Increasing tax rates and capping the wage bill will not likely be enough for the Government to meet its fiscal targets going forward.

The government will have to bring the fiscal deficit to below four per cent of GDP over the next four years under the dictates of an International Monetary Fund (IMF) programme aimed at securing US$1.3 billion for balance of payment support over 27 months.

“Strong fiscal consolidation over the next four years, characterised by a gradual rise in the primary balance to between seven per cent and nine per cent of GDP and a concomitant decline in central government deficit to below four per cent of GDP,” is what finance minister Audley Shaw in parliament yesterday said would be required under an IMF programme.

Prime Minister Bruce Golding indicated that the performance targets would have to be met on a quarterly basis.

New tax measures, which is expected to earn the Government $21.8 billion (annualised), will be put in place by Janury 1, 2010.

The additional $5.5 billion it projects to draw into its coffers for the last three months of this fiscal year will not be enough to offset the shortfall it is already facing in order to meet its new deficit target of $94.5 billion.

Having fallen short of its original revenue target for October by $2 billion, the Government is now trailing behind its new revenue target by $6.4 billion.

Caribbean Business Report projects that the fiscal deficit for the current fiscal year will surpass $100 billion or 10 per cent of GDP.

This means that on average, the government will have to compress its spending and grow revenue at a pace that will reduce its fiscal deficit by more than $15 billion a year.

According to Prime Minister Bruce Golding, it is not expected that Jamaica will see economic recovery until the third quarter of 2010, while Shaw projects that “the Jamaican economy is unlikely to record strong growth over the next two to three years especially if the bauxite/alumina companies remain closed until 2011 and flows from remittances and capital transfers continue to be weak”.

This limits Government’s ability to expect considerable growth in revenue that would be derived naturally from inflation and ecnomic growth, thus forcing the state to implement harsh tax measures and eliminate tax expenditure.

Already, the Government has ceased the issuance of discretionary waivers on December 1 and Shaw yesterday said taht “in implementing the programme of tax reform we are going to review and streamline the complex

structure of tax incentives and tax concessions, some of which date back to a long distant era whose circumstances no longer exist”.

Estimates have the Government giving up 50-60 cents for every dollar it collects on international trade through relief on duty and GCT at the ports, which equivalent to more $20 billion that it would have given up over the seven months to October 2009. Furthermore, tax incentives were estimated in 2003 to be equivalent to nearly 40 per cent of corporate income tax — equivalent to $4 billion over the same seven-month period.

Some business leaders expressed disappointment at yesterday announcements.

“Initially, it’s a dissapointment that the tax package doesn’t seem to have been housed in the context of any major tax reform and that is something that the private sector generally, and certainly the JCC in particular, has been pushing for,” said Milton Samuda, president of the Jamaica Chamber of Commerce (JCC). “We would have hoped that you’d of seen, in the unvailing of the tax package, some sort of direction towards tax reform.”

Samuda said after it analyses the package as a group, the JCC will “definitely” be speaking with the government “…about the road to tax reform”.

Even then, runaway debt — now at over 130 per cent of GDP or $1.3 trillion — is imposing a huge cost on the Government’s coffers. Interest cost will have to be dragged down drastically just to keep interest cost flat and reducing interest cost will require a very strong debt management strategy.

Neither the Prime Minister nor the finance minister in parliament yesterdaay said how the Government would would achieve this.

But the IMF also requires that Government increase its primary surplus — the difference betwee revenue and nonn-debt expenditure — to between seven to nine per cent by 2014. Achieving this also proves difficult.

As a percentage of GDP, Jamaica’s primary surplus has gradually declined from 11.9 per cent in the 2004/2005 fiscal year to 8.2 per cent in 2007/2008. Furthermore, the central government reported a primary surplus of 4.5 per cent last fiscal year.

This fiscal year, the Government is likely to make a primary surplus of around five per cent of GDP.

Golding announced that it would at the very least cap the wage bill at $125 billion as he said there was “no space for wage increases over the next two years”.

But programmes are susceptible to inflation while the Government is probably running at the minimum amount of capital projects it can undertake.