Columns

Jamaica's neoliberal agenda and trickle-down economics — Part 1

Canute Thompson

Monday, March 18, 2019

Print this page Email A Friend!


In assessing the Government's performance, having hit the three-year mark, I argued in my column on March 3, 2019 that the Government should be given credit for policy continuity and sticking with the fiscal programme left in place by the previous Administration.

Richard Byles, former chair of the Economic Programme Oversight Committee (EPOC), described the programme as laying the foundations of a strong economy. The country is now reaping the fruits of the success of that programme, and thus Finance Minister Dr Nigel Clarke has been able to do what I cannot recall ever happening in my lifetime – cut taxes.

There are several issues which this phenomenon raises, chief of which is whether the cuts are being deployed in the most appropriate and effective ways. But we should not forget how we got here. Between 2007 and 2011, the then Jamaica Labour Party (JLP) Government abandoned the International Monetary Fund (IMF) programme. As a result, Jamaica earned the ignoble designation as a “pariah state”. With the bleak fiscal future ahead, Prime Minister Andrew Holness promised “bitter medicine” during the 2011 election campaign. The People's National Party (PNP) won that election. Led by Finance Minister Peter Phillips, the PNP Administration not only restored Jamaica's good name abroad (which had also been tainted by the Dudus saga) but re-established the foundations of a strong and stable economy.

One of the criticisms often made by the late Ian Boyne, who was not enamoured by Jamaica's attainment of praises from the IMF, was that Phillips was pursuing too rigid an application of the neoliberal economic theory/prescription of the IMF. By contrast, he suggested that Audley Shaw, as finance minister in the JLP Administration, had been more creative. Notwithstanding presumed differences in approaches, both the JLP and the PNP have adopted neoliberalism.

Neoliberalism

Let us remind ourselves of what neoliberalism or neoliberal economic theory is. In Reflections on Leadership and Governance in Jamaica: Towards a Better Society (2018) I explained (page 58) that neoliberalism is an economic theory which purports that by giving tax cuts and incentives to large corporations and big businesses, the conditions for economic growth are strengthened. Coupled with tax cuts are removal of subsidies, a shift to indirect taxation, and strong fiscal discipline.

Strong fiscal discipline is defined as tight management of revenues and expenditure and cuts to social services, and some people may recall what that felt like back in 2013 when patties and other similar products were taxed, and travelling benefits by public officers to perform field services were cut.

But if we want to have a look at more palpable ways in which fiscal discipline impacts social services, visit a public hospital or look at the conditions of schools which do not have strong alumni and community support. Schools can no longer demand that parents pay fees at high schools, but what is the quality of the education product? User-fees are not required at public hospitals, for most services, but what are the conditions of the facilities and the quality of service?

In addition to cuts to funding for social services, including road maintenance and garbage collection, there is reform of areas of government spending such as pensions. But to give the appearance that things are not as bad as they really are, Government does window dressing in effecting facelifts to police stations and other public assets.

But the major feature of neoliberal economics is tax cuts for the wealthy, big businesses and larger corporations. According to David Harvey (2005), neoliberalism should be read as an agenda led by, and for, the powerful.

Trickle-down economics

Nestled within the neoliberal economic framework is the practice of trickle-down economics. In responding to questions at his post-budget presentation presser concerning why the tax cuts were not applied to lowering of General Consumption (GCT) and the tax on fuel, Minister Clarke, speaking out of the trickle-down playbook, asserted that the cuts were “targeted”. And, indeed, they were.

Kimberly Amadeo (2018), in an easy-to-read piece entitled 'Why trickle-down economics works in theory and not in fact', in explaining the arguments of the trickle-down theorists writes: “…[T]argeted tax cuts work better than general ones. It advocates cuts to corporations, capital gains, and savings taxes. It doesn't promote across-the-board tax cuts. Instead, the tax cuts go to the wealthy.”

This is exactly how Finance Minister Clarke defended the decision to, among other things, give up $3.431 billion on transfer tax by reducing the rate by 60 per cent (five per cent to two per cent), and almost doubling that amount with the removal of the ad valorem stamp duty, giving up $6.65 billion. The reason corporations, big businesses, and the rich are the greatest beneficiaries is based on volume.

Let us take transfer tax, for example. Most of the houses sold in Jamaica are sold by the National Housing Trust and private developers. Thus, the cuts in transfer tax will largely benefit them. The Government, and its surrogates have, unsurprisingly, argued that the $14-billion tax break does not represent trickle-down economics. But one need to simply look at the numbers to see where, and to whom, most of the money will be going.

The vortex of my criticism is not that the Government should not have made these tax cuts. No, the gravamen of my criticism is that these cuts are ill-directed, for the most part. It is the duty of the Government to conceive of ways to stimulate economic growth and, in so doing it may get it right or it may get it wrong. This is even more urgent given its failure, after three years, to come anywhere near its “5 in 4” growth target.

Hubert Scarlett (2011), in a paper titled ' Tax Policy and Economic Growth in Jamaica', while noting that “between 2008 and 2010 the Jamaican economy contracted on average by 1.7 per cent per annum, following average annual growth of 2.1 per cent over the previous five years”, concludes that the use of “indirect taxes is more conducive to economic growth in the long run, while increasing the share of taxes from personal income (PAYE) has the greatest harm on per capita gross domestic product over time.

The Holness Administration appears to have taken Scarlett's views on board in its $1.5-million tax-free threshold policy, and later its indirect taxation argument. But there is no evidence which supports the claim that “stimulus $1.5” has not had any discernible impact on economic growth or unemployment. Part of the reason it did not work is that, contrary to the mistaken notion that hundreds of thousands of workers would benefit, a mere 78,000 people benefited, as thousands of both public and private sector workers were already earning less than the 2015/16 income tax threshold of $692,000.

Thus, the big question is: Will trickle-down economics work? I will examine this question in Part 2.

Dr Canute Thompson is head of the Caribbean Centre for Educational Planning, lecturer in the School of Education, and co-founder and chief consultant for the Caribbean Leadership Re-Imagination Initiative, at The University of the West Indies, Mona. He is also author of four books and several articles on leadership. Send comments to the Observer or canutethompson1@gmail.com.


Now you can read the Jamaica Observer ePaper anytime, anywhere. The Jamaica Observer ePaper is available to you at home or at work, and is the same edition as the printed copy available at http://bit.ly/epaperlive


ADVERTISEMENT




POST A COMMENT

HOUSE RULES

1. We welcome reader comments on the top stories of the day. Some comments may be republished on the website or in the newspaper � email addresses will not be published.

2. Please understand that comments are moderated and it is not always possible to publish all that have been submitted. We will, however, try to publish comments that are representative of all received.

3. We ask that comments are civil and free of libellous or hateful material. Also please stick to the topic under discussion.

4. Please do not write in block capitals since this makes your comment hard to read.

5. Please don't use the comments to advertise. However, our advertising department can be more than accommodating if emailed: advertising@jamaicaobserver.com.

6. If readers wish to report offensive comments, suggest a correction or share a story then please email: community@jamaicaobserver.com.

7. Lastly, read our Terms and Conditions and Privacy Policy



comments powered by Disqus
ADVERTISEMENT

Poll

ADVERTISEMENT
ADVERTISEMENT

Today's Cartoon

Click image to view full size editorial cartoon
ADVERTISEMENT