Friday, February 17, 2017

The budget’s alternative facts

It’s that time of year again when businesses and people get edgy, and in some cases hold off on plans until the minister of finance speaks and reveals the tax package.

The fact is that tax policy has a direct bearing on economic growth and development, which is something our governments have failed to understand, as tax policy over the years is devised through political statements on platforms rather than through consultation with the technocrats.

So the politician gets on the stage and gives an impossible directive such as ‘ye shall fly’, and then says to the technocrat that they need to make them fly, even while it is not possible.

The consequence of this type of approach is that we have a tax framework that doesn’t encourage production and development, but rather takes pride of place in the 2016-17 Global Competitiveness Report as the third most problematic factor to doing business in Jamaica. And in fact it has consistently been in the top five most problematic factors over the years.

Obviously this means that politicians do not read this report, because if they did we would have done something about it years ago.

This is why when the Matalon report came out in 2007, and the Private Sector Working Group on Tax came out with their 2012 report, the Government just cherry-picked what they wanted from it and ignored the statement that the measures would only be effective if implemented as a whole. The fact is that the expediency of funding the budget was more important than long-term development.

Today, because of this naïve view of our policymakers, we still grapple with the same fiscal challenges we had 10 or even 20 years ago. So today we are faced with a budget deficit of close to $20 billion, and an expected tax package in the billions of dollars. And as usual, tax policy is merely a mathematical and allocation exercise, rather than one geared at driving growth.

One of the major challenges facing the Government over the years is that of low tax compliance. This is evident in the fact that even though the employed working force is estimated at 1.15 million people, just over 320,000 (around 27 per cent) are registered for payroll taxes.

But last year, instead of going after compliance, it was easier to impose a higher tax rate on people above the $6-million level. The promise, though, was that the move would be temporary — as the minister committed last year that in the upcoming year these people would enjoy the full $1.5-million threshold and the rate would not be increased. This is expected to be so as the minister is someone who sticks to his commitments, as evidenced by the $1.5-million threshold implementation.

What this would mean is that the additional $19-billion income tax increases on individuals should come from compliance measures, given the low percentage of people working who are registered for PAYE.
When I do some analysis on the revenue estimates for 2017/18, however, it again betrays the intended policy to move towards indirect tax, as the 2016/17 direct tax as a percentage of total revenues is 27.8 per cent, while the 2017/18 estimate is 29.8 per cent — suggesting a move in the opposite direction. This of course needs explanation.

This math exercise every year, in my view, speaks to the lack of innovative ideas and vision of our leaders over the years. Any society that is concerned about development and growth does not look only
short term at revenue collection and expenditure management, but addresses its mind to what needs to be done to encourage growth.

This is where I think our governors continue to fail us.

It is not all bad news, however, as since the economic reform programme started in 2013, we have admittedly seen legislative and fiscal changes to encourage growth and stability. But in my view it is not fast enough to cause the paradigm shift we need. And unless we start doing what’s necessary to cause this paradigm shift, we will remain behind our competitors in terms of development, which we must understand is relative.

Every year we continue to play a wait-and-see game to find out which sector is going to be called upon to finance the budget, but the truth is that our time is not being efficiently spent doing so.
The debates and analysis will continue in the media about what taxes will be raised and which ones will decline (mainly because of political announcements). But there is not enough talk in the media about the need to use tax policy to drive growth.

We have seen examples of the Employer Tax Credit resulting in Corporate Income Taxes increasing, and the tax incentive on the Junior Stock Exchange resulting in significantly more employment, payroll taxes, and consumption taxes. But yet still we have not embraced the fact that if we were to make the tax environment more competitive, primarily with lower rates, then we may actually see more economic activity. Again, just look at the Global Competitiveness Report.

The conversation we therefore need to have each year is not one about wondering if the minister is going to ‘hit me’ this year, but rather what tax policy should be introduced to spur development.
In Panama, for example, the law protects investors on the same terms as the investment was made. In the US tax rates are set out three to five years in advance. Therefore, investors and people can plan their business and have confidence that the decision they make today will not be altered by any political decision for the next five years.

This is the “alternative fact” of what budgets and debates should be about. For this to happen though we need to change how we think. In other words, we need to have a vision for development.

We need to not continuously seek to place one group against the other. And we need to understand that encouraging capital to make as much money as possible is to the benefit of the whole society.

The question therefore is: is it possible for us to make this paradigm shift in our thinking and reveal the “alternative facts”?

Friday, February 10, 2017

Solve crime by dealing with the root causes

On February 23, 2007, in my piece called “No public law and order”, I wrote:

“Any effort to permanently deal with…criminality in this country,must not only be addressed at hardened criminals, but must of necessity include an assault on the breakdown of law and order generally. We need to put a stop to the manufacture of criminals by discontinuing the corruption in the public sector and enforcing discipline in the society…Unless we can address these issues we will not be able to maintain discipline in the society. And if we cannot have basic discipline, then these same undisciplined people will grow up to be hardened criminals. What happens is that people will continue to buck the system as much as possible to see what more they can get away with.”

So far we have not managed to address the problem of indiscipline, which has in fact worsened, and like night follows day, we also continue to reap violent crimes with greater intensity. It is therefore no surprise to me that crime is at higher levels today. And, additionally, we see more violent crimes.

A recently released study by the IDB also shows that crime costs Jamaica four per cent of GDP every year, which approximates to $60 billion annually.
At the same time that we are losing $60 billion annually from crime, we are trying to find $16 billion in the fiscal accounts to deliver on the promise for an increase of the income tax threshold to $1.5 million per annum.

The solution to finding this additional $16 billion is that we may have to raid the funds from public sector bodies like the NHT and increase other consumption taxes.
It is therefore obvious to me that the reason for having to squeeze the hapless taxpayers, instead of being able to reduce taxes is the result of very poor governance/public policy over the decades.
This responsibility does not lie with any one administration, as the crime that we are reaping today is the result of poor public policy for more than 40 years. I would go further to say that the responsibility for this is not just with the politicians in Parliament, but also the public sector bureaucracy that has been charged with executing public policy.
In an interview with Minister Bobby Montague, on my TV programme

On Point, he made the very telling statement that we must ensure that we take the time to craft a correct strategy to tame this crime monster once and for all. Because, in my view, crime-fighting policies and initiatives over the years have been woefully ineffective.

For decades we have had several anti-crime police squads with various acronyms. We have imposed numerous states of emergency and pieces of legislation, which in most cases have only served to cause increased strain between the Jamaica Constabulary Force and the citizens.

Over the years, Jamaican citizens have also contributed to the crime problem by seeking to support the politicisation of crime. So when one party is in power they seek to criticise the ruling party — not because any careful analysis is done, but because they are not supporters. As citizens we also support indiscipline. As one person on social media said to me, why do we want to further oppress the transport operator by imposing increased fines for littering or traffic offences? The answer is that if you don’t want to pay the fine, then don’t break the law.

Recently, for example, the Minister announced the acquisition of two boats and an aircraft to monitor the borders. There was immediate outcry from some people, who if they really thought about it would understand that unless we secure our borders, with 145 illegal points of entry, then taking guns off the street will be meaningless, as they can be easily replaced.

But while we continue to announce initiatives to solve crime by deploying more security forces, having a zero tolerance approach (which we should always have had anyway), and putting more resources into crime, I still think that we have failed to address the root causes of crime. And so our efforts will be like treating the symptoms of an illness without finding out what is causing the illness.

As I pointed out in February 2007, the nourishment for crime is the lack of law and order in our environment. This is what, as a country, throughout all our crime strategies, we have failed to address. So while we roll out multiple crime plans, we have never in any serious way addressed the matter of road indiscipline, squatting, night noise, or child abuse for that matter.

The evidence is clear. We have failed to address the deficiencies in the Road Traffic Act and Child Care and Protection Act with any urgency, or in the same manner we pass legislation for retroactive taxes. We have failed to ensure that there is peace and quiet in communities, thus ensuring greater productivity.

And even though we are now talking about child abuse, because it is the current topic, we have not discussed the need for parents to be held accountable for the abuse of children, such as putting them on the roads to sell various items when they should be in school or at home studying. We have not discussed holding parents accountable for children not attending school regularly.

Like any other problem, one can only solve it in a sustainable way by identifying the root cause and taking steps to fix that root problem, while at the same time dealing with the symptoms.

So here are questions to ponder: Is it possible to solve crime without addressing the matter of accountability of parents for their children? Is it possible to solve crime without ensuring that we have a very orderly society, such as the way people drive on the road and ensuring proper zoning and noise levels? Is it possible to solve crime without a properly functioning and efficient justice system? Is it possible to solve crime without ensuring that the people asked to uphold the law (the police) enjoy acceptable working conditions?

The February 2007 article was written 10 years ago, and is as relevant today as it was then. The crime problem has not been solved, and during those 10 years we have spent a lot of resources and had many crime plans.

Still, crime worsens.

In my view, we have failed to address the social issues and law and order challenges, which are the root causes of crime. And, I should add, the main reason for our perpetual fiscal budget challenges.