Earl Bartley, Contributor
A BUDGET like that presented by Finance Minister Omar Davies last Thursday should be an impeachable offence. As I noted in my column last week, to reduce the deficit by tax increases alone would necessitate such harsh increases, as to be contractionary, and therefore counterproductive. And these fears seem about to be realised. Dr. Davies budget is theoretically unsound; its targets and projections are unrealistic; it has no development component; and it seems to be motivated more by political calculations surrounding the Local Government elections than in furthering the interests of the Jamaican
people in the short, medium, and long-term.
Elementary economics teaches that tax increases in a stagnant economy is the worst possible policy option. Tax increases (even indirect ones like the proposed import cess) withdraws from disposable income and lowers consumption and saving the very things that need to be boosted in a stagnant economy. Yet in an administration and public bureaucracy crawling with economists the Government insists on pursuing a theoretically unsound policy that is unlikely to work.
What inspires the most outrage about the Government's one-sided adjustments is that it seems to be greatly motivated by political calculations surrounding the Local Government elections. This immediately differentiates their conduct from innocent to malevolent misdirection.
Even the structure of the budget confirms the congealing misdirection, or rank indifference, or inability to deal with the fundamental objective of economic policy in Jamaica: promoting development.
Imagine in a developing country like Jamaica 65 per cent of public expenditures goes for debt service; 32 per cent for wages and salary, and only 3 per cent of the public budget is devoted to development projects. It is not like Jamaica has all the schools, clinics, roads and sustainable economic projects it needs. Rather, this very small portion of public expenditures devoted to development continues a decline from 14 per cent in 1993/94 and highlights the fundamental misdirection of economic policy as taxpayers become more and more the slaves of debt and bureaucracy.
UNREALISTIC TARGETS
In addition many of the government targets seem unrealistic. For the past three fiscal years tax revenues have grown by about 13 per cent annually. Last year revenues fell by $7 billion below projection. Yet the government projects revenue increases of $20 billion (about 20 per cent) on the previous tax base and $13.8 billion more in taxes. This combined $34 billion increase seems to be a tall order especially in a sluggish international economy and in a local economy in which output will be seriously constrained by high interest rates.
An even more serious flaw in the Government's projections is the assumption of 18 to 20 per cent interest rates utilised in the projections of debt service for fiscal 2003\04. Interest rates on Bank of Jamaica repos and Government of Jamaica instruments are now averaging 36 per cent and are likely to remain high because of the large volume of Government borrowing and the higher risk 'junk status' now associated with GOJ debt. It is estimated that every percentage point increase in interest rates adds $4 billion (annualised) to debt service. Thus a 10 or 20 per cent discrepancy between estimated and actual interest rates could add an additional $60 billion (annualised) or an average $30 billion to debt service considering the varying maturing of instruments. Such large unplanned increases in expenditures plus the possibility of revenue shortfalls would clearly throw Government projections for the fiscal deficit and primary surplus awry.
Indeed, it was such unplanned increases in expenditures and unexpected revenue shortfall that widened the fiscal deficit in 2003 by some $17 billion. Moreover, a few of the other tax measures such as the 4 per cent import cess, and the increase in duties of in-bond merchants are already encountering resistance from the affected interest groups and this will also likely lower their revenue intake. In stable times off-target projections are frequent. In times of greater volatility they are almost certain to occur, especially, if like now, the Government has incorporated wildly unrealistic assumptions in its projections.
NEGATIVE EFFECTS
Generally these fiscal policies of massive tax increases and stepped-up borrowing initiated by Dr. Davies are likely to be inflationary and contractionary, diminish the international competitiveness of Jamaican products, and further ensnare the country in the debt trap of borrowing to pay back debt. A few more extensive comments on some of these consequences are necessary.
Inflation
Dr. Davies' projection of a 7.5 per cent increase in inflation for fiscal year 2003/04 is likely to be exceeded. Though as a matter of accounting practice the cess on imports cannot be incorporated as a part of costs, but must be treated technically as a charge against income or profit, in all likelihood, importers are going to try to pass on this practical increase in their costs to consumers. But this increase will not be passed on as a simple 4 per cent increase in prices. Because, as an element of profit, it is subject to taxation and therefore full recovery might necessitate including the cess as a two or three times multiple of four. Thus, in all likelihood, the cess will be passed on as an 8 to 12 per cent increase in prices to consumers.
In addition to the wide-ranging price increases resulting from the cess the Government's elimination of zero-rating and GCT exemption for a number of items will push up the price of these items by at least 15 to 20 per cent for the GCT and 4 per cent for the cess. Thus over the next fiscal year cost push inflation ranging from 8 to 20 per cent will affect every item imported, sold, or consumed in Jamaica. These price increases will have a ripple effect throughout the economy as workers scramble to obtain increased wages to maintain their purchasing power parity.
Contractionary Effects
Generalised inflation raging throughout the economy are likely to keep interest rates high as lenders try to maintain their margins. This upward pressure on interest rates, operating through the price level, is additional to the pressures on rates operating through the investment schedule. The money demand curve, arising from intensified competition for the lesser volume of money, is due to heavy borrowing and massive taxation. In effect there will be two or three sources of upward pressure tending to keep interest rates high.
Higher interest rates means a slow-down in investment (except in the money market), growth and job creation. Unlike the mid-1990s when foreign money moved into the Jamaican market to profit from super high interest rates, this time around, there is likely to be few foreign or other investors rushing to buy Government of Jamaica instruments. This is due mainly to the Government's poor economic management and the growing doubts about the capacity of the Jamaican economy to repay its debts. Indeed, like a prostitute desperate to turn a trick, the Government may be forced into offering higher and higher interest rates on shorter instruments.
THE ALTERNATIVE
Clearly, the better alternative would have been a combination of moderate tax increases and expenditure cuts. Even a moderate seven per cent cut in Government expenditure could reduce borrowing by $5 billion, and because of its effect on market confidence, reduce interest rates by three to four per cent, yielding savings on debt service of $10 billion to $12 billion per year.
That, along with about $15 billion of revenue increases would have achieved the desired reduction in the deficit for this fiscal year.
But, as I have noted, while the Government has a debt reduction programme which is constantly being thrown off by lack of market confidence, it does not have a programme of planned attrition, redundancies, and expenditure cuts for the public sector.
The Jamaican people have spoiled this Government. For the past 14 years, the Government has treated us contemptuously like hapless sponges that will soak-up an endless amount of their folly, inefficiency and corruption, and which they can wring whenever they want for additional taxes to finance more of the same.
Having perfected their duping skills by practising on us, the economic pretenders of the Patterson Administration proceeded to globalise their efforts in the mid to late 1990s.
For a time, they succeeded in suckering and beggaring Jamaicans abroad and other foreigners, dazzling them with high interest rates to lighten them of their money.
But people abroad work too hard in the cold to be duped for long. And, by December last year after Dr. Davies' infamous admission, the foreign lenders may well be shy to invest in Jamaica. The foreigners have pulled the plug.
And this one-sided Budget of Dr. Davies' with its cackle of counter-productive measures is mainly designed in a vain effort to woo back foreign lenders and to enhance the PNP chances in the Local Government elections.
The Government's manoeuvring for that election over the past five months has cost the Jamaican taxpayer over $40 billion dollar in interest charges and to defend the Jamaican dollar because of the Government's dithering over taking corrective action on the deficit.
I am convinced, like Bob Marley, that "dem crazy". I hope the Jamaican electorate will send them a message at the Local Government elections and eventually "chase dem outta town".
E-mail Earl M. Bartley at adapapa@cwjamaica.com
