Budget faces toughest fiscal crisis ever

IN a matter of weeks, we will see the 2012-13 budget revealed, amid a fiscal crisis that may be the toughest we have ever had to face. Economic growth is not going to be sufficient to bring in the revenues needed, expenditure (and in particular loan payments) will be higher than last year, and any move to seek further loans to close the gap (outside of the IMF or other multilaterals) will have a negative effect on interest and exchange rates.

With an IMF agreement in abeyance for over a year, you could surmise that any additional loans from that source could come with demands for significant structural reforms. Saying that we are stuck between a rock and a hard place is an understatement.

But is it any surprise? A few of us have been saying that the IMF agreement that was entered into in 2010 was not very practical and would lead to the contraction of the economy. I remember having this same conversation with someone the month after the IMF agreement came into force. I told him then that I would talk to him again in November 2010, and contrary to what he said, I was confident that the economy would contract. I have not seen him so I am unable to collect.

I would not like to be in the shoes of the finance minister or other Cabinet members; They must be kicking themselves about being accountable for this problem that they didn't immediately cause (I say immediately because all governments since the 1970s must take some responsibility for where we are today).

For the first time since I started commenting on the economy, I find it difficult to see a solution to our problems. Not only the fiscal problem, but more importantly the increasing balance of payments deficit, poorly functioning institutions, high levels of bureaucracy (the one shining example of what is needed is the tax administration of Jamaica, TAJ), relatively high levels of crime, and general indiscipline in the economy (e.g., a failure to enforce simple things like the Noise Abatement Act).

If you think about the fiscal and balance of payments challenges, you will get an idea of where I am going.

Some positive moves have been happening but these need to be implemented much faster if we are to have any hope. The first one is the energy policy being proposed by the energy minister, and in particular the push for renewable energy and competition in distribution. We are still going ahead with LNG, which is not going to be the panacea many expect. But if we get the other thing right, then even if the LNG project fails we will still be okay.

The clampdown by the transport ministry on the illegal taxis is commendable. Indiscipline and illegality must not be accommodated, even if some want to say that we are "boxing food out of peoples' mouth". This is a bold move that I commend the ministry for.

Similarly, the increase in police personnel dealing with road indiscipline generally, and trying to deal with organised crime. The commissioner and security minister must continue with this trend but we need to have greater urgency in the implementation. One thing I must comment on is that the month-to-month comparison of the murder rate is the right way to compare murder. The way we used to compare murders, by looking at the same quarter in consecutive years, is senseless. The only reason for doing that would be if what you are comparing is seasonal. Murders are not seasonal, so they should be compared on a continuum.

These initiatives will not be featured in the budget, but they are important things to do to solve the fiscal challenge, for without creating a proper social environment the economics will not work. This social issue is at the root of our anaemic IMF growth projections of one per cent for the next few years, and 1.5 per cent in 2017. I do not know why we should be surprised, though, as the IMF projections, for example, have us increasing oil as a percentage of GDP from 14 per cent to 14.5 per cent, thus ensuring we remain uncompetitive.

Another point is the narrow focus we have always had on the debt/GDP ratio. I hope that the great concern with this ratio is fading, as certainly the past two years should have illustrated that we cannot come out of our problems by just focusing on cutting expenditure and restructuring debt. To grow GDP in any significant way (in addition to dealing with the social issues) we will need to fund certain major infrastructure projects. Any attempt to impose additional taxes will shrink the economy further without achieving the targets.

We must look at projects like the highway development, Vernamfield aircraft maintenance facility, and upgrading of the ports to prepare ourselves to benefit from the expansion of the Panama Canal. Instead of removing the GCT on electricity, the revenues from this tax could provide a short-term boost to the balance of payments by funding a credit to tax-compliant individuals for setting up solar solutions at home.

It is only through making these bold decisions that we will see any long-term sustainable improvement in both our fiscal and trade situation.

Tax Compliance

Tax compliance is being touted as one of the ways to raise the needed revenues, and has been promoted as such for a few years now. I do not think that the tax is out there is, and we will spend more on enforcement than we will actually collect.

However, it is necessary for us to ensure as much compliance as possible and support the Tax Administration of Jamaica (TAJ) in its effort. The TAJ, has made significant strides in the transformation of the tax culture and the service delivery by tax departments. Other organisations need to follow this example.

We always seem to try to do things such as compliance the hard way. The easier way would be to move more towards consumption taxes, which are more difficult to avoid, rather than direct taxes.

The other point about compliance is that the Government needs to understand that it is a two-way street, and that when they do not provide tax refunds in a timely manner to tax payers that they are also out of compliance.