LETTER TO JAMAICA - Focus on collection of existing tax liabilities, says former BoJ head
published: Monday | April 24, 2006

1969: INSURANCE TALK: Mr. Horace Barber, deputy financial secretary, speaking at the monthly luncheon meeting of the Corporation of Insurance Brokers at the Courtleight Manor Hotel in Kingston.

Dear Jamaica,

YOU ENTERED the second half of the first decade of the 21st century with some pleasing positive features. Economic growth averaged 1.2 per cent per annum, cautioned by a per capita real GDP rate lower, on average, than in the nineties; inflation has settled in low double digits; interest rates are at levels more appropriate to production; the manufacturing - construction/installation - and distributive sectors seem to be in a recovery stage; and the unemployment rate has declined.

This suggests adjustment to the consequences of the extreme policy decisions of the 90s: a 'cold turkey' exchange rate mechanism with associated high double digit inflation, a very tight monetary policy aimed at correcting the inflation consequence, and the financial sector 'fall out' from applied monetary/interest rate action.

It appears that monetary and fiscal policy adopted, with some measure of success, a neutral stance during 2001-2004. Unless unexpected factors arise e.g. inappropriate inflation movements, such an approach should continue as sustained growth does require a shift of resources to productive sector activity and the creation of jobs.

SECTOR PERFORMANCE

My forecast of sector performance for 2005 and projections for the period 2006/07, suggest GDP growth averaging 2.2 per cent per annum, compared to 1.2 per cent per annum for the previous five years.

This brings the pace of real per capita growth in line with the average rate for the nineties. The table above presents the picture:

THE BUDGET

Budget neutrality and consolidation, which was the theme for financial year 2005 but not fully achieved, should continue through financial year 2006 and 2007. This implies living within current resources, including 'draw downs'from outstanding liabilities.

Incremental borrowing for current consumption and even asset creation, would worsen the existing situation of an interest 'drag' on the economy (external interest at around 4.5 per cent of GDP) and allocable budget resources.

Also, it would divert domestic financial resources from productive sector activities.

Tax flows are a function of economic activity, account for 85 per cent of current resources, and display a regressive characteristic as over 50 per cent is indirect and consumption based.

While there is some room for tax adjustment/reform, this should not be a priority in the short term. Instead, the focus should be on the collection of existing tax liabilities and correcting, as necessary, the negative impact of external factors such as oil prices. Certainly, additional taxation should not be a choice.

Expenditure policy must be the main weapon in a budget neutrality and consolidation exercise - especially as it relates to current programmes.

However, the options seem limited as interest servicing is 43 per cent of resources while programmes (current/capital) are 57 per cent.

Nevertheless, expenditure priorities should be re-evaluated, programme cost effectiveness measured, programmes closed out as necessary, and the existing structure of government overhauled.

In addition, a growing economy requires infrastructure support (schools, hospitals, roads, water, etc.) which only a government can provide and borrowing should not be the main financial source.

Some equity in the form of public sector saving is negative and has been so for many fiscal years. The suggested period of budget neutrality and consolidation, associated with the appropriate yet difficult decisions, should provide the space to develop appropriate public sector saving flows.

Finally, it is important that the Government recognises the critical role of fiscal affairs and the budget, in the effort to achieve sustained growth and optimum employment opportunities for the work force. I look forward to the forthcoming budget presentation.

With best wishes,

HORACE BARBER

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GDP forecast 2005 and projection 2006/7 $Jm

	2004			2005				2006	2007
Agriculture/For/Fsh	13,167			12,772				13,538	14,241
Mining and quarrying	13,687			14,029				14,310	14,596
Manufacturing	32,715			33,205				33,537	33,872
Construction and Ins.	23,343			24,160				24,643	24,890
Electricity and water	9,454			9,927				10,224	10,532
Distribution	51,923			52,183				54,791	57,531
Trans/sto./com.	32,973			33,962				34,641	34,988
Financial services	19,640			19,786				19,983	20,183
Real estate. etc.	12,193			12,376				12,499	12,624
Govt. Services	23,493			23,493				23,493	23,493
Hotels and mis. services	21,050			21,681				22,356	23,003
TOTAL		253,589			257,574			264,015	269,952
Less imputed serv. charge	15,794			16,134				16,295	16,458
Real GDP		237,615			241,440			247,720	253,484
Growth rate (%)			1.2			1.6		2.6	2.3
Nominal GDP	475,350			482,880			495,440		506,568

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