Business

The best budget ever ever

Understanding our capacity for growth

Friday, March 16, 2018

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I have described the recently read fiscal budget as the best I have experienced to date.

My recollection is that every year the budget is to be read, businesses and individuals are always on edge as to what new tax will be introduced. Because of this annual anxiety, business and individual planning is always an uncertain event as, depending on the mood of the finance minister, your business or life could change for the worse in the two to three hours of his presentation.

This uncertain situation, in my view, has always contributed to lack of confidence and risk-taking.

It is for this reason I say that this was the best budget I can recall. Not because there were no new taxes introduced, which is very good, but by itself is not the most significant achievement. I say this because tax policy must not be driven by whether one wants to score political points or not, in either introducing or not a new tax regime. It must be driven by the need to realign your economy for growth and development, based on global and local changes — which is not what we have used tax policy to do in the past.

The main exception was the introduction of the $1.5-million tax plan, which was mainly driven for political reasons but had the benefit of moving us towards indirect from direct taxes, although it didn't go far enough to get the maximum benefit. This is because I think the objective of the tax break was wrong.

So the primary reason for me saying that this is the best budget I have experienced is that — for the first time I can recall — the finance minister has presented a budget that has not caused any shift in business or personal strategy. That is a remarkable achievement for us, and is something that we have been longing for in this country for a long time.

But the presentation day alone is not what made this happen. Prior to the budget the finance minister had stated that there would be no new taxes, and he lived up to that. Secondly, there was no suspense period, which is usually the case, between when the finance minister opens and closes.

Additionally, the budget projections for the next three years have been presented.

In addition to the above, the over-performance of the taxes is significant, which 10 months to January 2018, was $10 billion (2.8 per cent) better than budget. This is something that I had said over a year ago would start to happen, not because of the change in the tax regime primarily, but because the TAJ has been repositioning itself through increased compliance measures, greater intelligence, and much improved customer service. Ainsley Powell and his team must be congratulated for this.

But despite all of this on the fiscal side, and the increased economic activity we have seen, we are still unable to see the types of growth rates we need.

The question has been asked if we are understating our growth numbers and my answer to that is no.

Jamaica still has not developed the capacity to grow consistently at three per cent, and above, because we still have some of the same structural issues that inhibit high levels of growth. This has been identified by Aubyn Hill, who has been saying so publicly, and in conversations I have had with him.

The fact is that GDP growth is not a linear relationship with increased economic activity.

Economic activity is like someone who borrows money to drive a high-end car and pay rent for a luxurious home. There is a lot of perceived activity but the fundamentals is that there is no growth in his/her assets.

On the contrary, someone who is frugal and saves his/her money and invests in growing assets, and drives a five-year-old car, may be seeing substantial growth in their assets.

In the same manner, we see more and more tourists coming to Jamaica, but this does not mean it translates to high levels of growth, as we are still having a high import content level. So in effect what we are doing is exporting growth.

Growth may, however, come from improving the value of Mobay's Hip Strip by reducing crime, harassment, disorder, and improving the infrastructure. So instead of getting US$200 per night for a room, we get US$500 per night, on the same cost structure. So the US$300 additional is pure local value being created.

It also means (as Aubyn says) improving our infrastructure such as water and roads, as this not only has short-term employment and economic gains, but improves long-term productivity and product quality.

As an example, traffic congestion in Jamaica, I estimate last year cost us around $200 billion in lost productivity time just sitting in traffic. So improving the road infrastructure, and more importantly for me, improving the public transportation system (which is much less costly), is very important to productivity and GDP improvements.

One other main driver of growth is public sector modernisation. A significant part of this is moving towards performance pay for public sector workers.

When the wage freeze was introduced by Omar Davies, I said publicly that unless we move to performance pay then we would be back at the table repeatedly dealing with strident wage negotiations. And going forward — unless we are able to move to performance pay — we will be right back here.

The fact also is that wage increases as we apply them, will not result in the medium- to

long-term improvement of the people who receive them. All that will happen is they will get a short-term boost and inflation and the fiscal stresses will erode all that gain.

So while we have seen a fiscal turnaround happening, we still lack the capacity for high levels of growth. There are signs that it is changing but it could happen much quicker.

Apart from the positives above, we have recently seen the moves by Montague to improve the resources for the security forces and more importantly he has brought more order to the streets, with the deployment of the police.

The question is: Are we willing to even go further (such as freeing up restrictive capital regulations) and see the economic boom we deserve?

Dennis Chung is the author of Charting Jamaica's Economic and Social Development AND Achieving Life's Equilibrium . His blog is dcjottings.blogspot.com .

E-mail: drachung@gmail. com

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