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Job cuts won't be enough to satisfy IMF
BY CAMILO THAME Business Co-ordinator [email protected]
Wednesday, October 14, 2009
The International Monetary Fund (IMF) has, over the last five years, been campaigning for the Jamaican Government to implement reform measures which, among other things, would eliminate tax exemptions and incentives that may have cost the state more than $150 billion in revenue this year alone.
And even while the multilateral lending agency has called for rationalisation of the public sector that would invariably lead to job cuts, slashing staff will not be enough to close a $50-billion shortfall in primary balance that the Government will likely need to achieve to satisfy the IMF.
The Government still has not demonstrated how it will meet the IMF's criteria that give it access to a US$1.2 billion stand-by agreement, but what is clear is that the lending agency will demand structural reform.
The IMF changed its approach to lending in May this year, having discontinued structural performance criteria for all loan programmes. The fund, however, still insists that "structural reforms will continue to be part of IMF-supported programmes, but only when they are seen as critical to a country's recovery".
According to its website, countries gaining access to future loan tranches will still depend on the IMF's Executive Board determining that "the country is successfully implementing the policies that have been agreed, and that programme objectives are being met".
By Edward Seaga's reckoning, the Government will have little say in what those objectives are.
"Governments like to boast that they formulate plans and give them to the IMF," the former prime minister of Jamaica said at the Observer's Monday Exchange meeting of reporters and editors this week. "That's not true. At best the plans are formulated between the IMF and the government and when it is all over the IMF tells (them) 'write it up and put your signature'."
Seaga had significant experience with the IMF in the 1980s - a period when the term "structural adjustment" became known to Jamaicans as a pejorative - after he had to go to the fund when faced with insufficient reserves.
Then, the Government had to cut 27,300 jobs from the 100,000 employed by the state.
Now, the Government is facing large, persistent fiscal deficits, low revenue growth and little room to contain cost. The result - a bourgeoning debt that annually costs the Government more than it earns.
For years, the IMF has contended that for the Jamaican Government to reduce the public debt/GDP ratio to about 100 per cent of GDP it would have to run primary surpluses - the difference between revenue and non-debt expenditure - consistently at double-digit percentages of GDP.
As a percentage of GDP, however, 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 and expects to see improvement to 7.3 per cent this year.
But the Government has already identified $16 billion more needed to pay teachers and nurses alone and may be hard-pressed to impose another wage freeze next year. Other costs will rise by at least the 10-12 per cent inflation projected for the current fiscal year.
Interest payments - projected at $175 billion for the current fiscal year - will hardly go down, given that only a third of existing public sector debt will see any significant reduction in interest costs going into the next fiscal year, which begins April 1, 2010 while debt continues to climb.
High deficits and devaluation late last year and at the beginning of 2009 helped push up public sector debt as a proportion of GDP, from 108 per cent at the end of March 31, 2008 to 115.8 per cent at the beginning of the current fiscal year.
The fiscal deficit for the fiscal year to August 31 stood at $60 billion, which means that another $35 billion minimum will be added to the total debt to meet revenue shortfall, which will move debt to GDP past 120 per cent, or well past $1.3 trillion by March 31, 2010.
Ultimately, increasing that primary surplus to double-digit percentages will require the Government to increase revenue by more than four per cent of GDP, or close to $50 billion next year.
Finance Minister Audley Shaw said that tax reform next year will be aimed at improving compliance, broadening the tax base, reducing the level of incentives and relieving provisions with respect to various tax codes, amalgamation of payroll deductions, rationalisation of public bodies, which can be a major drain on the GOJ budget through divestment mergers, restructuring and some closures.
However, he did not make clear how the Government intends to significantly improve revenues.
The IMF's own view of tax reform can be seen in its article IV consultation reports over the years.
At least from 2004, the IMF mission has been calling on the Government to identify policies to close Jamaica's fiscal gap.
The following year, it went as far as to say the Government should implement measures including "an expansion of the special consumption tax on motor vehicles and adjustments to other specific rates that have been eroded by inflation. (and) removing exemptions and preferences."
In 2007, it went even further to say "fundamental expenditure reforms are generally more durable over the long term but realising savings from public employment reform will take time", adding that it "saw scope, over the short-term to rely on revenue measures to reduce exempted items from the General Consumption Tax (GCT), retire or substantially eliminate discretionary exemptions for imports and raise specific taxes eroded by inflation".
According to the report of the tax reform committee led by Joseph Matalon - now called the Matalon Report and which is used as a working paper by finance ministry officials in addressing tax reform - the Government gives up the equivalent of 60 per cent of its tax dollars through exemptions and incentives, or at least that was so in 2003.
This fiscal year, that would equate to over $150 billion, but there are several underlying issues that limit Government from making sweeping changes along those lines.
Aside from the special case of incentives that are afforded to sectors and entities that would otherwise be uncompetitive, removing GCT exemptions and zero-ratings negatively impact consumers, many of whom are already overtaxed.
For instance, electricity is still exempted from GCT and the Government could raise over $5 billion if it is applied on energy rates next year. JPS is expected to earn $32 billion in non-fuel revenue over the next 12 months.
The Government already demonstrated in April that it would not test consumer reaction when new taxes are applied to everyday commodities when it rolled back GCT on printed material and certain food items.
Trying to capture tax dodgers in its nets could yield significant revenue gains.
The Matalon committee estimated that individual income tax revenues could be at least 50 per cent higher if the self-employed were fully compliant. That would have led to $32 billion more this year.
But getting unregistered taxpayers to comply is extremely difficult, and the IMF has already described as 'overly optimistic' any projections made by the Government to increase tax collection through compliance in any significant way.
Between 2006 and 2008, tax authorities increased revenue from collecting back taxes each year by an average of one per cent of GDP, but the stock of tax arrears actually climbed from four-and-a-half per cent of GDP to six per cent by mid-2008.
Some of the revenue measures suggested by the Matalon report and the IMF have already been implemented.
GCT was increased by 1.5 percentage points in 2005, and this year exemptions on computers and relief to allowances on rent were removed. In addition, a special consumption tax of 8.75 per litre was applied to gas, among other things.
The majority of GCT exemptions and incentives remain, however.
BY CAMILO THAME Business Co-ordinator [email protected]
Wednesday, October 14, 2009
The International Monetary Fund (IMF) has, over the last five years, been campaigning for the Jamaican Government to implement reform measures which, among other things, would eliminate tax exemptions and incentives that may have cost the state more than $150 billion in revenue this year alone.
And even while the multilateral lending agency has called for rationalisation of the public sector that would invariably lead to job cuts, slashing staff will not be enough to close a $50-billion shortfall in primary balance that the Government will likely need to achieve to satisfy the IMF.
The Government still has not demonstrated how it will meet the IMF's criteria that give it access to a US$1.2 billion stand-by agreement, but what is clear is that the lending agency will demand structural reform.
The IMF changed its approach to lending in May this year, having discontinued structural performance criteria for all loan programmes. The fund, however, still insists that "structural reforms will continue to be part of IMF-supported programmes, but only when they are seen as critical to a country's recovery".
According to its website, countries gaining access to future loan tranches will still depend on the IMF's Executive Board determining that "the country is successfully implementing the policies that have been agreed, and that programme objectives are being met".
By Edward Seaga's reckoning, the Government will have little say in what those objectives are.
"Governments like to boast that they formulate plans and give them to the IMF," the former prime minister of Jamaica said at the Observer's Monday Exchange meeting of reporters and editors this week. "That's not true. At best the plans are formulated between the IMF and the government and when it is all over the IMF tells (them) 'write it up and put your signature'."
Seaga had significant experience with the IMF in the 1980s - a period when the term "structural adjustment" became known to Jamaicans as a pejorative - after he had to go to the fund when faced with insufficient reserves.
Then, the Government had to cut 27,300 jobs from the 100,000 employed by the state.
Now, the Government is facing large, persistent fiscal deficits, low revenue growth and little room to contain cost. The result - a bourgeoning debt that annually costs the Government more than it earns.
For years, the IMF has contended that for the Jamaican Government to reduce the public debt/GDP ratio to about 100 per cent of GDP it would have to run primary surpluses - the difference between revenue and non-debt expenditure - consistently at double-digit percentages of GDP.
As a percentage of GDP, however, 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 and expects to see improvement to 7.3 per cent this year.
But the Government has already identified $16 billion more needed to pay teachers and nurses alone and may be hard-pressed to impose another wage freeze next year. Other costs will rise by at least the 10-12 per cent inflation projected for the current fiscal year.
Interest payments - projected at $175 billion for the current fiscal year - will hardly go down, given that only a third of existing public sector debt will see any significant reduction in interest costs going into the next fiscal year, which begins April 1, 2010 while debt continues to climb.
High deficits and devaluation late last year and at the beginning of 2009 helped push up public sector debt as a proportion of GDP, from 108 per cent at the end of March 31, 2008 to 115.8 per cent at the beginning of the current fiscal year.
The fiscal deficit for the fiscal year to August 31 stood at $60 billion, which means that another $35 billion minimum will be added to the total debt to meet revenue shortfall, which will move debt to GDP past 120 per cent, or well past $1.3 trillion by March 31, 2010.
Ultimately, increasing that primary surplus to double-digit percentages will require the Government to increase revenue by more than four per cent of GDP, or close to $50 billion next year.
Finance Minister Audley Shaw said that tax reform next year will be aimed at improving compliance, broadening the tax base, reducing the level of incentives and relieving provisions with respect to various tax codes, amalgamation of payroll deductions, rationalisation of public bodies, which can be a major drain on the GOJ budget through divestment mergers, restructuring and some closures.
However, he did not make clear how the Government intends to significantly improve revenues.
The IMF's own view of tax reform can be seen in its article IV consultation reports over the years.
At least from 2004, the IMF mission has been calling on the Government to identify policies to close Jamaica's fiscal gap.
The following year, it went as far as to say the Government should implement measures including "an expansion of the special consumption tax on motor vehicles and adjustments to other specific rates that have been eroded by inflation. (and) removing exemptions and preferences."
In 2007, it went even further to say "fundamental expenditure reforms are generally more durable over the long term but realising savings from public employment reform will take time", adding that it "saw scope, over the short-term to rely on revenue measures to reduce exempted items from the General Consumption Tax (GCT), retire or substantially eliminate discretionary exemptions for imports and raise specific taxes eroded by inflation".
According to the report of the tax reform committee led by Joseph Matalon - now called the Matalon Report and which is used as a working paper by finance ministry officials in addressing tax reform - the Government gives up the equivalent of 60 per cent of its tax dollars through exemptions and incentives, or at least that was so in 2003.
This fiscal year, that would equate to over $150 billion, but there are several underlying issues that limit Government from making sweeping changes along those lines.
Aside from the special case of incentives that are afforded to sectors and entities that would otherwise be uncompetitive, removing GCT exemptions and zero-ratings negatively impact consumers, many of whom are already overtaxed.
For instance, electricity is still exempted from GCT and the Government could raise over $5 billion if it is applied on energy rates next year. JPS is expected to earn $32 billion in non-fuel revenue over the next 12 months.
The Government already demonstrated in April that it would not test consumer reaction when new taxes are applied to everyday commodities when it rolled back GCT on printed material and certain food items.
Trying to capture tax dodgers in its nets could yield significant revenue gains.
The Matalon committee estimated that individual income tax revenues could be at least 50 per cent higher if the self-employed were fully compliant. That would have led to $32 billion more this year.
But getting unregistered taxpayers to comply is extremely difficult, and the IMF has already described as 'overly optimistic' any projections made by the Government to increase tax collection through compliance in any significant way.
Between 2006 and 2008, tax authorities increased revenue from collecting back taxes each year by an average of one per cent of GDP, but the stock of tax arrears actually climbed from four-and-a-half per cent of GDP to six per cent by mid-2008.
Some of the revenue measures suggested by the Matalon report and the IMF have already been implemented.
GCT was increased by 1.5 percentage points in 2005, and this year exemptions on computers and relief to allowances on rent were removed. In addition, a special consumption tax of 8.75 per litre was applied to gas, among other things.
The majority of GCT exemptions and incentives remain, however.