Friday, April 12, 2013

Bureaucracy's effect on productivity and growth

FINALLY we can celebrate that we have an IMF agreement again. The real importance of the agreement is that it will bring with it a certain amount of confidence and multilateral support for the fiscal accounts. Importantly also, it will arrest the slide in the NIR.

However, unless we address the structural issues of law and order, energy, and bureaucracy, this will be like any of the past agreements we have had over the past 39 years. That is, nothing but additional debt, with no sustainable improvement in our economic or social situation.

Dennis Chung says he spent two hours in the line at the Constant Spring tax office on Monday, as there were only two cashiers working, while there were six empty stations.

Having discussed energy and law and order many times before, today I will examine the effect of bureaucracy on productivity and growth. What I will do is use an example relating to my recent experience at the tax office.

The 2013 Doing Business Report shows that out of 185 countries, Jamaica ranked 163 in relation to paying taxes. This means that in the category of how easy it is to pay taxes, we are better than only 22 of 185 countries. Is it any wonder then that tax evasion is rampant, and fiscal revenue targets cannot be met?

It is important to recognise (I believe because of the efforts of the TAJ) that we moved up 11 places from 2012, when we were ranked at 174. Despite the improvement, however, and the good work that the TAJ has been doing, the fact is that the bureaucratic nature of our tax system still creates a host of missed opportunities and leads to low productivity.

A real example is my recent experience with paying two types of taxes, over the past three weeks.

First, let me say that the recent online filing and payment of my annual returns went quite well. The customer service experience on the phone was great, and here I have to single out Taneka Newell, who way into the evening called me back to see if everything worked out all right, as I was having some difficulties navigating and recording the online payment because of the number of persons online.

A few days later, however, this excellent customer service was to be negated. I had reason to visit the King Street tax office, and while there sought to ascertain my property tax liability. When I asked the cashier to check it online, she indicated she couldn't because they had no access to the system. So I had to go to another location, and wait in another line. I had to leave because of time constraints, thus delaying the inflow of much-needed taxes to the government coffers.

The second experience came a few days later at the Cross Roads branch, where again I made an attempt to ascertain my property tax liability, so that I could pay it online. This was not to be, as there was a line extending outside the door, and the door was being manned by a security guard, determining who went in (note, not a customer service person). I indicated to him that I just wanted to go to the information desk to find out how much I owed. He told me that I had to join the line to find out how much I owed, and then join again to pay the taxes. That process could easily have taken two hours. Again, I opted to leave, as I figured that the government needed the tax more than I needed to pay it.

The next day I went to Constant Spring tax office where I explained my problem to an employee. He was good enough to ascertain on a computer the amount I owed. He was very pleasant, and was from the large taxpayer office. He also told me that I could have gone online to find out what was owed, even though the notice sent said that I should visit a tax office, and a similar thing was told to me by the cashier at King Street.

I went home and paid online quite easily.

While driving out of town last Friday, a policeman stopped me to do a random check, and when he saw my road licence, he told me that I was in the grace period. It was a good thing he stopped me, because I thought I had another month.

I went to pay it at the Constant Spring office on Monday. I spent approximately two hours in the line, as there were only two cashiers working, while there were six empty stations. The supervisors said they were not able to help, as they were short-staffed.

This meant that the 100 or more persons who were there, while I was in line, spent at least two hours trying to pay their taxes. And it is important to remember that the taxes have been increased significantly. The authorities are telling us to pay more taxes than we did last year, while they cut back on their staff to add to the pain of our experience.

The important point to note here is that there is significant productivity loss. We can compare the savings to the productivity loss as follows.

The saving from the empty work stations is approximately six salaries, which we can put at maybe $20 million per annum. However, this means that 1,000 persons per day will have to wait an extra 90 minutes to pay their taxes, resulting in a daily loss of productive time of 90,000 minutes, 1,500 hours, or 187.5 working days each day.

If we assume a straight-line contribution to GDP, 240 working days per year, a GDP of $1.3 Trillion; and an employed labour force of 1,000,000, then the average daily GDP per person is $5,417 ($677 per hour). The computations therefore show that the lost GDP value per year, from the 1,000 persons per day, at just this one location, is $243.8 million, and a tax (fiscal revenue) loss from that of $73.1 million.

So to save $20 million annually in salaries, we may be giving up $73 million in fiscal revenues. This is why a value-added approach to policy is essential. When you multiply this example by the number of public sector locations with this problem, then you can see the negative effect of bureaucracy on growth and productivity.


Anonymous said...

Like the analysis. A good read.

Anonymous said...

Your analysis is spot on- old time people would have termed it "penny wise and pound foolish"!
It essentially reflects a dearth of progressive thinking from our technocrats and policy leaders. They have to start doing better.

Anonymous said...

Your analysis is spot on- old time people would have termed it "penny wise and pound foolish"!
It essentially reflects a dearth of progressive thinking from our technocrats and policy leaders. They have to start doing better.

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