IN his presentation ending the budget, Finance Minister Peter Phillips made crystal clear the reasons for the extremely harsh tax measures recently imposed in the budget. “Mr Speaker, I cannot say it any clearer — the present level of debt threatens the very stability and survival of our country.”

He noted that between the Inter-American Development Bank (IADB) and the European Union alone, there were US$306 million in loans and grants that we could not access due to the lack of an IMF deal. He also argued that at our present debt levels “the only loans we may be able to get from private capital markets will be those at unacceptably high interest rates because they perceive Jamaica to be a high risk client.”

He outlined the steps of the vicious circle that Jamaica knows so well, where, without international funding, net international reserves fall, domestic interest rates rise (as we increase our reliance on domestic borrowing), capital expenditure is cut back further, all followed by drastic cut backs in recurrent expenditure, including public sector job losses.

Phillips noted that the gap in the budget, requiring a tax package, was not the $7.5 billion sought by the Private Sector Working Group (PSWG) tax reform package, but a $43-billion deviation from the targets agreed under the IMF stand-by arrangement, far above the $19.4-billion tax package sought for the 10 month period, June to March, in the budget. If we annualise the $19.4-billion figure, at say $25-billion, the Minister appears to be suggesting that even with the current mammoth tax package, we are still $18 billion, or about 1.5% of GDP below the fiscal targets originally agreed with IMF.

Referring to Jamaica’s Article 4 consultation, reviewed by the IMF on Wednesday May 30th, Minister Phillips noted that this soon to be released document “provides insight into the issues that will be of concern to the IMF’s Board when it is asked to consider approving a successor programme to the aborted stand-by arrangement”.

He notes that “The Board broadly agreed with the assessment that a strong upfront fiscal adjustment is necessary to place the public debt on a clear downward path and to create buffers to protect against further negative shocks.” Significantly, he noted that “There are those, including Fund staff, who believe that more could be done in this year. I don’t think so. Whether, and to what extent our initial effort can be supplemented is an area of negotiation. A key issue, therefore, is the appropriate degree and pace of fiscal consolidation, given the need to unlock growth after nearly four decades of low growth”.

The last point gets to the crux of the matter. According to Minister Phillips, the IMF Board discussion and conclusions focussed on the need to boost growth and competitiveness, and enhance fiscal sustainability. Jamaica appears to be nearing a point of decision, involving very difficult tradeoffs.

Another way of saying the same thing, a point Minister Phillips addressed himself, is to say that “there is no growth strategy in the budget”. Phillips argued that there was a growth strategy, based first on reducing the cost of energy by diversifying away from oil, public sector projects (the North South highway, Port redevelopment, and Fort Augusta, with the latter project including a logistics centre), and a number of long awaited legal and regulatory improvements to the business environment, to be implemented under the able Minister Mark Golding.

It is the fourth element of his growth strategy, as outlined in his speech, that looks challenging. He argued that this was the promotion of foreign direct investment in all sectors, but specifically tourism and information and communications technology (ICT).

The deal struck by the government with tourism still seeks essentially the same amount of increased taxation as before, but in a slightly less problematic fashion. The essence of the change is to charge a US$20 arrival tax, to be paid by tourists coming to Jamaica as part of their airline ticket, and reduce the additional room tax charged accordingly to between US$1 and US$4 per night, depending on the size of hotel, as opposed to between the US$2 and US$12 originally contemplated. Essentially, the hope is that this form of “muddy” pricing will be absorbed by our tourists (in a way that the room tax certainly wouldn’t be), as they won’t notice it as much because of the variability of international airfares.

This may work for the next few months, particularly if some of the other Caribbean countries follow suit, but can only last if the current state of the world remains the same. It has probably gone unnoticed by our policymakers, absorbed as they are in the budget process, that the international metal with a PhD in economics, Dr Copper, fell 13% in May, confirming the sell off in the international stock markets, which have now given back virtually all their gains for the year. The yield on the two year swiss bond is now a negative 0.46%, meaning that you pay the Swiss Government half a per cent to park money with them.

We must now all hope that the 2,000 new hotel rooms that drive the Government’s medium-term growth projections will still be built, despite the revised room tax. In short, that it does not become the straw that breaks the camel’s back. It is almost certain, for example, that the rooms would not have been built if they had gone ahead with the initially proposed US$12 rate. The issue now is whether these investment plans will still be over taken by events overseas, such as the aftermath of a Greek rejection of austerity at their own election on June 17th. There appears to be a severe lack of understanding of the economics of the hotel industry in Jamaica.