Member of Parliament for St Andrew West Rural, Paul Buchanan, is cautioning his political administration against entering into a ‘second mortgage’ agreement being undertaken by the Jamaica Mortgage Bank as, according to him, it presents an example of the type of actions that has disallowed the government from meeting its inflation targets.

Speaking in the Sectoral Debate in Parliament recently, Buchanan, a land economist by profession, with a strong background in housing administration and development, said that the entire country needed to be aware of inflationary activities and what he called the awesome implications of an inflation-prone economy.

“In this regard, I would ask that the minister with portfolio responsibility for housing, take another look at the recently announced second mortgage facility being undertaken by the Jamaica Mortgage Bank, which was introduced by the former Government. I disagree with the position held by the former minister on this issue,” Buchanan said.

Second mortgages arise when people who run into problems with their mortgage payments, or seek to borrow funds for personal interest or other uses, go to a bank to pay out the mortgagee or enter into another mortgage arrangement.

The Jamaica Mortgage Bank offers funding for second mortgages.

“It might be argued, Mr Speaker,” Buchanan said, “that the overall effect of the JMB’s involvement reduces second mortgage rates, but that argument cannot hold when the opportunity cost factors are applied.

“Firstly, Mr Speaker, using short-term bondholders’ money, even when mixed with NHT loans, to on-lend over the long term at low rates for second mortgages, is ultimately unsustainable.

“Secondly, the massive amounts borrowed and others earmarked for future borrowing would be better spent in the primary market to produce low-cost units, which is the surest way to reduce mortgage rates.

“Thirdly, despite the confirmed overall reduction to nine per cent from 14 per cent that the former minister cites as a positive, the JMB cannot achieve the floor rates that the traditional mortgage institutions can. Let those institutions treat with their customers in default. Government cannot take on everything.

“Fourthly, the NHT with one line, can guarantee second mortgages, without passing out one single cent. If the NHT policy needs amendment, so they can guarantee second mortgages, then let’s do it. Most important Mr Speaker, to place massive amounts of borrowed funds on money supply without commensurate or further production of goods, for example more houses, is intrinsically inflationary,” Buchanan said.

In addition, Buchanan said, the current stock of houses has been built at prices way above the real cost.

“This means that with such mortgages, you are simply engendering more cost-push inflation. This, Mr Speaker, is but one example of an inflationary policy that should be examined.

“The prime minister, the minister of finance and the former minister of finance are well aware of the concern. It was under the prime minister’s watch, in fiscal year 2006 – 2007, that we recorded a rate of 5.8 per cent, the lowest rate of inflation in our economic history. This was concurrent with single-digit unemployment and a significant growth rate of approximately three per cent in that fiscal year.

“When you add the positive out-turns of the Net International Reserves and the debt to the GDP ratio for the 2006-2007 fiscal year, the importance of inflation control is underscored, as the correlation between all those indices is clear.

“I would therefore recommend that all managers of public institutions, such as permanent secretaries and CEOs of statutory bodies be required to attend annual inflation monitoring seminars undertaken by the Ministry of Finance. Inflation presents a quiet but destructive impediment to growth. We must plan for it constantly,” Buchanan said.

Regarding tax reform, Buchanan also felt that some necessary adjustments were necessary.

“Mr Speaker, at the broad level, we have the clear precedent of the tax debate outcome in the USA under the so-called Reagan Revolution where tax reductions were granted to the wealthy in return for investments. These ‘supply side economics proponents backed up their arguments with highly impressive points, especially those of Professor Laffer and his famous (or infamous) Laffer Curve model, which showed that in the event of tax reductions, revenues will fall (in the short run) initially and rise sharply (dramatically) based on the new (incentivised) investments.

“Mr Speaker, this did not occur. The tax reduction measures passed during the Ronald Reagan era led to some of the greatest budget deficits in US history. It was left to the sane President (Bill) Clinton to reverse the policies and place taxes on the highest income earners leading to unprecedented budget surpluses in his time.

“In this context, the minister of finance has settled the corporate tax rate at 30 per cent down from 33 1/3 per cent. However, there are many voices which seek further reductions and incentives.

“Mr Speaker, the rates should remain as set by the minister. Any further reduction must be earned through research and development (R&D), investments and jobs created. The tax incentives or tax reductions claims must be verified by audit, with the deliverables measured and indexed to the specific level of tax credits assigned.”

He also argued against other touted amendments to General Consumption Tax regulations.

“Mr Speaker, I wish to draw attention also to another suggestion coming from some of the leaders in the private sector, for the establishment of a singular General Consumption Tax for all:

* “Mr Speaker, this proportionate attempt at tax reform is not advised. You cannot place the rich and the poor in the same GCT basket.

* “This proposal not only has a regressive effect, but removes the element of social protection guaranteed by the GCT threshold on basic items.

* “Reliance on PATH as a bailout mechanism against the anticipated increase in poverty levels should be rejected, as the poor expend a greater percentage of their incomes on consumption and the PATH capacity, while improving is not a safeguard,” Buchanan said.