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Political leadership and economic transformation

Claude Robinson

Sunday, June 24, 2012    

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HAVING put together a difficult 2012/2013 Budget that starkly revealed the limited options available to fix an economy in crisis, the Portia Simpson Miller Administration will now have to rise to the challenge of pulling the country together to achieve the modest expectations from the process.

The big challenge for the Administration is to persuade voters that the impositions are part of a necessary process to reverse the trajectory of Jamaica's economic history over the past four decades or so. This will require extraordinary political leadership; it's a difficult — but not an impossible — ask.

Several reasons for cautious optimism present themselves: first, growing recognition that the crisis is real; second, the two main parties converge on what needs to be done despite the mandatory bluster to the faithful; third, there's a national yearning for reasons to be hopeful in this 50th year of Independence; and fourth, the governing People's National Party (PNP) has time and a strong mandate to act decisively.

With respect to the nature of the crisis, Finance Minister Dr Peter Phillips argues that the central context for crafting the Budget was that Jamaica's debt of $1.7 trillion (128 per cent of GDP) was not sustainable. Debt servicing accounts for $334 billion, more than half of the $612-billion Government plans to spend in the 2012-2013. Debt and public sector wages together account for 78 per cent of the projected expenditure.

We cannot borrow our way out of the crisis as has been the case over several decades because the global bond markets will only lend us money at unacceptably high interest rates. That's what the markets are doing to Greece and Spain, much larger economies than Jamaica and with substantial geo-political leverage.

Hence there is no alternative but to improve public finances through a combination of increased taxes, reduced spending and support from multilateral institutions with the seal of approval of the International Monetary Fund (IMF).

So while there has been much debate on whether the burden of taxation has been equitably shared, whether it was carefully thought through, whether it is collectible, or whether it will lead to growth or contraction, there appears to be general agreement that tough measures had to be taken and that a deal with the IMF is essential sooner rather than later.

The Government must now prove the sceptics wrong by effective collection of the revenue despite the familiar history of non-compliance and tax evasion among many Jamaican taxpayers and the ability of some taxpayers to persuade governments to grant waivers and exceptions.

As for the growth prospects, Government is pinning much hope on fast-tracking major public sector infrastructure projects such as the north-south leg of Highway 2000 and expansion of the port of Kingston; lowering bureaucratic hurdles to starting and running a business; providing more access to credit, particularly for small and medium enterprises.

Some of the projects are embroiled in a deep governance controversy between the Government and the contractor general and may even be heading to the Courts for resolution, according to Attorney General Patrick Atkinson.

On the matter of policy convergence, the Budget Debate did not bring out any substantive differences between the two major political parties, although there was the obligatory political point-scoring.

Opposition spokesman and former minister of finance, Audley Shaw, suggested that the Government should have opted for more substantial lowering of the GCT than the minuscule one per cent dip.

This would have been closer to the proposal of the Private Sector Working Group to cut GCT from 17.5 per cent to 12.5 per cent while simultaneously applying the tax to a far wider range of basic food items and increasing targeted social interventions for the most needy in society.

Ahead of the 2007 general election, the then prime minister, Andrew Holness, promised "bitter medicine" after the vote.

Mr Holness was presumably referring to the actions that would be necessary to get the derailed IMF agreement back on track. These actions included balancing the budget by 2016; reducing public sector wages as a percentage of GDP; radically overhauling the tax system to make it more equitable by widening the tax net and removing discretionary waivers.

Voters roundly rejected the offer of "bitter medicine" — with or without sugar coating — choosing instead a ride in Mrs Simpson Miller's JEEP and the promise of reduced electricity costs.

We will never know whether 'Doctor' Holness and 'Dispenser' Shaw would have administered the medicine or whether it would have returned the patient to health.

What we know is that the patient is still on life support. Income per person today is the same as it was in 1973 and, over the past 40 years, economic growth has averaged only 0.8 per cent.

Faced with the same diagnosis that the previous Administration was unable to deal with, 'Doctor' Simpson Miller and 'Dispenser' Phillips chose a middle ground of applying limited dosage of the tax medication and growth incentives.

Opting for what is politically 'doable', the Administration limited the number of basic food items and educational materials that will attract GCT; made significant concessions to agriculture and tourism; and the prime minister was able to salvage some credibility by removing GCT on JPS's household customers and offering a much-needed break to low-income contributors to the National Housing Trust (NHT).

There are two immediate tests to measure the success of the compromise: one is whether the Government has done enough to persuade the IMF and other lenders that they are serious about lowering the debt and cutting public spending.

The other is whether the targets of the minister of finance are achieved. Can he collect the taxes, hold the expenditure and achieve a primary surplus of six per cent in this fiscal year? Chopping and changing and early supplementary budgets will hardly inspire confidence.

So far the public statements from the IMF seem supportive of the Administration's efforts. Now we wait to see the release of some US$306 billion in loans and grants from the European Union and the Inter-American Development Bank. These have been clogged up since the 2010 Standby Agreement with the previous JLP Administration went off the rails.

Over the next year or so, the Government will be further tested: Will they be able to get public sector unions to agree to further restraint for the 2012-2014 contract, having already accepted a wage freeze for the present period?

Will they be able to negotiate pension reforms that extend the retirement age and require all public sector workers to contribute to their pensions? Will the Government be able to scale the legal and political hurdles created over the embarrassing 'advice' from the Attorney General's Chambers over the constitutionality of the pension reform proposals?

The financial calculations by all the experts conclude that the reforms are necessary. What cannot be calculated is the political will to take the tough decisions. Sometimes these come with a political cost, as happened in the 1980s to prime ministers Erskine Sandiford in Barbados and George Chambers in Trinidad. But their economies got a fighting chance.

In our process, so far Prime Minister Simpson Miller has shown courageous leadership: She did not insist on full implementation of her election pledge to roll back GCT on all electricity bills; she acknowledged the need for GCT on a wide range of basic items; she takes responsibility for the Budget as reflecting the collective decision of her Administration. These are significant demonstrations of leadership.

The prime minister knows better than most of us that in the long run (read next election) what will be important is not whether she had back-tracked on an election promise or whether her Administration had to make concessions and compromises. It will be about whether we the people have real gain to show for the pain we are enduring. kcr@cwjamaica.com

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