Jamaica to finally face its economic truth?

By Keith Collister

Sunday, September 23, 2012    

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The anticipated arrival of the IMF negotiating mission in Jamaica on Friday coincides with the real start of the US election campaign. This is important as it means that for at least this calendar year, we can expect no "divine intervention" and the contents of any future IMF agreement are likely to be solely determined by the IMF technocrats in Washington.

The issues that need facing for Jamaica to get an IMF agreement are by now exceedingly well known, but it is worth going into them in a little more detail.

The most serious short term issue standing in the way of an agreement appears to be the public sector wage and benefit bill, and its direction over time. At this point it is worth noting Minister without Portfolio in the Ministry of Finance, Horace Dalley's extremely honest response to a reporter at the PNP's party conference last Sunday, namely that these are issues we will have to deal with, "IMF or no IMF". The combined projected public sector wage and pension costs for the current fiscal year are $173 billion, or $149 billion in wages and $24 billion in pensions. This is just under the catastrophic number of around $180 billion in interest costs in 2009 that required the Jamaica Debt Exchange, which at its low led to a fall in interest costs of about one third to around $120 billion, although unfortunately interest costs are now increasing again as the nominal value of the debt has continued to increase. Even a small percentage increase in wage costs of say three per cent, and a continued rise in pension costs on their current trajectory, would mean that the wage and benefit bill for the next fiscal year would exceed the crisis number for interest costs in 2009.

The issue of a true comprehensive tax reform is likely to be the number two priority for an IMF agreement. It is worth spending a little time, once again, to understand what a true tax reform looks like, and the circumstances in which it can be executed, and compare it with our current circumstances as we await the sign off of the white paper on tax reform in cabinet, and its tabling in Parliament, presumably before the IMF negotiating team leaves on October 5th.

The first page of the 1985 White paper on tax reform prepared by the then Revenue Board, incidentally entitled "Comprehensive tax reform", notes that it has been prepared after two years of collection and analysis of data, and that the present tax system has been developed in a "piecemeal" fashion, and that "changes have primarily been driven by the need to raise more revenue". There are actually two documents, part 1 being the 120 page key proposal, part 2 being 152 pages of appendices summarising the detailed data collected. The tax reform committee report on which the white paper was based had both private sector involvement and direction, the Chair being the immediate past president of the PSOJ and JCC, and the direct representative of the Prime Minister in the form of Richard Downer, a very high level Price Waterhouse accountant who had been seconded full time to then Prime Minister Seaga "to get things done". This ensured Prime Ministerial support , by a Prime Minister who was in any case also the Minister of Finance, ensuring that there was no daylight between these two critical posts on what needed to be done.

Critically, all the areas covered in the white paper had just been extensively researched and modelled for a period of two years by a dedicated team of international economists under the outstanding leadership of Professor Roy Bahl. Finally, at all stages of the process, both the committee and the international US AID funded research team had worked extremely closely with the able Ministry of Finance technocrats of the period, who had themselves become extremely tired of administering such a complex and inefficient system as then prevailed, and were committed to the implementation of the reform. The same technocrats who wrote the two extremely detailed white papers were then tasked with implementing it by a Prime Minister who was notorious for his focus on results once a decision had been made, with a willingness to make tough decisions. In the context of looking at political will, we should however note that the decision to implement general consumption tax, which was chapter 6 of part 1 of the White paper, was deferred, being finally implemented by then Finance Minister Hugh Small.

It may be a useful process to compare the effort made then with the current efforts on tax reform over the past decade, and particularly over the period of the last three years, when we have either been negotiating an IMF agreement, or in one, with it being clearly understood the entire time that it was a critical part of the agreement. We can however note that it is almost a decade since the draft report of the famous Matalon committee on tax reform was prepared in October 2004, and just under a decade from when the process actually started with the appointment of a new tax reform committee.

The final issue is one of competitiveness. In the first quarter of 2010, the quarter in which the Jamaican current account was roughly in balance, the IMF pronounced the Jamaican dollar as correctly valued on an average of three measures. Over the intervening period, Jamaica's inflation rate has significantly exceeded that of the US, presumably leading to a substantial loss of competitiveness for the traded sectors. If we exclude gifts (remittances), the largest source (about half) of foreign exchange is the tourism sector. If the focus on tax reform has moved to the issue of reducing incentives and waivers, as has been reported to be the case, it is worth noting that one is yet to be made aware of an Asian Tiger that became an export success through high taxes on the raw material and capital goods that fed its export industries, typically in manufacturing. The very high capital investments required in tourism, and the resultant longer pay back periods, combined with its extremely competitive nature (again like manufacturing) make this something that requires both detailed research, and very clear communication and cooperation between the government and private sector, as occurred in the 1980's in the run up to the 1986 comprehensive tax reform.





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