Trust in me. The bank tax fiasco was unnecessary but may offer lessons.

First, a declaration. I used to work for the IMF. Second, another declaration: I have no mandate to speak for the IMF, or any other multilateral agency. Third declaration: I probably think differently from most people on the island of Jamaica. Horray! for me, the independent thinker.

Dr. Peter Phillips, Jamaica’s finance minister is in a deep hole. He has a budget whose financing he thought he had closed, but has found that the seams of the jacket are bursting open to the tune of J$2.25 billion. He cannot borrow his way out of that hole. He cannot cut more spending fast enough, or without severe social consequences. He cannot get revenue from non-taxes fast enough, either. He can go after delinquent tax payers, but his likelihood of success is uncertain. He is better off trying to tax his way out of the hole. He came up with a simple and efficient tax, but few people really liked its implications, and its universality and efficiency are not sufficient reason for people to like it, at the present time. He may have to pull the proposal to tax bank withdrawals. I feel sorry for him, on the one hand, but on the other hand I have little sympathy. I know he’s a nice man, but that’s not at issue. The issue is how and why did this hole not get filled in properly? From my viewpoint–as a former IMF employee–I see several awful mistakes, which should not have occurred and which really should be avoided like the plague in the future.

Make unpleasant things seem necessary. The need for higher taxes was baked into the potato pudding a long while ago, if only we had looked carefully. The forecasts for fiscal year 2014/15 needed tax revenue to rise and therefore more tax revenues were coming, despite Dr. Phillips saying “no new taxes”. With few signals that the tax base was going to be expanded, that meant either higher tax rates, or new taxes. We saw a mixture of both: alcohol, for instance, got taxed more; bank withdrawals were going to be taxed anew. People do not like paying taxes; we all know that and the finance minister knows it and acknowledges it. So, if a new tax is to be imposed, try to get people to understand why and how:

  • No other route is available, at present.
  • The tax burden will fall on a sector that has capacity to handle it–the financial sector. (But, make sure that they do not pass it on to those already over burdened.)
  • The tax may not be a permanent feature. This is a risky argument to hand to people, unless Dr. Phillips is sure, but he could have said that, as the economy starts to grow again, the need for this tax should decline, or if it will be continued, it may be with the removal of other taxes.

Those reasons are not all, but they might have gone some way towards letting people understand the predicament that the government faced. Let’s not beat up any more about how we got into this pickle.

Get buy-in from those who are likely to ‘suffer’ most. When I heard the finance minister respond to a question at a press briefing after his budget speech, about whether he had spoken to the banks about the tax, I knew something very bad was unfolding. He said he’d met them “last Wednesday”; that was the day before the budget. He was not asked a follow-up question and he did not expand. I took that to mean that he had not discussed how the tax would apply with the agents who were due to bear it. Now, in most circumstances, this would be quite normal: he would not meet with smokers and drinkers about imposing taxes on cigarettes and booze. But, that’s because as the people consume the goods the tax would be applied and flow to the Treasury. With banks, however, in this case, a large volume of transactions may be involved and the government would need to know that the banks could levy the tax correctly and be collected and that the money would flow to the Treasury in the amounts expected. Banks have very good accounts, so tracking what is happening is easier than say for other companies and individuals. But, banks also have complicated systems and they need to be calibrated properly to get money flowing where it should. This aspect did not seem to have been broached. The banks confirmed that when they issued their statement against the bank tax and announced that they were working on an alternative. The securities dealers made the same point, and added that, logistically, they were not in a position to implement the tax in the time frame indicated by the minister. Both sets of institutions indicated that they would seek to pass the tax on, with some understandable logic. Not what the minister wanted to hear, I’m sure. Basically, the minister had not prepared his ground well, if at all. His seeds would fall on stony ground and never sprout. That’s a cardinal sin in policy-making.

Convince people that you understand what you are doing. Much policy is effective simply because people think that it is credible, and officials help carry that conviction by their ability to speak effectively and coherently about measures.

PM Portia Simpson-Miller, fronting finance minister, Dr. Peter Phillips, in her budget 2014/15 presentation
PM Portia Simpson-Miller, fronting finance minister, Dr. Peter Phillips, in her budget 2014/15 presentation

Here, we hit a snag as big as an iceberg at the bottom of Dunn’s River Falls. First, the minister could not handle some simple calculations about how the tax would be computed. He destroyed in a few seconds any sense that he was the man to handle the country’s finances, because he could not do the sums when he wanted to. Whoever briefed him did not give him a simple enough table from which he could read. He bumbled and looked bad, by making not one but several mistakes. Policy fail! Then, the PM, asked impromptu about the tax, used terms that suggested she had no real clue. The finance minister’s ‘thing’? It was clear that Mrs. Simpson-Miller was losing the plot fast and she scrambled for dry land by saying that the minister himself needed to explain better what the tax meant. Sorry, Madame PM, it was clear that you had not absorbed whatever briefing had been in ‘the thing’, even to pretend that you knew what ‘pain’ you were going to share with the people. Policy fail again! That was what you do when you want to define an unmitigated disaster. It is of the same kind as the Malaysian officials over the disappearance of flight MH370 and whether it was lost, found, off-track, on-track, the victim of terrorists, the victim of an errant crew, etc. People’s confidence in any word sagged, then plummeted. That is what is really damaging. The Jamaican population are looking at the prime officials who are supposed to steer the country through economic rapids and see that they cannot handle an oar and do not know how to sit in a canoe, and it is toppling over and they will drown and take passengers with them. 

Later this afternoon, the bank tax may be history, even if not forgotten, when Dr. Phillips wraps up the budget debate. What is important, however, is that the government has “listened”, as the PM said yesterday. But, of equal importance is that the government needs to speak to its people. It’s funny to me that the PM did not seem to understand that for many people the whole matter of questioning her official travel was not really to know from where she should have been sending postcards or bringing souvenirs, and exactly how much was spent. It was about having a conversation with people over whom you have stewardship. It is like a parent telling a child where he or she has been, or how the work day has passed, when coming home; it’s decent and courteous and enables the child to share some of the experience. You know how it is when you ask “How was your day?” and you get “Fine.” If the child asks “Well, what did you do?” and you reply “The usual,” that conversation has just headed off into the toilet.

I do not understand the resistance on the part of government officials. I think I know it’s cause, but I wont go there just now. Part of the problem, I suspect, comes from the tribal nature of Jamaican politics, which means that all questions get translated into “It’s the opposition, in some form, trying to get me.” It’s a bit of paranoia. It means that the population is not seen as a neutral audience, but factions. I can’t help there, except to say that leaders need to lead and see the nation as in need of guidance, not as objects of scorn or fear all the time.

If in some way, government officials get the message about what it means to be transparent and inclusive in policy making, then this bank tax fiasco will have some good outcomes.

Digging countries out of their economic dump is not easy, and it is much harder if the burden is not shared fully with those who really have to carry it. (The PM needs to stop saying she “feels” the people’s pain. People do not believe it, because if she did, she would not look and act as she does. It may seem trite, but people who are in real economic and social pain in Jamaica dress and act and deal with their days quite differently than she does.) Most people do not believe what politicians say, so politicians need to be extra vigilant in trying to convince people that they are saying the truth or making sense.

If the idea is to walk the course together, then let me suggest that the first thing the government does is to take the people in its hands and start to trust them with information and see how much easier it may be to work out problems.