THE Bank of Jamaica (BOJ) has indicated that an increase in the income tax threshold for individuals at this time will make its fight against inflation much harder, but added that depending on how and when it is implemented, the impact could be negligible.

Governor Richard Byles outlined the forecast while responding to queries about the expected impact of the promise by the Government and the Opposition in the ongoing election campaign to increase the income tax threshold from the current level of $1.5 million per year.

The Government said it is exploring an increase in the income tax threshold dubbing it 1.5 (2.0), playing on the use of “1.5” but not saying what level the threshold will be increased to. The Opposition has proposed increasing the income tax threshold to $3 million per year. Neither has said how it will be funded.

Still, while not having details on the level of the increase to be expected, the BOJ governor said the central bank has already taken the proposal into consideration, and especially how its implementation could impact inflation.

“We haven’t modelled the increase in the tax threshold, but it depends a lot on how much and it depends also on when it occurs. But what that [an increase in the income tax threshold] does generally is reverse taxation. You [consumers would] now have more purchasing power, which is really more fuel for inflation,” Byles said.

He, however, acknowledges that much will depend on how the increase in the income tax threshold is financed and accommodated within the overall government spending.

When the income tax threshold was increased to $1.5 million in two phases — the first phase on July 1, 2016 increased the tax threshold to $1,000,272 from $592,800 and the second phase was implemented on April 1, 2017 moving the threshold up to $1.5 million — the Government implemented taxes amounting to $26.7 billion to pay for it.

The taxes were implemented on a number of items ranging from an increase in the special consumption tax on petrol, the introduction of a tax on liquefied natural gas used chiefly to generate electricity, broadening of the number of households paying GCT on electricity bills by reducing the consumption threshold for the tax from 350kWh per month to 150kWh per month, an increase in the income tax rate for those earning over $6 million per annum, higher taxes for tobacco products, reimposition of the withholding tax on general insurance premiums, increased motor vehicle fees and an increase in the departure tax and denominating it in US dollars.

Byles said if the Government introduces countermeasures to the proposed increase in the income tax threshold, such as adjusting indirect taxes, similar to what was done with the $1.5 million tax threshold, then it should have minimal impact.

There has been no increase in any tax measure since the 2017/17 fiscal year. Then finance minister Audley Shaw at the time of increasing the threshold to $1.5 million, said 397,083 individuals would no longer pay the tax. Just before the increase in the threshold, 469,131 employees were registered on the PAYE tax roll. From Shaw’s indication then, only 72,038 workers were left paying income tax which at the time suggested that 94 per cent of Jamaica’s employed labour force was not paying personal income tax. In the last fiscal year, the Government collected $105 billion from personal income tax. Up to the end of December, the flow from the revenue source was $95 billion, which suggests that last years total will be exceeded by the time the final figures for the current fiscal year are published at the end of April.

That aside, the governor also said that the Government’s attempt to cushion the impact of fare increases on overall inflation is expected to be far less than previously forecast.

The Government granted an increase in the fares to operators of privately owned public passenger vehicles (PPVs), but later announced that it would slash fares charged for those travelling on the State-owned Jamaica Urban Transit Company (JUTC) to cushion the impact on inflation.

The first phase was implemented on January 1, with a cut in the regular fare from $100 to $70, with the fare for children moving from $30 to $25, and for pensioners from $40 to $30. Additionally, effective April 1, 2024, there will be a further lowering of the regular fare from $70 to $50, from $25 to $20 for children, while the fare for pensioners will be reduced from $30 to $25.

Given those numbers, the central bank first said its forecast was that it would have a significant impact on inflation, reducing the headline figures by 2 per cent. But now, Byles said those forecasts were way out of line.

“We had estimated that the announced measure would have had a material impact on tempering the inflationary pressures of the PPV fare increases. Inflation was consequently projected to generally remain within the target range, except for December 2023 and a few months in 2024.

“Upon review, the bank now recognises that it had overestimated the impact of the reductions in JUTC fares. The two-phase reduction is now estimated to have offsetting impact of only 0.2 percentage points on annual inflation, with the first reduction already evident in the CPI data for January 2024,” Byles pointed out.

The inflation out-turn at January was higher than the bank had projected in November 2023. Last week, the Statistical Institute of Jamaica (Statin) reported annual inflation at 7.4 per cent for January 2024, higher than the out-turns for the previous three months, and above the BOJ’s target range of 4 to 6 per cent.

The BOJ said that notwithstanding the “welcomed and offsetting reduction” in JUTC fares, the higher than forecast headline inflation at January largely reflected the impact of the increase in PPV fares as well as the effect of the wage increases throughout the economy. It was the reason behind policy rates being kept at 7 per cent with a warning that it could be increased if inflation continues to raise its ugly head.

Inflation is now projected to fall back within the prescribed target range in June 2025, six more months than was previously forecast by the BOJ. Until then, Jamaica is expected to report as much as 7 per cent in headline inflation.