The failure of a joint committee formed by Finance Minister Dr Omar Davies to work out an arrangement to pave the way for the increase in the income tax threshold could have been one of the main reasons behind this year’s low-keyed budget.

Commensurate with the increase in the threshold from the current $193,440 to $275,000, should have been the removal of zero rated and exemptions from the General Consumption Tax (GCT) list and/or the merging of non-taxed allowances into workers’ salaries.

The new threshold, which was expected from January 1, would have meant about $1,800 in income tax savings for the average worker earning approximately $30,000 per month.

The GCT revisions, which the minister insists were recommended by the Joseph Matalon-led tax review committee, would have been even more lucrative for the Government with increased revenues flowing from the removal of zero rated and exempted items.

The Government would have loved to sell the country the idea of GCT payments for all goods, in return for an increase in the threshold. But that would have earned them the wrath of consumers, especially those at the bottom, who would lose the protection they currently enjoy in terms of some basic goods. Furthermore, the Government was obviously in no position to finance a subsidy, like an expanded food stamp programme, which the tax review committee recommended to ease the increased pressures on the poor from this policy.

So a joint committee, comprising representatives of the Government, trade unions and the private sector, was created in January with the slightly easier task of trying to sell the workers the idea that they could still get the threshold increase if they agreed to have their non-taxed allowances rolled into their salaries.

The problem is that the workers are not in a mood to give up their non-taxed allowances – like gratuities (tips) travelling and housing – and the unions realised the futility of the exercise from early.

Dr Davies said in February that he had made the suggestion about rolling the non-taxed benefits into salaries from 2005, when he first announced the three-staged increase in the threshold linked to the 1 1/2 per cent increase in GCT, which he effected that year.

He said that after he made the suggestion, the tourism sector launched a “strong lobby” against it, arguing that it would be a major blow to the sector to tax the gratuities earned by its workers.

Since then, the Bustamante Industrial Trade Union (BITU) has also expressed its opposition to the move, claiming that the workers would be worse off since most of their earnings were in gratuities.

Dr Davies has since been seeking to dispel the fear of lost earnings.

He pointed out that because non-taxed allowances, like the gratuities earned by tourism workers, were the bulk of their earnings, their basic pay was close to poverty levels denying them benefits like National Housing Trust (NHT) mortgages.

The workers did not accept the minister’s explanation, resulting in the failure of the joint committee to reach an agreement prior to the budget.

So the Government ended up with estimates that don’t allow for an increase in the income tax threshold, which would have cost nearly $5 billion, since they couldn’t neutralise the cost with the rolled-in new taxes, much less a new GCT system.

Therefore, it was obvious from the Throne Speech that there wasn’t much to shout about this year. And when some “financial wizards” tried to create some excitement recently, by suggesting that the capital budget was stocked with election goodies, Dr Davies had to put them in their place.

“Fact is, nothing can be further from the truth,” he said. “As I indicated during the Standing Finance Committee hearings, approximately $14 billion of this sum represents expenditure which took place in the past and is now being brought in for transparency and accounting purposes.”

He explained that the $14 billion is made up as follows:

. Approximately $5.3 billion for projects executed using deferred financing;

. $3 billion representing expenditure on road construction activities financed from Petrocaribe funds; and

. $3 billion for Consolidated Fund payments.

The remainder represents debts which his ministry has taken over from public sector institutions in order to “clear up their books”.

Clarifying the Consolidated Fund payments, Davies said that these related to projects in which no cash was received, but the country received benefit in terms of equipment, consultancy, buildings, technology transfer, etcetera.

“These goods and services were paid for directly by the relevant funding agency, upon receipt of an invoice for work done,” said Dr Davies. “When these payments are made by the funding agency, an equivalent amount must be paid by the relevant ministry into the Consolidated Fund and explicitly recorded in the expenditure budget.”

He said that while the accounting approach may seem overly complicated to the lay person, it is required by the auditor-general, “as his office must have corresponding documentation, through the expenditure budget, to justify payments made by the accountant-general for the loans used to finance the projects”.

Whatever he could afford for increased spending, including that $39 billion in capital spending, was squeezed through the “fiscal space” which was created this year by the fact that debt servicing fell from $219.6 billion, amortisation plus interest, to $203.6 billion.

In other words, he said, “we will be spending $16 billion less this year on debt servicing compared to last year”.

“This is a trend which we need to maintain, as the ability to address pressing problems, in both the social and fiscal infrastructure, will be dependent on debt servicing consuming a smaller percentage of total expenditure,” Dr Davies said.

And this is likely to be the theme around which this budget debate will develop: how can the country reduce its debt burden sufficiently to find enough breathing space to deal with other compelling issues like employment, national security, agriculture, education, housing, water and roads?

House schedule

Opposition spokesman on finance and the public service Audley Shaw is scheduled to respond to minister of finance and planning Dr Omar Davies’ opening contribution to the 2007/2008 budget debate when the House of Representatives sits on Tuesday.

Shaw has suggested that the incremental increase in spending is deceptive and warned of increased allocations coming in supplementary estimates.

He has promised to “pierce the veil of secrecy and deception”, which, he said, characterises Davies’ budgets, and offer “a clear alternative”.

Tuesday’s meeting will also be interesting as Opposition spokesman on mining, energy and telecommunications Clive Mullings is scheduled to make his budget debut.

He will share the stage with the minister of agriculture and lands Roger Clarke, on that date.

Mullings is expected to focus strongly on issues like the Nigerian oil arrangements, which led to the Trafigura affair; the sale of Mirant’s shares in the Jamaica Public Service Company (JPS); the Liquefied Natural Gas issue – the Trinidad aspect as well as the MOU signed with Venezuela; and ICT issues, including the proposed sale of the former Goodyear factory in St Thomas.

Clarke is expected to detail plans for subsidising fertilisers and animal feeds prices; insurance coverage for coffee farmers; land administration; forestry and wildlife development; and multilaterally funded programmes such as the CDB-backed national irrigation development project, the sugar transformation project supported by the European Union, as well as the agricultural and banana support services project and the programme to eradicate screw worms.