Good news and good move on tax incentives, Finance Minister

Aubyn Hill, financial gleaner COLUMNIST

During the weeks and months leading up to the signing of the International Monetary Fund (IMF) agreement Dr Peter Phillips must have felt awfully lonely.

As the missed deadlines for completion of the agreement piled up, the criticisms from the public became louder and louder.

The Jamaican dollar took off on a downward spiral even as the country's net international reserves sank lower and lower to meet up with its 10-year low point.

The criticism of the minister of finance was both fierce and public in Jamaica.

Knowing how tough these negotiations can be, one suspects that the discussions were extremely bruising with the IMF, and while the minister and his team were not subject to any public chastisement by the unelected but powerful bureaucrats at the Fund, the comments and questions the Jamaican officials had to bear and try to answer would have, at times, felt to be snide and even humiliating.

One could say that is part of the job and should be expected given the state of the Jamaican economy - a condition the minister knew before he took on the portfolio.

Nonetheless, Dr Phillips' sense of loneliness would have moved into the darkest corners of his soul when chatter reached the local public space about how he was cut loose and left on his own by many of his Cabinet colleagues - 'hung out to dry' was the phrase commonly heard then.

THAT WAS THEN

On August 23, the local media was full of the faces and voices of Dr Phillips, Bank of Jamaica Governor Brian Wynter and the IMF Mission Chief Jan Kees Martijn commenting on the "strong billing on first test" that the IMF team gave to Jamaica on the first quarter results under the new IMF four-year Extended Fund Facility.

It must have given the finance minister great pleasure when the IMF team concluded "that overall policy implementation under the programme has so far been strong".

When the IMF's Martijn went on television to confirm that all the quantitative performance and indicative targets for end-June were met, the minister and his team must have felt relief.

Those targets included the floor on social spending — quite an important matter to his political colleagues in Cabinet, and opponents elsewhere.

The primary surplus — what the Government collects in revenues minus what it spends, excluding interest payments — was well above the 7.5 per cent target of the IMF.

That would make the IMF happy, work towards reducing our deficit even as it reduced government spending in the economy, and gain Dr Phillips some praise from Jamaica's lender of last resort, the IMF.

The IMF is not the only international financial body that has praised or recognised Jamaica's decent first-quarter results on a long road to fiscal repair.

Earlier this week the international rating agency, Standard & Poor's (S&P), moved Jamaica's credit rating up a notch from 'CCC+' to 'B-' which still leaves us in junk-bond territory, but going the right direction on the tough fiscal path we have carved out for ourselves.

S&P also gave the country a "stable" outlook based on the expectation that the "Government will largely meet its ambitious fiscal targets this year while advancing its tax-reform agenda and avoiding a fall in foreign-exchange reserves".

But the rating agency is not Pollyannaish about us making the first-quarter targets and thus become a model country. Far from it.

Like many of us in Jamaica, S&P is fully aware that only solid economic growth will move the country out of economic danger in a sustainable way.

Indeed, the rating agency raises the spectre of serious "economic disruption" to our financial system and "Government recapitalization" if what it terms "sluggish growth and high unemployment" continue to hold sway in Jamaica.

Many believe that S&P is very charitable to classify Jamaica's economic growth as "sluggish".

TAX-INCENTIVE PROPOSALS

Minister Phillips made a good move in Parliament on Tuesday afternoon. He postponed, for a month, the tabling of the Omnibus Incentives Act (OIA) which reflects the work done by the Incentives Working Group (IWG) chaired by economist Dennis Morrison.

The IWG sought to reform Jamaica's tax-incentives regime as part of the overall tax-reform project agreed with the IMF.

The minister announced that he had the IMF's blessing for the postponement. I believe the IMF had good reason to agree, even as its officials stress that the Government has the responsibility to make the specific final decisions, not the IMF.

The IWG seemed to have omitted to consult key stakeholders concerning the proposals and proposed changes in the OIA.

They are proposing, for instance, that companies which trade on the main market of the Jamaica Stock Exchange (JSE) such as NCB, Scotiabank and GraceKennedy should pay 67 per cent more tax - a 25 per cent corporate income tax rate (CIT) - than privately held companies which make huge profits but pay no dividends and only a proposed 15 per cent CIT rate.

They conveniently overlook that owners of privately held companies, often have their tax advisers find esoteric ways to avoid paying taxes.

They want to tear out the guts of the junior market of the JSE by removing the tax incentives entrepreneurs get to take way-above-normal risks to invest in Jamaica with its endless bureaucratic hassles, no-growth environment and very large business and other risks.

Minister Phillips should instruct his technocrats not just to look at collecting taxes but using incentives to encourage people to invest and create productive non-state funded employment and growth.

Building, deepening and strengthen our capital markets - not gutting them - is one way to foster economic growth.

Take the time as well, minister, to ask some pointed questions, such as why the higher CIT of 33.33 per cent is kept on 'regulated entities' such as banks, but 'life assurance companies' - also regulated entities - are proposed to be exempted in the draft and allowed to pay the lower rate of maybe 15 per cent or 25 per cent CIT?

When the answers are given, please tell us all.

Aubyn Hill is the CEO of Corporate Strategies Limited and was an international banker for more than 25 years.Email: writerhill@gmail.comTwitter: @HillAubynFacebook: facebook.com/Corporate.Strategies