Jamaica's opportunity

At the time of writing this column, I, like every other Jamaican, am waiting to see what tax package the government delivers and the final outcome of the IMF negotiations. Both these issues have been on the tongues of everyone except the dead in Jamaica.

Jamaica is, I believe, at a significant crossroads, as what happens over the next six to twelve months will determine if we go down like the Titanic or rise like the phoenix from the ashes. It is, I think, the "last hurrah" for Jamaica, because if we mess up this time then there is a very low probability of turning back. And this is why all hands must be on deck and political expediency must take a back seat. It also means that the way in which we seek to crucify persons for the smallest of mistakes must stop because I guarantee you that as we seek to emerge from the mire we are in, mistakes will be made. What we need to ensure is that the mistakes are controllable and do not have a materially detrimental effect. We need to take a practical approach to it lest we find ourselves being a victim of our own criticisms.

A serious bind
There is no denying that the country is in a serious bind, and this will have a dramatic negative effect on the lives of many Jamaicans. But I really do believe that the present crisis provides us with a significant opportunity, as we are forced to face our reality as we are unable to postpone our challenges by going to the capital markets. In addition to this inability to beg or borrow our way out of the problem, there are some positive signs as shown in the significantly improved balance of payments, and more heartening for me, the way in which the police seem to have risen to the challenge of ridding the streets of indiscipline and stemming the tide of corruption within its ranks. The police leadership must be applauded for this, and I only hope that the courts can start to support them by dispensing with cases quickly.

One thing is certain: when we emerge from this present crisis we will be looking at a different Jamaica. In order for Jamaica's economy to properly adjust we will see business failures, as well as changed consumption patterns that will result in changed market behaviour. And there is nothing wrong with that if we are to move ahead, but any resistance to change will see a more painful and prolonged transition.

One of the changes will be to the government bureaucracy and in particular the fiscal accounts. Government has responded to the shortfall in revenues by announcing that new taxes will be announced, and no doubt the IMF may have had some hand in this. While the truth is that the government did not seem to have any other option, I don't think this will improve the fiscal situation much and could in fact cause it to worsen.

The fact is that taxes have been raised twice since the start of the current fiscal year, and the revenues continue to underperform. In addition the signs are evident that the retail sector is in trouble. The Bank of Jamaica has released data showing that the real value of money in circulation this Christmas is lower than last year. Real GDP is also down by 4 per cent and over 40,000 persons have lost jobs since the start of the year. There also has not been any increase in the salaries of public sector and many other workers. The fact is that purchasing power has fallen by approximately 20 to 25 per cent.

The world has learned from the 1930s recession that in a declining economy the only viable course of action is to increase government spending and reduce taxes. This course was not taken in the 1930s when we had the great depresiion.

Under performing revenues
As at October 2009 tax revenues have seen a real increase of approximately 3.68 per cent over October 2008, which means that government is already taking more money out of the economy, no doubt to primarily pay debt charges. In relation to the budget, however, tax revenues have under performed by approximately 10 per cent, indicating that the economy will not give up anymore taxes.

Increased taxes will have the effect of reducing the real purchasing power of an already fledgling consumer market. This will in turn lead to more conservatism around spending and result in lower profits for companies, which will face a stagflationary environment. This will result in lower company profits tax, which will see more businesses closing their doors resulting in lower employment or lower incomes. This in turn will lead to lower PAYE collections. Again, if more people see lower income levels (from reduced income or unemployment) then the result is lower consumption, which of course means lower GCT, SCT, and customs duty.

In addition to this, as government seeks to further reduce interest rates then a natural outcome will be lower tax collected on interest. Some have argued that government needs to increase tax on interest payments but that move itself will have a downside which could cause a more significant longer-term problem. The Prime Minister referred to this in his interview last weekend, when he said that this would result in persons seeking a higher interest rate to compensate for the increased tax. In addition to that, any taxes on interest, or profits, raises the question of uncertainty and risk for capital and therefore could see a resistance to invest risk capital, which is what is needed for economic development. So while this is an attractive offer, it could lead to a Tiger Woods-type backlash.

In the past the government was able to increase taxes successfully because it borrowed monies to support the economy and by doing so created a false sense of growth.

So the question is, if new taxes will cause the economy to compress and not improve the fiscal, and if the attractiveness of taxing interest or profits further is not recommended, then what options does the government have?

The first thing is that the public sector like businesses must accept that the environment has changed and they must adapt, or pull Jamaica down with it. A smaller and more efficient public sector is necessary if we are to move forward, but the bureaucratic and inflexible culture of the public sector does not provide me with much hope. The Prime Minister is making an attempt to make the change and I wish him well. At the same time this is happening the only real viable option for growth is to conclude the IMF agreement and allow for access to multilaterals for budgetary support. When this funding is accessed, however, it must be spent efficiently and not get caught up in the old ways of expenditure habits in an increasingly burdensome public sector.

Diamond in the rough
While all of this is happening it is critical that we applaud the efforts of our entrepreneurs. About two weeks ago I was given a brief tour of the development that is happening at the Wexford Hotel and was quite impressed. The new wing of suites and facilities for meetings is impressive in an environment that has not been very kind to the tourism industry. This investment shows a certain amount of confidence in the Jamaican economy and must be commended, and I would even go as far as to nominate it for Business Leader in 2010, even though I have no influence on the selection committee.