Ministers mum after Cabinet retreat
Ministers ended their pre-budget retreat at Jamaica House yesterday, but remained tight-lipped on the specifics of the strategies that the administration plans to pursue to meet its promise of a balanced budget by 2006.
“The prime minister will provide a report on the discussions and decisions at a news briefing at Jamaica House (tomorrow),” said the prime minister’s spokesman, Huntley Medley.
But there were suggestions last night that not only a substantial gash in Government spending was likely to be on the table, but a possible hike as well as widening of the general consumption tax (GCT) and higher tax rates for the wealthy.
The Government was also considering the closing of loopholes in the tax on interest income, through which finance ministry officials believe billions of dollars escape annually.
The three-day retreat, at which ministers placed their wish list before the finance minister, Omar Davies, and heard him warn of the need for belt-tightening, came against the backdrop of the administration’s initial projection of a public sector deficit this fiscal year of 8.4 per cent of gross domestic product (GDP).
That deficit was originally to run at just over four per cent of GDP, but Davies has said that things went off rails because the administration had done unscheduled spending to respond to a series of flood damage and lower-than-projected revenue inflows.
Some sources insist, too, that the problem was exacerbated by the timing of last October’s general election that prevented the finance ministry from reining in public expenditure earlier.
Despite the huge growth in the deficit, Davies is keeping to a three-year deadline for a balanced budget and told ministers at the retreat that his first task was to, by the end of the current fiscal year on March 31, bring the deficit to eight per cent of GDP.
At the start of the retreat, Prime Minister P J Patterson announced a two-year extension of the timetable to bring the public debt – now heading to 140 per cent of GDP – to 100 per cent of GDP. That is now projected to happen by fiscal year 2006/07.
“Minister Davies was clear that reaching the eight per cent level would be an important hurdle to send a signal to the international markets that Jamaica is serious about dealing with the problem,” said a source who was close to the discussions. “This has implications for the price Jamaica will have to pay for any debt it wants to raise on the international markets.”
In fact, in December the rating agency, Standard & Poor’s moved its outlook for Jamaica from positive to negative – a signal that the island had to move with dispatch to improve its fiscal performance or face a downgrade on its debt.
“Everyone is now very focused on the issues at hand,” said an Observer source. “The finance minister laid it all out very soberly. He insisted that we were not in a crisis but that things were difficult and that strong measures will have to be taken.”
Apparently, among the proposals canvassed between key ministers and their advisers was an increase in the GCT to 17.5 per cent, the rate that applies in Britain, and a reduction of the number of goods that are now zero-rated.
The administration, additionally, had previously signalled its intention to widen the tax net to cover thousands of individuals and firms who do not now pay taxes.
Advisors have also put on the table, Observer sources said, a return to some level of progressive taxation rather than maintaining a single rate of 25 per cent for personal income tax.
The suggestions apparently include at least two income tax bands, with the lowest being 25 per cent and a higher rate for bigger earners. This would be coupled with a hike in the threshold for income taxes.
“At present, these are all just ideas and could well be discarded by the minister and his technocrats and the senior ministers who get a final say on these matters,” stressed the Observer source.
However, none of these issues were touched in the terse Government statement on the retreat.
The statement said that ministers yesterday focused on initiatives for inner-city renewal and the promotion of economic activity in rural areas, including greater emphasis on agricultural development.
“More detailed discussions on other job creation initiatives are to take place at the regular Cabinet meeting on Monday,” the statement said.