Jamaica to finally face its economic truth?

The anticipated arrival of the IMF negotiating mission in Jamaica on
Friday coincides with the real start of the US election campaign. This
is important as it means that for at least this calendar year, we can
expect no “divine intervention” and the contents of any future IMF
agreement are likely to be solely determined by the IMF technocrats in
Washington.
The issues that need facing for Jamaica to get an IMF agreement are by
now exceedingly well known, but it is worth going into them in a little
more detail.

The most serious short term issue standing in the way of an agreement
appears to be the public sector wage and benefit bill, and its direction
over time. At this point it is worth noting Minister without Portfolio
in the Ministry of Finance, Horace Dalley’s extremely honest response to
a reporter at the PNP’s party conference last Sunday, namely that these
are issues we will have to deal with, “IMF or no IMF”. The combined
projected public sector wage and pension costs for the current fiscal
year are $173 billion, or $149 billion in wages and $24 billion in
pensions. This is just under the catastrophic number of around $180
billion in interest costs in 2009 that required the Jamaica Debt
Exchange, which at its low led to a fall in interest costs of about one
third to around $120 billion, although unfortunately interest costs are
now increasing again as the nominal value of the debt has continued to
increase. Even a small percentage increase in wage costs of say three
per cent, and a continued rise in pension costs on their current
trajectory, would mean that the wage and benefit bill for the next
fiscal year would exceed the crisis number for interest costs in 2009.
The issue of a true comprehensive tax reform is likely to be the number
two priority for an IMF agreement. It is worth spending a little time,
once again, to understand what a true tax reform looks like, and the
circumstances in which it can be executed, and compare it with our
current circumstances as we await the sign off of the white paper on tax
reform in cabinet, and its tabling in Parliament, presumably before the
IMF negotiating team leaves on October 5th.
The first page of the 1985 White paper on tax reform prepared by the
then Revenue Board, incidentally entitled “Comprehensive tax reform”,
notes that it has been prepared after two years of collection and
analysis of data, and that the present tax system has been developed in a
“piecemeal” fashion, and that “changes have primarily been driven by
the need to raise more revenue”. There are actually two documents, part 1
being the 120 page key proposal, part 2 being 152 pages of appendices
summarising the detailed data collected. The tax reform committee report
on which the white paper was based had both private sector involvement
and direction, the Chair being the immediate past president of the PSOJ
and JCC, and the direct representative of the Prime Minister in the form
of Richard Downer, a very high level Price Waterhouse accountant who
had been seconded full time to then Prime Minister Seaga “to get things
done”. This ensured Prime Ministerial support , by a Prime Minister who
was in any case also the Minister of Finance, ensuring that there was no
daylight between these two critical posts on what needed to be done.
Critically, all the areas covered in the white paper had just been
extensively researched and modelled for a period of two years by a
dedicated team of international economists under the outstanding
leadership of Professor Roy Bahl. Finally, at all stages of the process,
both the committee and the international US AID funded research team
had worked extremely closely with the able Ministry of Finance
technocrats of the period, who had themselves become extremely tired of
administering such a complex and inefficient system as then prevailed,
and were committed to the implementation of the reform. The same
technocrats who wrote the two extremely detailed white papers were then
tasked with implementing it by a Prime Minister who was notorious for
his focus on results once a decision had been made, with a willingness
to make tough decisions. In the context of looking at political will, we
should however note that the decision to implement general consumption
tax, which was chapter 6 of part 1 of the White paper, was deferred,
being finally implemented by then Finance Minister Hugh Small.
It may be a useful process to compare the effort made then with the
current efforts on tax reform over the past decade, and particularly
over the period of the last three years, when we have either been
negotiating an IMF agreement, or in one, with it being clearly
understood the entire time that it was a critical part of the agreement.
We can however note that it is almost a decade since the draft report
of the famous Matalon committee on tax reform was prepared in October
2004, and just under a decade from when the process actually started
with the appointment of a new tax reform committee.
The final issue is one of competitiveness. In the first quarter of 2010,
the quarter in which the Jamaican current account was roughly in
balance, the IMF pronounced the Jamaican dollar as correctly valued on
an average of three measures. Over the intervening period, Jamaica’s
inflation rate has significantly exceeded that of the US, presumably
leading to a substantial loss of competitiveness for the traded sectors.
If we exclude gifts (remittances), the largest source (about half) of
foreign exchange is the tourism sector. If the focus on tax reform has
moved to the issue of reducing incentives and waivers, as has been
reported to be the case, it is worth noting that one is yet to be made
aware of an Asian Tiger that became an export success through high taxes
on the raw material and capital goods that fed its export industries,
typically in manufacturing. The very high capital investments required
in tourism, and the resultant longer pay back periods, combined with its
extremely competitive nature (again like manufacturing) make this
something that requires both detailed research, and very clear
communication and cooperation between the government and private sector,
as occurred in the 1980’s in the run up to the 1986 comprehensive tax
reform.
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