and lower import duties reduced the cost of food and other items), and sharply increased the average effective tax rate on the income of the richer segment of society, from around three to five per cent to a much higher 11 per cent, partly through a withholding tax on interest and professional fees, and increased property taxation. The key was to keep tax reform very simple, combined with aggressive enforcement to identify conspicuous consumption to see who was not paying their fair share of tax. For example, they sent tax inspectors to the law courts to see who was practising law without paying taxes.

The essential issues facing Jamaica are remarkably similar, even if we are twice as late in implementing the reforms as Mauritius, as Mansoor said that their own reforms should have been done ten years before. The main caveat is that Jamaica is in significantly worse shape than Mauritius was in 2006, with a much tougher global environment. Almost everybody in Jamaica, including the man on the street (suffering in silence and still waiting for the vision to give him hope of a better future) by now understands the predicament we are in. Therefore, there is absolutely no point in the government not releasing the results of the IMF article 4 review, starting with the leadership of the union movement, as part of a conversation on how to get 'Team Jamaica' (defined as government, opposition, public sector, private sector, unions, civil society) working together to construct the social contract necessary to share out the short term pain, "bitter medicine" if you will, that is now inevitable. This is absolutely no different from a company, nearing bankruptcy, showing its union its books as part of its wage negotiations.

The basic principles should by now be crystal clear. The public sector wage and benefit bill will be able to go up very little, if at all, in nominal dollars, over the next three to four years. The only way this can be achieved in a manner that is fair to public sector workers (this time around private sector workers will be in essentially the same position) is to prioritise a sharp increase in our ridiculously low income tax threshold, so that as in Ireland in 1987, workers receive an after tax increase in pay despite three years of wage restraint in both the public and private sectors. This will need to be combined with a sharp phased reduction in our overly high tariffs to reduce costs to the consumer, which would help keep inflation down.

The increase in the threshold is very costly, and benefits upper income earners more. However, rather than destroy the simplicity of the flat tax through trying to achieve an artificial progressivity , the corporate and personal income tax rate should be equalized, as occurred in Mauritius, to avoid people setting up companies to reduce taxes. The increase in the threshold should then be financed through a combination of increased property taxation, withholding taxes in areas such as professional fees (equalizing personal and corporate tax rates would make this much simpler and fairer to collect), higher taxation of gas and licencing fees on cars above a certain size, and perhaps a temporary cessation of NHT contributions by companies, which could be re imposed in another form to benefit either workers or the government. In such a scenario, as in Mauritius, the share of upper income earners income being paid in tax would actually increase, particularly for those operating in the informal sector, who should bear more of the burden of adjustment.

Such a social contract would also need to increase export earnings. If the personal and corporate tax rate is equalised, say at a still high 25 per cent, due to financial constraints, local and foreign investors could still access an incentive rate of say 50 per cent off, upon meeting certain performance criteria, either in export earnings, new job creation or training, or all of the above, on an automatic and non-discretionary basis based on audited historic financials. Combined with a policy of making raw materials, capital goods, and other key operating inputs duty free as outlined in the Private Sector Working Group (PSWG) parliamentary submission, this would go a long way to creating the correct environment to attract foreign investment and drive job creation.

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