Is Shaw's Budget for growth?

Ian Boyne, Contributor

Significantly slashing the tax on motor vehicles, including gas-guzzling SUVS, might not be the best way to send the signal that you support production over consumption, and it is certainly not sending a message that you are eager to reduce our crippling oil-import bill.

To implore us to switch off light bulbs, get more energy-efficient ones and to turn on the heater no more than 15 minutes before use and then to give us a big incentive to import luxury vehicles is to invite uproarious laughter - if it were not such a serious contradiction. Minister Shaw might counter that this will, indeed, aid energy conservation as it will encourage people to buy newer and, therefore, more fuel-efficient vehicles rather that old 'deportees'. It could also be argued - and there could be a point here - that this might encourage young professionals to stay here, as well as ordinary workers, to buy vehicles, and this would compensate for unsatisfactory salaries.

And certainly, all of us would agree that the Common External Tariff and other taxes on cars have been too high and needed to have been slashed long ago. Besides, why should people like me be one of the few who can afford luxury vehicles? Allow other people to 'step up inna life' and don't be so bad-mind.

This is a Budget which has billed as one from 'Stabilisation to Growth'. So the signals are important. We have to await the prime minister's presentation before we assess the roll-out of all the measures to boost growth and provide a stimulus to the economy. I suspect the prime minister, as is traditional with prime ministers, will save a number of goodies for himself. And the minister did deliver a number of his own, for which he has justifiably been receiving kudos in the media, even from some traditional critics.

It is good that stamp duty and transfer tax will be removed from securities, and it is certainly good that fees on probate and letters of administration have been reduced. The reduction of the transfer tax on death for estates is overdue. That the existing fee structure applicable to the estates of the deceased will be abolished and be replaced by an ad valorem stamp duty is welcome. The boost in the competitiveness of the mortgage market and the relief to mortgagors will be greeted with many sighs of relief and sheer joy.

The tax measures are welcome, but I am afraid more needs to be done to really provide the boost needed for growth in this economy. One certainly cannot be unaware of where we are coming from and of the solid achievements which have been registered by this Golding administration, but it is fair comment that we need stronger signals for production. Let's hope the prime minister will fill in some clear blanks which were left in Finance Minister Audley Shaw's presentation. (Our ecstasy over no new taxes and, indeed, tax relief should not lull us into complacency over our continuing production challenge).

We have to take Minister Shaw at his word when he said in his presentation that "the Government must begin to use fiscal policy not just to support itself, but to promote economic stability and growth".

very good news

The signal to education was good, and the reduction in interest rates on loans to students of tertiary institutions was very good news. This is strengthening the foundations of production and growth, while providing needed relief for students. The redaction in insurance premiums on student was also good. That some students could have a reduction in monthly repayments of up to 45 per cent is a significant boost to them, and the Government is to be highly commended for this move.

Many will be watching to see what relief will be provided to the public-sector workers who have entered their third year without an increase. This is the most volatile issue facing the Government, and it is clear that it understands the explosiveness of the issue and is treading cautiously. The challenge is to maintain fiscal discipline and macroeconomic prudence while protecting social stability. This will continue to be the essential challenge of Government through the rest of its time in office.

But macroeconomic prudence should not just be a goal of this Government. It should be a goal of the country as a whole. It is not in the country's interest, despite populist myth, for us to pursue reckless economic policies and wish lists which cannot be rationally fulfilled. It is the very poor, in whose interest populism is usually proffered, who will suffer the most from fiscally irresponsible policies.

It is good, and we must celebrate with the minister, that interest rates are at a 40-year low. Don't be disingenuous and say that lower interest rates are not enough to boost production. For many years, many were bawling about high interest rates and how they were ruinous to production and investment, saying their lowering was a prerequisite to growth. So don't be grudging and intellectually dishonest now and downplay lower interest rates and make the point that that is necessary, but not sufficient.

Of course, it is not sufficient - but it is necessary in our context for growth and its achievement should be lauded. I hope Omar Davies will not make light of the country's achievement in this area. That would only diminish him. Point to the companion measures which are necessary, but don't take away from this administration's significant achievement in lowering interest rates. Yes, cuss the banks for not following through, etc., but give the Government its due.

impassioned appeal

Minister Shaw himself admitted that private-sector credit demand was marginal at 1.5 per cent over the fiscal year to February. That is why he had to make such an impassioned appeal to the private sector at the end of his presentation. We need more than just low interest rates (and, in fact, cross-country data have shown that a number of countries have growth with both high interest rates and high inflation). This is why the Government should demonstrate that it takes its Budget theme, 'From Stabilisation to Growth', seriously and roll out the specific measures which will push us in that direction.

The Government's achievements in the area of the foreign exchange market, the net international reserves, inflation, and the lowering of the cash-reserve requirements must all be commended, and again the opposition spokespersons must not be disingenuous and unnecessarily propagandistic in not acknowledging these achievements - however much they need to be supplemented with other measures. I don't know why we find it so hard to give honest critique.

That the minister has announced the Government's intention to seek an extension to the IMF programme sends a very important signal to the international financial community, institutional investors, the multilaterals, as well as the investing community. It also sends a powerful signal to local investors that no "run wid it" policies can be adopted to seek to curry-favour for an election victory. The extension of the engagement with the IMF sends the signal that the Government is committed to fiscal responsibility and to game-changing economic policies. Of course, this will also call for flexibility on the part of the IMF which, thankfully, has been chastened by the global economic crisis and the crash of confidence in neoliberal orthodoxy.

development banking

What this country needs is genuine development banking. The State cannot just sit back and leave economic growth to the private sector. That laissez-faire model has been discredited. Indeed, Harvard economist Dani Rodrik has demonstrated conclusively that the countries being touted today as models of rapid economic growth - China, India and Brazil, and Japan, South Korea and Taiwan before them - all used state-directed funds to chart their economic development. We need to use whatever fiscal space we have to facilitate business growth and the provision of credit through development banking - with easy accessibility - is an important way to go.

This purist free-market myth cannot even be sustained if we look at the economic history of European industrialisation. Late industrialisers like Germany and France used development financing to build thousands of miles of railroads, drill mines, construct canals and build ports as well as to modernise cities and build factories. The short-term, narrow interest of commercial bankers cannot satisfy a country's development needs.

Two developing countries which have heavily used development banking are India and Brazil, two of the celebrated BRIC countries. Brazil's principal development bank Banco National, or BANDES, was established in 1952. Over time, the Brazilian government has used measures such as levies on insurance and investment companies and the direction of pension fund capital to mobilise resources for industrial financing.

India set up its Industrial Finance Department within the Reserve Bank of India in 1957. They have administered a credit guarantee scheme for small-scale industries. But even before that there were the State Financial Corporations (1948). India is strong on development banking. Its 1991 liberalisation programme was predicated on a foundation of strong, inward-oriented growth and the development of indigenous productive capacity, as Rodrik has amply demonstrated.

In Brazil, BANDES has grown in strength, and at the close of 2008 had close to US$120 billion in funds. In fact, this helped Brazil cope when commercial funds dried up after the financial crisis of 2008. Says the well-known development writer C.P. Chandrasekhar in his paper 'Development Banks: The Role and Importance for Development': "This countercyclical role helped Brazil face the crisis much better than many other developing countries." Development banking is also being used quite productively in Vietnam.

Says Chandrasekhar: "Through its financial policies, the State must ensure an adequate flow of credit at favourable interest rates to firms investing in (certain segments of manufactures) so that they can not only make investments in front-line technologies but also sustain themselves during the long period when they expand market share."

Jamaica, I submit, needs more of this kind of sensible, prudent, productive state intervention if we are to move from stabilisation to growth.

Ian Boyne is a veteran media practitioner. Email feedback to columns@gleanerjm.com and ianboyne1@yahoo.com.



Opposition spokesman on finance, Dr Omar Davies, pores over a document
with Opposition Leader Portia Simpson Miller during Finance Minister
Audley Shaw's Budget presentation last Thursday. - Ricardo Makyn/Staff
Photographer