Producing to survive instead of borrowing - KEN CHAPLIN

Tuesday, May 05, 2009
Apart from the effects the global economic recession is having on Jamaica, the country's gravest problem is not producing enough goods and services to ensure economic stability and viability, yet it wants to enjoy a high standard of living mainly through borrowing upon borrowing.
All the statistics on the economy released by Finance Minister Audley Shaw in his 2009-2010 budget presentation point to the need for Jamaica to produce far more goods and services in order to survive, especially in the current world economic environment. The Gross Domestic Product is the most important barometer for measuring economic stability, in that it measures the value of goods and services produced by a country. If a country is not producing sufficient goods and services to maintain a level of economic and social stability, it cannot be said to be doing well. Jamaica is not doing well and has been borrowing money to survive instead of producing to survive.
The debt ratio to the GDP is staggering. At the end of March this year the ratio stood at 108.9 per cent. In actual figures, we owed $1.2 trillion dollars and we are still borrowing. Of a budget of $555 billion, $309 billion had to be reserved for debt payments. Under law, the first charge on the budget is debt servicing.
The expected revenue for the fiscal year will be $321 billion. Government will have to borrow $215.8 billion and impose $18.131 billion in taxes or 1.5 per cent of GDP to close the fiscal gap. The major portion of the revenue will come from an increase of $8.75 per litre in the Special Consumption Tax on petrol which is estimated to yield $13.3 billion, and broadening the General Consumption Tax (GCT) estimated to yield $7.5 billion. It has been widely recognised that the government has no other option but to increase taxes although the level of the increase in petrol prices and some of the items added to the GCT basket is being questioned. For example, it includes computers and books. This is unacceptable.
Some economists wanted the government to cut its spending, but others argue to the contrary that, like President Obama's administration, government should increase spending, give the economy a stimulus injection, especially in infrastructure development and create better conditions for increasing goods and services to improve the GDP standing. Hence this year 20 per cent of the intake from the SCT on fuel will be used on road rehabilitation, 35 per cent next year and 50 per cent in year three. There is also money for capital development, but many more incentives will be needed to enhance production appreciably. When Prime Minister Bruce Golding speaks in the budget debate today he is expected to announce other incentives to raise the level of the production of goods and services.
In his landmark contribution to the debate last Tuesday, Opposition spokesman on finance, Dr Omar Davies, proposed an economic recovery programme for national growth which would see an additional $6 billion added to the budget for capital programmes, including infrastructural works like draining, river training, reforestation and building retaining walls.
The programme, he said, could be financed by withdrawing $3 billion from the Universal Acess Fund and the Tourism Enhancement Fund. He suggested a tax regime which could result in the rolling back of the tax increase on petrol. Many people are calling Dr Davies' contribution as the most statesmanlike speech he has ever made in a budget debate, including those he made during his 14 years as minister of finance.
But to return to the importance of having a strong GDP. The fiscal deficit this year is targeted at 5.5. per cent of the GDP or $65.4 billion. Such a deficit is much too high for a small economy and shows that the country is living well above its means and has to increase its income considerably. The internationally accepted safe point is 3 per cent of GDP. We cannot compare our position with that of a large country like the United States which has a large economy and can cope with the problem better than a small country like Jamaica. Their deficit is running at about 8 per cent of the GDP. Another figure we have to watch is the current account deficit which, for the financial year just ended, was 19.2 of GDP, a deterioration of 3.9 per cent over the previous year.
As usual, government gives "a little something" to soothe taxpayers whenever it imposes taxation. It was a good decision to take the tax burden off PAYE employees. There are 1.3 million workers in the labour force of whom 323,000 are PAYE workers. For the workers, the income tax threshold is to be doubled from $220,500 to $440,000 by January 1, 2010, which means that an additional 85,000 people will no longer pay income tax, bringing the total to 132,000. Some 191,000 workers will take home an additional $55,000 per year. But there are nearly a million other workers outside the loop who are going to feel the bite of the tax increase on petrol. So when journalists asked Finance Minister Audley Shaw at his press conference whether the government would be considering increasing the fares charged by taxi operators, Shaw seemed upset by the question and referred the journalists to Transport Minister Mike Henry. It was a perfectly legitimate question, because in the past price increases in petrol have caused unrest as taxi operators passed on the increase to commuters.The truth is that the government should have discussed the matter with taxi operators before the tax and established a position prior to the announcement.
Another matter of concern is that up to the time of writing this column the additional list of items to attract GCT had not been completed. It seems to me that the list was put together hurriedly. When GCT was introduced during the Seaga administration in the 1980s, as communication consultant to the Revenue Board which was compiling the list, I noted that it took the team several weeks working long hours to prepare the list of items, including those which were zero-rated.
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