Fiscal policy failure since Political Independence

Sunday, July 31, 2011    

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ON the eve of marking our 49th year of political Independence, it is important to grasp that the weakest part of Jamaica's economic management since 1962 has been fiscal policy.

Poor fiscal management and the lack of a growth promoting fiscal policy has been detrimental because it has:

* undermined the stability of macroeconomic fundamentals such as inflation and the exchange rate.

* deprived the economy of the capacity to cope with adverse external economic events.

* been the main cause of the debt addiction of all governments since the early 1970s.

* not promoted economic growth, and

* been a severe disincentive to the middle class.

On the expenditure side, there has been irresponsible political indulgence in debt-financed expenditure in the irrational belief that an expansionary fiscal policy can stimulate growth in a highly open small economy such as Jamaica's.

Too much government expenditure is allocated for parochial partisan politics and "letting things run" to win elections. The consequence is that government expenditure has no overarching economic rationale but is an amalgam of often contradictory sectoral and special interest handouts.

On the taxation side of fiscal policy, there has been a disastrous and comprehensive failure of all governments since 1962.

The tax burden is not excessively high compared to some countries but it is inefficient and unfair. Many businesses, professionals and self-employed persons evade or minimise their taxes while salary earners pay income tax and other direct taxes. More needs to be done to pull in those avoiding taxes and those best able to contribute. Taxation policy must expunge the tax breaks and waivers which benefit the rich and special interests.

The Ministry of Finance has never and still does not have the kind of fiscal expertise needed to design a tax policy which promotes economic growth. As a consequence, bureaucrats have always formulated tax policy as a purely accounting exercise with scant regard to a rationale for economic growth. Taxes are selected or invented solely on the basis of what revenue they can generate regardless of the repercussions for investment and production.

Taxation policy must be an integral component of economic growth promotion and must not be the captive of those concerned only with treasury management.

Tax reform is urgently needed to ensure that (1) there is a reasonable tax burden in which all sectors contribute to the extent to which they are capable and (2) fiscal policy (expenditure, taxation and borrowing) is designed to promote short-term growth and long-term economic development.

There is much talk of reform and even some positive activity among the leadership of the private sector. While this is commendable we are concerned that tax reform does not become the captive of special interests of the business sector. The process of redesigning the taxation policy must be transparent and inclusive of all economic interests and social groups.

The tax reform process must also be an exercise in sovereignty and must not be at the behest of the International Monetary Fund which has a long tradition of forcing its one-size fits all model on developing countries and whose fiscal dictates have been of dubious efficacy and inevitably politically emasculating to governments.





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