The new budget and Jamaica's fiscal policy

Last year was the first time in the country's history that the Government tabled close to a balanced budget. Proposed spending for 2014-2015 of $540 billion only adjusted to accommodate inflation when compared to the 2013-2014 Budget.

The budget was tightly configured with a difference of $6.7 billion existing between revenues and expenditures. It was clearly outlined how they proposed to fill this small gap via revenue measures grounded on tax reform, including amendments to improve tax-collecting efficiency and effectiveness.

This year, the Budget was read early and for the first time, expenditures and income are tabled together under conditionality stipulated by the fiscal rule. The Government has proposed to spend $641.5 billion in expenditure, while expecting to collecting $443 billion in tax revenue for the financial year 2015-2016; leaving a gap of $198 billion, which they did not outline clearly how they plan to fill. New taxes of $10.5 billion have been proposed for the 2015-2016 financial year, $3.8 billion more than the proposed increase last year.

New tax measures proposed this year include:

n A special consumption tax (SCT) increase of $7 on auto fuel per litre, which is expected to generate $6.4 billion.

n Imposition of 16.5 per cent general consumption tax (GCT) on residential electricity consumption greater than 350 kilowatt-hours per month, which is expected to generate a little under $806 million.

n The imposition of withholding tax of three per cent on payments made by large entities for services obtained locally.

n Replacing the one per cent cess tax imposed on Petrojam to a $2 per litre SCT to provide $1.8 billion in revenues.

n Increase in personal income tax threshold to $592, 800.

n To broaden the tax base and address World Trade Organization concerns, an environmental levy of 0.5 per cent is to be applied to domestic supplies, which will bring in another $962 billion.

n A $1.50 increase in the SCT on cigarettes from $10.50 to $12 per stick, will bring in $488 billion in taxes.

n Comprehensive reform of life assurance income tax regime. No revenue to be generated from this change.

n Overhaul of trade and business licence fees, excise duty fines, fees and penalties, will generate $500 million.

n Customs duty on race horses reduces from 40 per cent to five per cent; the effect here is insignificant.

 

How has fiscal policy been performing?

 

Historically, Jamaica has demonstrated difficulty in collecting proposed tax revenues. Every year, the Government consistently collects fewer taxes than originally anticipated. Subsequent budget adjustments in the middle of the year are very frequent and capital expenditure is always first to be neglected when revenues do not materialise as planned. This has been and will continue to be one of the country's main problems as it has been a contributing factor to slow growth in GDP. How is the overall tax package?

Considering the collective goals we want to achieve as a country, I did not expect any new taxes this fiscal year. We should be well aware that proposed increases in tax rates do not necessarily guarantee an increase in tax revenue, as evident from Jamaica's historical trend. The Laffer curve shows the relationship between tax rates, tax revenue and taxable income and suggests that total tax revenue will fall if the country tax rate is too high, which appears to be the case in Jamaica. In this case, the tax revenue-maximising tax rate is different from the growth-maximising tax rate.

The Jamaican government has somehow pretended that this Laffer curve does not exist, with a very stubborn approach to the nation's fiscal policy. Good fiscal policy is never about tax increases and tax increases every year. How can we do the same thing over and over again and expect the same results? High tax rates reduce the amount of transactions in the economy, which reduce the amount of tax revenue the Government can collect; basic maths. Furthermore, tax dodgers will increase their efforts if the tax rates are too high.

Then we wonder why GDP isn't growing. GDP increases when demand increases and the country increases production and more people are employed. If income levels are low and tax rates are high, people have low disposable income, which means very low demand.

Wise men do not do the same thing over and over and over again and expect the same results. Then again, who can expect wisdom from politics?

n Dr Andre Haughton is a lecturer in the Department of Economics on the Mona campus of the University of the West Indies. Follow him on twitter @DrAndreHaughton; or email editorial@gleanerjm.com.