With the IMF Standby Arrangement seemingly unraveling, poverty and unemployment on the rise, necessary pension and tax reforms yet to take place, a debt mountain of J$1.5 trillion and a debt to GDP ratio rising to above 130 per cent it is imperative that the necessary structural reforms must be implemented expeditiously regardless of which political party wins the next general election in Jamaica.

Sticking to the plan

Speaking with Caribbean Business Report earlier this week from JMMB’s headquarters on Haughton Avenue, Kingston, Group CEO Keith Duncan said: “The IMF medium term plan requires that we come up with a credible plan which involves the implementation of tax reform, public sector rationalization and pension reform. These reforms have been outstanding for decades and over the years we have had many papers and Committees put forward solutions. The Matalon Report, the Orane Report and the list goes on. But successful political regimes have not been able to implement them due to lack of political will, organised resistance by the opposition to these reforms and losing sight of what is important choosing instead to score political points. It is very clear that we have not used the window of opportunity to implement these necessary structural reforms.

“One can speculate that these reforms have been long outstanding because we lack the political will as they would be hard to swallow in the short term but in the medium and long term would stimulate growth in the economy. We shouldn’t have to wait for the IMF to give us an ultimatum,we should do what’s right.”

Duncan notes that as the implementation and execution of the required reforms lagged so has Jamaica’s fiscal worries become even more challenging and its economy become less competitive. Even more disturbing is Jamaica’s marginal growth over the last 25 years which has seen many other Caribbean countries outperform what ought to be one of the leading lights in the region.

“The reason we find ourselves in this present predicament is because we are not taking the hard decisions and executing what needs to happen to position us for growth. Whether the PNP or the JLP gets in power, tax reform, pension reform and public rationalization needs to happen. If they don’t happen then our debt dynamic situation will get worse so to will our primary ratio surplus and our debt to GDP ratio. We are at a point where we cannot afford to allow this to happen.

If we do allow such a situation to happen what will occur is declining confidence in Jamaica’s financial markets similar to what happened in Greece. Also we will see an increase in financing the widening debt,” said JMMB’s CEO.

The situation with Italy underscores his point. Under the leadership of Silvio Berlusconi, Italy’s borrowing costs have soared to unsustainable levels. Rates for the Italian government to borrow money is now at 7 per cent, that’s almost four times that of the UK. Italy will now need a bailout from the multilateral agencies or the European Union.

A level of stability

Duncan however is not all doom and gloom. Unlike some European countries he believes that Jamaica can come through this period if it exhibits the will to do so.

In support of his assertion, he notes: “Over the last three years we have been able to achieve a level of stability. Interest rates are at historic low levels, inflation is trending down, the currency has not dramatically fluctuated and we have reserves close to US$3 billion. This is all good and sets us up well for the future. But that window that we had is now closing on us therefore we need to move a little more quickly. Whoever wins the next general election must realise that if they fail to implement the necessary changes it will be to the detriment of the country.

As it stands now we have one of the most inefficient tax structures in the world. The World Bank ranks as at 172 out of 188 countries in ease of paying taxes.. Our tax system is archaic. Now this is a perverse situation because one would think that a country that is struggling for tax revenues, yet it is so difficult for people to pay taxes. So from a revenue perspective we make it difficult and in doing so hurt our economy and prevent it from growing.”

So where do we begin?

The way Duncan sees it a good place would be to make the size of government smaller, increase our primary surplus and become revenue positive. He also sees it as vitally important that any future administration quickly moves to lift exemptions on GCT exempt items.

” Many people say this will impact the poor but those who benefit more from those exemptions are in fact the more wealthier people because they are buying the goods and services with the exemptions. If the average Jamaican can buy two tins of corned beef and the more well off Jamaican buys ten tins but gets the exemption you see the anomaly. What is needed therefore is a more targeted approach.

“What we see is talk of tax reform and removing exemptions in an environment where poverty levels are growing. That means that you have to have a direct taxation method that sees savings passed on to those who are impacted. One cannot get away from some kind of income redistribution. Those who are more affluent and can pay more should pay more. Those on the lower rungs of the ladder and who are marginalised obviously they need some protection. In essence the tax reform measures have to be characterised by fairness,” said the JMMB boss.Tax reforms must be fair and the burden sharedPart II next week.

He firmly believes that the private sector will now have to bear some of this revenue positiveness needed from the above mentioned reforms. In other words these tax reforms have to bring in billions of dollars and that means a targeted approach which will see some income redistribution. The fact remains that from a compliance perspective whichever party assumes power, they will have to get people paying their taxes. Corporates need to pay their taxes and there can be no exceptions or machinations that sees them avoiding doing so. As it presently pertains in Jamaica there is a point where it is cheaper to avoid paying the tax than pay it. He sees it as vital that the country arrives at a situation where it reduces income tax so that it is cheaper to pay the tax than to avoid it. In other words, reduce the corporate tax, raise the compliance and so bring in more revenue. As far as taxes are concerned it must be seen to be fair and that the burden shared. The tax reforms must be done within a growth oriented plan.