Sunday Observer Budget 2017/18 Commentary: The government still in the jaws of a dilemma

Below, is commentary requested by The Jamaica Observer, immediately after this week’s presentation by the Finance Minister, Audley Shaw, in the debate on Budget 2017/18. It’s broadly in lines with comments I made on Nationwide Radio 90, the day after the Budget presentation.



The government still in the jaws of a dilemma


Sunday, March 12, 2017

JONES — How is the tax ‘give away’ going to be financed?

The government remains clearly committed to the idea of moving from direct to indirect taxation. This has merits, especially making it more likely that revenues will flow as expected — revenues in FY 2016/17 are already overperforming significantly.

However, it is my impression that this move is still taking more of a toll on those less able to afford this shift — the poor — in some sense or other. It’s also clear that where direct taxes remain, they are a heavier burden on those towards the top end of the income ladder.

The Budget leaves the government still in the jaws of a dilemma: it does not convincingly push the needle towards the much vaunted growth target of 5 per cent growth within 4 years, the so-called ‘#5in4’. (In that vein, it’s worth noting that the accelerated growth in 2016 has largely been driven by agriculture rebounding from previous drought, and is not reflective of the effect of policy measures.)

The tax measures — pulling $13.25 billion to cover the commitment to move the personal income tax threshold to $1.5 million — are revenue neutral: that is, income tax relief is offset by higher indirect taxes on ‘sin’ (alcohol and tobacco), but also on near-essentials such as electricity, fuel, and vehicle licence fees.

The passing through of these higher indirect taxes will impact the living costs of a wide range of people. In essence, the income tax gains of a few has been replaced by the tax-induced pain of many, and we see more give but even more take-back.

Benefits from income tax relief are diluted by higher spending by households on a range of basics and ‘luxuries’. This seems to be less growth-inducing than the opposite.

Key industry partners have already expressed various levels of dissatisfaction with some of the indirect taxes: Red Stripe argue that may have to curb their US$20 million investment since consumption of alcohol will be affected, in a market already near the regional bottom in its consumption per head of alcohol. The insurance industry sees a negative outlook from making group health insurance more expensive.

We are already seeing push-back from taxi operators to the increase in fuel taxes and vehicle licensing fees.

The reshaping of Property Tax is interesting, moving to more current valuations (2013, compared to the 2002 values, at present) but also reducing the rates that will apply. The following question needs to be answered, however: Will it really be the start of using regular valuations? We need to see how the revenues flow in the various parishes and whether the local councils will have the revenues badly needed to improve some roads and lights, etc.

Social safety net measures announced sound good, but more people other than those who qualify for PATH will need financial support.

The drawing down of $11.4 billion from the National Housing Trust (NHT) is not good, in principle or in practice. The surplus of this and other special funds is there to serve specific purposes, not for general financing of government activities. In that regard, it is not a prudent fiscal measure and is ultimately unsustainable.

To sum up, the budget looks set to hit both consumption and investment negatively, emphasising that it is not growth-positive. But it also looks at risk from offering help it sees as needed to only some of those who really need it.

Author: Dennis G Jones (aka 'The Grasshopper')

Retired International Monetary Fund economist. My blog is for organizing my ideas and thoughts about a range of topics. I was born in Jamaica, but spent 30 years being educated, living, and working in the UK. I lived in the USA for two decades, and worked and travelled abroad, extensively, throughout my careers and for pleasure. My views have a wide international perspective. Father of 3 girls. Also, married to an economist. :)

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