Dr. Omar Davies, Minister of Finance & Planning presented the Revenue side of the Budget yesterday.
Today the Gleaner presents the first of a two-part analysis by PriceWaterhouseCoopers
INFORMED OBSERVERS will have been surprised if not disappointed that the tax reform programme, implementation of which commenced in last year's budget exercise has paused. Indeed, the re-instituting of zero-rated status for a number of goods may be said to be a reversal of the process, even if to a minor extent, since one of the major reform recommendations of the Matalon Committee was the elimination of all zero-rating other than exports (see page 38 of that report). By our count, five broad areas of the Committee's recommendations were addressed in whole or in part in last year's budget and five were deferred. At that time, the Minister had indicated that the entire package would be addressed in due course. None of this has happened in this year's Budget.
EXPENDITURE
The Budget this year calls for expenditure of $240.6 billion, up from the 2005/06 actual of $207.7 billion (provisional). Amortization of debt will amount to another $117.6 billion.
Of the $240.6 billion, $211.6 billion will be recurrent expenditure and $29 billion will be on capital account. Interest and Capital repayments will account for $210 billion, or 59 percent of total expenditure.
Total Revenues are targeted at $222.2 billion, 19 percent up on last year's actual of $186.7 billion. Last year, overall revenue collections were less than budget to the extent of about $17.8 billion but approximately 8 percent above the actual collections for 2004/05.
The 2006/07 fiscal deficit is projected at $2.6 billion (12.6 percent) less than the outturn for 2005/06. Despite the stated macroeconomic objective in 2005/06 of a balanced budget, the country had a fiscal deficit of 3.3 percent of GDP. It would seem that the Minister has therefore decided that the pain of pursuing such an objective in 2006/07 would be too much in the current climate so instead has programmed a fiscal deficit for 2006/07 of 2.5 percent of GDP.
PRINCIPAL LOAN REPAYMENTS
On a positive note, the level of Amortization (i.e. principal loan repayments) projected for 2006/07 (of J$117.6 billion) represents a 16 percent reduction in comparison to the 2005/06 requirement. The absence of any bullet payments due in 2006/07 on the Government's Global Bonds has contributed significantly to this.
TAXATION
The Minister projects that 87 per cent of total Revenues will come from Taxation, with a projected increase of 20 per cent over 2005/06. He is relying on buoyancy in the economy as well as improvements in tax compliance and collection in order to achieve this. Non-Tax Revenues for 2006/07 (of J$12.8 billion) are projected to increase by approximately 20 percent over 2005/06.
This includes an estimate of receipts from the sale of a fourth cellular licence. Capital Revenues for 2006/07 (of J$6.77 billion) are anticipated to fall by 20 percent over 2005/06 (which had included a one-off inflow of J$5 billion from the NHT for the Education Transformation Project).
The second part of this analysis continues in the Sunday Gleaner
The 2006/07 projections reflect both anticipated reductions in inflows from the Financial Institutions Services (FIS) as well as a forecast for revenue inflows from the proposed divestment of the Government's shares in the Jamaica Public Service Company. The Bauxite Levy projection for 2006/07 (of J$3.9 billion) reflects an anticipated increase of 25 percent over 2005/06 reflecting expected growth in the bauxite sector and world aluminium prices. Finally, Grant Revenues (of J$3.69 billion) are anticipated to be over 415 percent greater than 2005/06 figures as a result of large grant inflows from the European Union (in relation to the North Coast Highway and Major Rural Water Supply Projects), China (in relation to the Sligoville Stadium) and the Global Fund (re. HIV/AIDS Treatment Project).
In terms of specific tax measures announced by the Minister, the following goods and services will be zero-rated for GCT purposes with effect from 1 June 2006:
" Certain agricultural inputs including animal feeds, machetes, planting materials, cereals, fishing apparatus and herbicides.
" funeral expenses not exceeding J$100,000;.
The re-introduction of zero-rating on these items runs contrary to the Matalon Committee recommendations on Tax Reform while we would express reservations over the feasibility of determining the GCT classification of any goods or services based on the consideration paid. In practice, this can provide much scope for abuse and sets a bad precedent.
The Minister is placing significant reliance on realising his revenue targets on improvements in administration, enforcement and collection, other major planks of the Matalon Committee recommendations. There has been a significant amount of discussion on the nefarious "underground economy", which is said to account for a significant amount of tax leakage. This year, the focus will be on enhanced audits of large companies and collection of troublesome arrears. Forensic audits will be pursued for targeted companies, aided by "international help" which has been secured for the purpose. A programme involving 100 specially trained officers which commenced in 2005/06 and which was successful in collecting an incremental $5.6 billion in arrears (versus $5 billion that was targeted) is to be continued this year. Bearing in mind that the tax package last year was designed to raise an additional $9.6 billion in taxes, the expectation that we will be able to achieve a 20 percent increase this year, having narrowed the base through the re-introduction of zero-rating for a number of items and no new taxes must be optimistic. For this reason and given the Government's commitment to holding the Budget Deficit to within 2.5% of GDP, we would not be surprised if the Government were to revisit the financing of the Budget early in the fiscal year. One clue as to where the Government may look is found in the Minister alluding to the "need to speak to a more rational system and which will mean perhaps that some sectors will have to give up special privileges (that) they have had". He mentioned specifically that attention will need to be paid to the "complex web of incentives granted to various sectors and sub-sectors" and gave as a specific example the tourism sector, which had its GCT burden increase significantly in last year's budget. This is one aspect of the Matalon Committee suite of recommendations which has not yet been addressed in full, since only the tourism sector has been affected thus far. Perhaps when the tax reform programme is revisited, other recommendations will also be addressed, including equalising the corporate income tax rate with the individual rate, elimination of tax on dividends paid by non-listed companies, and the removal of certain of the payroll taxes. The 500 pound gorilla represented by the need to adjust taxation policy in relation to petroleum products will also at have to be addressed once and for all at some point. The policy must become an effective instrument in influencing consumption levels of the country's largest import.
