Finally, a budget for both growth and equity


Finally, a budget for both growth and equity

Monday, March 11, 2019

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Some have already argued that in his maiden budget presentation, Dr Nigel Clarke has made the best budget speech ever by a minister of finance in Jamaica. In examining this claim, one must first review the economic policy objectives he outlined when he was first appointed last year, namely: the pursuit of economic independence; the promotion of economic opportunity for all; the protection of the vulnerable; and deciding the appropriateness of his outlined vision and goals for our level of economic development.

One would then need to determine whether he had made concrete progress in each of these areas. Finally, such an evaluation will also need to assess his initial starting conditions (obviously more favourable than virtually all his predecessors), the economic logic of the sequencing of his reforms, and whether he made the right choices in terms of using the fiscal dividend, the fruit of our past prudence, that he had available.

The key question would be whether he had achieved the right balance between a “pro-growth” reduction in taxes, a continued reduction in the debt to GDP ratio, and expanding the social safety net for the most vulnerable.

The short answer seems to be yes on all fronts. The first thing to note is that despite a fairly large tax cut, Jamaica is credibly projected to have its sixth-consecutive balanced budget this fiscal year, so our still-low projected growth rate means that our now automatic reduction in the debt to GDP ratio will continue.

Second, unlike what occurred recently in the US, it is entirely possible that the $14-billion tax cut will be completely self-financing, or even produce multiple additional tax revenue in the medium term, something we haven't seen in Jamaica since the late 1980s. The reason is our high level of informality, and low overall level of business transactions.

Most informed observers believe that there is an enormous stock of transactions that have not occurred due to our excessive financial transactions costs. These include the vast amount of untitled land in Jamaica, billions of dollars in assets held in the estates of the long dead, an unquantifiable but clearly huge number of legal contracts avoided or reduced in size due to high financial transactions costs, and all manner of businesses that have remained wholly or partly informal as they see no net advantage in formality, neither in paying taxes nor in adopting proper corporate structures and governance.

The combined effect of taking thousands of businesses outside the GCT net (and simultaneously legalising the operations of tens of thousands more operating informally), sharply reducing the cost of adopting a corporate structure through the abolition of minimum business tax, all combined with the abolition of stamp duty and the reduction in transfer taxes is, by far, the largest and most effective step to reversing our decades-long rise in the size of the informal sector.

These measures, we believe, will sharply increase our rate of economic growth, thereby achieving a much faster and less painful reduction in our debt to GDP ratio than we have seen to date. The largest growth impact is likely to be through faster, cheaper and greater lending to the productive sector, the lifeblood of economic growth. The combination of reforms, through allowing greater competition, will finally allow small businesses to get access to finance, typically their largest incentive to become formal.

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