Don't bad-mouth the $14-billion gift to this country


Tuesday, March 12, 2019

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As the country continues to digest the reality of a Government giving back $14 billion in taxes, we are now hearing the Opposition People's National Party (PNP) saying that the tax 'giveback' is only for the rich. The poor does not benefit, and that it would have been better to lower General Consumption Tax (GCT), etc.

That's seriously disingenuous.

Let's look at something. The two surest ways to generate growth consistently is by investment and consumption. The Government chose to go the investment route. I agree. But consumption has its problems. The problem with consumption growth is that it is predicated on the assumption that more money in people's pockets will translate to greater spending. But what about if people decide to save the majority of that money instead of spending it all? Government would have given up $14 billion and in return got negligible growth in consumption.

Furthermore, Jamaica cannot consume its way to sustainably high growth. Simple, we don't have enough people to do that. America, China, the European Union can go the route of consumption growth because they have multiples of millions of people to drive it. We don't. So, again, if the Government goes the route of consumption growth it's almost guaranteed it will fail. Just 1.5 per cent to two per cent growth will not cut it — we would need five per cent to 10 per cent growth. Our internal market is too small to generate that growth. We need investment-led growth that will produce goods and services to export to the world.

And, if the Government has the fiscal space to return $14 billion, how much would be shaved off the GCT rate if it was to give that back by cutting the GCT rate? Not much. So you might very well have GCT going down by 0.2 of a per cent and that, in many cases, may translate to saving of $2 or $5 off certain items. But really and truly that doesn't amount to much.

Same thing with the gas tax. Same thing with the oil hedge money which the Special Consumption Tax (SCT) was placed on fuel ostensibly to earn. Remember, it's only about eight million barrels of oil that were hedged by the then PNP Administration. Jamaica was expected to import almost 30 million barrels over the period of the hedge. So even if the Government were to totally remove the tax it placed for the hedge then, that it still collects now, it would have a negligible impact on the price of fuel.

Furthermore, with the Government's drive from direct to indirect taxes, lowering the GCT rate while not widening the tax base makes no sense. And if the Government widens the tax base, then it's the same poor people who will suffer, as they will be required to spend more money to buy more items even though the rate has decreased. That's not helping the poor; that's conning the poor by giving with one hand and taking it back with a bulldozer. That's not what the Government is about. When the Jamaica Labour Party (JLP) gives the country a break, there are no strings attached.

Also — and this is a point Finance Minister Dr Nigel Clarke made at the budget press conference — Jamaica's debt-to-gross domestic product (GDP) ratio is still at crisis levels at 96 per cent. If it wasn't that we were coming from an eye-watering level that the PNP put us in at nearly a 150 per cent of GDP, we wouldnt be celebrating at all. We would be telling the Government to use it to help pay down the national debt. Let that sink in for a moment.

GCT is by far the most efficient and collectable of all the taxes the Government has in this country. When you have a debt-to-GDP ratio that high you can't reduce the tax you get the most money from, and one that you can collect with minimal fuss. Only an idiot would do that.

We are not at the place yet as a nation when we can start talking about lowering of the GCT rate without widening the taxable items to which it's applied. It's either the tax rate is lowered and the base widened, which in turn will require the savings made by the lower rate to be spent on purchasing other products that are now taxed, which makes the consumer worse off, or going the route the Government has gone. As a nation we can't have it both ways.

If Government is seriously thinking of spurring economic growth by taxation policies, then Dr Clarke is absolutely correct on the taxes he has targeted. The taxes he has gone after are those that were distorting the economy. What that means is that because of the distortionary impact of these taxes it was inhibiting growth and development. That translates to less opportunities for poor people to get employment, less opportunities for students to get a good education, and the list goes on. That's not in the interest of the poor. What holds people in poverty is lack of opportunities. And one way of removing impediments to opportunities is for the Government to use whatever tools it has at its disposal to level the playing field, so to speak. That's what this Government is doing.

The taxes that have been removed or cut drastically are the ones that were causing trouble. And now that something has been done about it we can expect more economic opportunity for the country, and that means more opportunities for the poor. That's the best way to empower the poor. Give them work.

Some have levelled the criticism that the Government is dealing in trickle-down economics. Let's look at that. All countries that have developed with the capitalist model have depended on trickle-down economics to varying degrees. There is absolutely no way that the benefits of greater economic growth will reach everybody all at once. If that were the case we would have eradicated poverty around the world a long time ago. Socialism was meant to make the benefits reach everybody at the same time, at the same rate, and to the same degree. We all know what happened to it.

Trickle-down economics is not inherently bad, especially when the Government has a safety net. And this Government has increased the official safety net to the tune of millions of dollars this financial year. Everybody is getting an increase. And let's not forget that unemployment is at its lowest ever, and poverty also. The surest way to get people well off is to give them jobs. Since this Government has taken over, trickle-down economics has taken on new speed and is reaching more people, more quickly, in a more sustainable manner than ever before. Just look at the unemployment numbers. So, yes, it's working admirably. I think we need to change its name from trickle-down economics to 'Bolt Economics', because under the JLP it surely has got much faster.

Growing a middle class

Another point that seems to be missing many is that this tax break is also geared towards creating a sustainable middle class. In any society, a certain level of economic stratification is necessary. You need multiple classes in order to move people up the economic ladder. Remember now, the benefits will not reach everybody at once, so classes become necessary.

Jamaica, at this time, hardly has a middle class. It's the poorer class and the richer class. The middle class was decimated by the PNP in the '90s. We need a thriving middle class if we are ever going to have sustained economic development. The poorer masses will never be able to jump from poor to rich all in one go. You need them to go from poor to middle to upper class. That's orderly economic development.

The present tax set-up is going to help to rebuild and accelerate the development of a middle class. One important benefit of a thriving middle class is its ability to spend money to buy more than just normal, everyday stuff. They can buy greater levels of luxury items, which in turn will spurn manufacturing and services that cater to that class. That then drives economic growth and development which boosts the economy to employ greater levels of people. The more people who are being employed is the greater the chances of sustaining a middle class, as more from the lower class graduate into it, thereby ensuring greater levels of economic growth — sustainably. It all augurs well for the development of this country.

Yes, it would be great to lower GCT, but that's not feasible at this time.

At the rate the JLP is going, our debt-to-GDP ratio will be down to normal levels in time for the next election, at which time we can lower the GCT rate without widening the base. And that would have been the final giveback to the citizens of this country who have endured so many years of taxation without representation or benefits.

PS: A note on Dr Clarke politically. He has arrived as a politician. His performance in Parliament shows he has grown up since we first saw him. I think he would make a fine deputy prime minister.

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