Thursday, April 17, 2008

A tale of two approaches

Over the past two weeks we have all been engrossed in the budget debates and the developments in the Cash Plus saga. As usual the presentation by Audley Shaw took place and the response came later from Omar Davies, and there were criticisms for and against both presentations. While both presentations had their fair share of politics, and also highlighted some very salient points, I believe that the overall response from the public and media has been lacking in quality.

As usual we tend to keep judging the quality of the presentations based on (1) how well it was delivered, and (2) how much more expenditure was allocated to critical ministries and how large, or small, the tax package was. My question is, isn’t this the same way we have been assessing every budget? Hasn’t every budget each year sought to give more money to the police and education? And what has been the result of this traditional approach to budgets? It certainly has not resulted in any rates of growth to speak of, as we continue to feel special when we eke out a 2% growth rate. The increased expenditure on security over the years has not served to reduce crime.

Wrong approach
This to me implies that there is something seriously wrong with the way we have approached the creation of budgets over the years. It seems to me that the problem we have had with the crafting of budgets had more to do with the philosophical approach rather than the amount of money we allocated to one project or another. The last time we have seen any respectable growth level was in 1990, when growth was at 5.5%. Since then we have been lucky to see growth in excess of 2%, even while we have budgeted (and spent) significant increases on security and education, and imposed significant tax packages on the Jamaican people. The result of all of this has been more hardships, higher crime rates, and no growth.

It seems to me therefore that there was something philosophically wrong with our budget approach. The fact is that our budgets were focused on controlling expenditure and paying off the debt. For a very long time budgets have not been focused on creating a platform for growth, which is the only way that we will get out of this now $1 Trillion debt level that Jamaica is burdened with. Increasing expenditure on security, education, and health by itself will not provide us with the platform needed for growth.

In any event this criticism of whether the budget is realistic or not is more an attack on the technocrats, who were the main architects of the budget rather than the politicians who really just set the framework for what the budget should look like. This is the difference between operations and policy. The latter is responsible for setting direction, and the former for making recommendations about that direction.

This I think is at the heart of the difference between the two approaches to the budget. The opposition spokesman on finance has chided the finance minister for an unrealistic budget. This is an attack on the same technocrats he worked with in preparing past budgets rather than on the finance minister. The fact is that the finance minister would be the one who would set the course but the technocrats would sail the ship.

Therefore any criticism of the finance minister should have been on the philosophical direction of the budget rather than (1) the amount of money allocated to ministries, which would have been submitted by the various departments; and (2) the level of inflation and growth, which would have been provided by the technocrats responsible for projections. I am therefore yet to see any constructive criticism of the real essence of the finance minister’s responsibility which is the philosophical approach of the budget.

A foundation for growth
The fact is that this year’s budget is fundamentally different in its approach in that it seeks to lay a foundation for growing an economy rather than just seeing how much more we can tax Jamaicans to pay debt or how much more expenditures can be increased, e.g. road infrastructure where the massive amounts spent in the past seems to have been spent incorrectly as the quality of the roads fixed only a few years ago leave little to be desired.

The budget this year addresses some fundamental issues that were not much of a concern in the past, which centre on preparing the Jamaican economy for growth, which is the essential ingredient that we have lacked over the years. This can be seen from a few initiatives such as:

1) Tax amnesty programme that seeks to formalize the informal players. It seems as if the only thing we have done in the past about the informal sector is to brag about how large it is;

2) A symbolic gesture to the taxpayers of this country that more money will be placed in their hands for expenditure – reduction in transfer taxes/stamp duty and an increase of the threshold. Although small this is a move in the right direction;

3) A desire to spend within our means and bring efficiency to the use of funds – so that budgets are not just increased for the sake of spending more money this year over last but a targeted approach is taken to spending and reducing the burden of loss making entities on Jamaicans such as Air Jamaica;

4) An emphasis on encouraging lower oil consumption – the increased taxes on motor vehicles should be seen as an encouragement for people to curb spending on a severely escalating energy bill. What we need to ensure now is that through the JUTC a very efficient public transportation system is provided; and

5) Addressing the cost of tobacco on our health system by taxing this nuisance more so that more money will be available for persons who fall ill as a result of this scourge.

This I think is the difference in the approach to the budget, and what should be highlighted. It is not just about how much more money is spent this year over last. But rather how will I more properly spend the money that the Jamaican tax payer has worked so hard to pay. It is not about how will I increase tax revenues this year above inflation levels, but rather what uncollected taxes are out there to be paid and what do I have to do to collect it and level the playing field. It is not just about raising taxes to raise money to pay debt but rather how to use taxes as a means to drive behaviour and encourage growth. It is not just a matter of borrowing money to finance the budget but rather putting debt to work productively.

I do agree with Omar Davies that the greatest challenge this year will be that of food security and is a matter that must be addressed going forward. The government has shown its commitment to addressing this by allocating $1 Billion for subsidy support his year, following on the $500 million last year, which I will admit came too late. We could successfully argue that it is not enough but a time must come when we start to live within our means. The way we approach this will be critical for Jamaicans and the contribution of the Agriculture Minister will be very important in solving this looming crisis.

Even this situation will demonstrate that it is not how much money that is thrown at it that is important but the approach to solving the problems of the country. To continue on the path of just cutting expenditure or throwing money at problems would have had us continue on a road to certain destruction.


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