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Audley Shaw's contribution to Jamaica's 2013-2014 budget debate

A Brief Fact Check
Mr. Speaker, when the Minister of Finance started his presentation last Thursday, he promptly reminded the nation that when his government left office in 2007, debt was 107 percent of GDP versus 130 percent by the end of 2011.
 
What the Minister did not remind you of was that the national debt increased for a variety of reasons including legacy debt which had to be taken on board from the previous administration.
 
These include deferred financing arrangements from the previous government and we disposed of loss-making entities like Air Jamaica and the Sugar Company of Jamaica and had to bring remaining liabilities on to the books.  Other liabilities included the World Cup Cricket and the Central Waste Water Treatment plant to name just a few. 
 
The Minister did not remind you that the 128 percent debt to GDP ratio that his government took in 2011 is now past 140 percent,[1] in less than one-and-a-half-years since this government has been in power.
 
The Minister did not remind the Jamaican people that during 2008 to 2009, the world suffered the most devastating financial meltdown and a crushing global economic decline followed. He did not remind the people of Jamaica that during his government’s 18 years in power, they did very little to reshape the Jamaican economy in order to help it cushion external shocks.
 
The Minister did not remind Jamaicans that for the entire period since independence to 2011, while Jamaica's GDP growth averaged 0.7 per cent[2] during which time the JLP government is consistently associated with strong periods of economic growth in the 1960s and 1980s in excess of 6 percent, and each time the JLP has handed over the government to the PNP, including 2011, it has left an economy on a path of restoration and growth.
 
In fact, an interesting footnote is that since 1972 the dollar has devalued from US$1:J$1 to almost J$100:US$1 today, and the PNP is responsible for $80.00 of this devaluation with the JLP responsible for $20.00.
 
Where is Jamaica’s economic growth now?  Negative 0.3 percent at the end of 2012 according to STATIN, five (5) times worse than when the Jamaica Labour Party left it. 
 
Now is really the time to restore hope as you said in your presentation Minister.
 
It is indeed the time to restore hope to the Jamaican people, rather than speaking half-truths. 
 
And the mother of all half-truths is the one the Minister of Finance told this Parliament and the Jamaican people, that there are “no new taxes in this Budget.”
 
Minister, I have to agree with the cartoonist, “You are better than Brer Anancy.”
 
When in February of this year, in Nicodemus-like fashion, the Minister slapped on an additional $15.9 billion of taxes on the Jamaican people, most of which started on April 1, the beginning of this budget year, what do you call that Minister?  “No new taxes in this Budget?”
 
When the Jamaica Labour Party did the JDX, the then Opposition said “the Debt-Exchange Programme would transfer about 3.5 percent of Gross Domestic Product (GDP) from private households, representing sums that would have been due to them during the fiscal year and that ‘It is the same as a tax package’. [3]
 
What do you call the NDX now?  What do you call the two NDX programmes now?  Transfers or TAX PACKAGES?
 
So when you have to pay more property taxes, more taxes on telephone calls and phone cards, more GCT on the fees and taxes for the goods at the ports and to collect your barrels at Christmas time, more taxes on dividends, more asset taxes if you have a business, more for education tax, more stamp duty and transfer tax on real estate transactions in this current budget period, what do you call those Minister?
 
Are all these not new taxes in this Budget?
 
You are better than Brer Anancy.
 
 
2.      THE STATE OF THE NATION
Mr. Speaker, what is the background of this Budget Debate?
 
The PNP Government inherited a stable economy in January 2012, in which for the first time in a long time, all the major macroeconomic indices were simultaneously pointed in a positive direction.
 
-          The Net International Reserves stood at US$2.0 billion with gross foreign exchange reserves at US$2.8 billion.
 
-          The exchange rate was stable for over 2 years, at J$86:US$1.00
 
-          Inflation was in the 6 percent range
 
-          Interest rates – a key driver of new investments large and small – had reached single digit, with mortgage companies competing in single digit rates
 
-          Confidence had returned among key stakeholders
 
-          We left in place a blueprint for real reforms to taxation, pension and the public sector with the tabling and commencement of parliamentary review of Green Papers and a report of the Public Sector Transformation Unit (PSTU).
 
-          Not surprisingly the economy, after the ravages of the global financial meltdown grew by 1.5 percent in 2011.
 
-          Jobs were being created again from the expansion of the economy.
 
Mr. Speaker, this is what was left in place.
 
And let me state without any fear of contradiction that this stability was in place, despite the global recession, the massive increase in oil prices never seen since the 1970’s;  the massive decrease in our bauxite revenue – only comparable to the 1980’s; and, despite the lack of IMF reviews under the previous Standby Agreement for several quarters.
 
And let me repeat, this lack of review was not due to any fundamental disagreement with the IMF – except on the issue of the pace of adjustment of major structural reforms as well as our decision to honour a contractual commitment to pay arrears to public sector workers – a decision we do not regret.
 
Indeed, the sister multilateral institutions, as late as November 2011 were sufficiently satisfied with the progress of the JLP government and signed off on US$318.0 million in development policy and project loans (water, energy and tax administration) from the World Bank and the IDB, respectively.
 
Mr. Speaker, this is the background that was left.  It is the indisputable, irrefutable and incontrovertible truth.
 
Let me make it clear that the Opposition rejects without hesitation or equivocation, the politically charged assertion of the Minister, that when he took over “Jamaica was drifting on a sea of hopelessness and despair”. 
 
Mr. Speaker, nobody either inside or outside of this House, believes such ridiculous statement.
 
But where are we today?  Here is where the Minister’s words really fit.  Sixteen (16) months after this government took over the reins of leadership with promises of a rapid IMF Agreement, abandonment of chicken back and steak and oxtail in abundance.
 
-          The Net International Reserves has declined to less than the benchmark 12 weeks of imports, standing at US$884.0 million the lowest level in over 11 years. 
 
-          The exchange rate has slipped precipitously close to J$100.00 to US$1.00 with the re-emergence of a virulent Black Market for foreign exchange which is trading informally at between $105 and $110, and pricing now being done at higher levels.  Some companies are quietly cutting staff as they are unable to get foreign exchange to purchase raw materials.
 
-          In consequence, prices have moved to new and unprecedented atmospheric heights, with the price of basic foods increasing at an alarming rate, much higher than the officially stated average inflation rate.  Basic foods prices have increased by a range of 20-60 percent over the past 16 months.  Chicken back flew from $40 to $80 per pound, and a 2-pound loaf of bread has increased by $85 from $180 to $265.  A whole chicken costing $700 is now a luxury for many.
 
 
 
 
 
 
 
 
 
PRICE LIST

Item 2011   2013 Nominal Increase Percentage Change
  Prices   Prices    
Corned beef      (340 gram) $180   $306 $106 70.0
Lasco W Milk      (80 gram) $90.72   $110 $19.28 21.3
Betty Milk          (395 gram) $156   $190 $34 21.8
Pampers  Pack with 3  (Retailed)  $70   $120 $50 71.4
Banana chips $30   $40 $10 33.3
Swizzle drink $35   $45 $10 28.6
Sweet biscuits $12   $20 $8 66.7
Bread  (2lbs) $180   $265 $85 47.2
Chicken mixed Parts  (per lb) $140   $185 $45 32.1
Lider cooking oil     (500 ml) $150   $180 $30 20.0
Brown sugar    (per lb) $45   $55 $10 22.2
Rice    (per lb) $35   $50 $15 42.9
Flour (per lb) $35   $50 $15 42.9
Refined Cornmeal  (per lb) $50   $65 $15 30.0
Gas Pro  (25 lbs) $1,800   $2,400 $600 33.3
IGL  cooking gas (25 lbs) $1,700   $2,300 $600 35.3
IGL     “            “  (100 lbs ) $6,000   $8,000 $2,000 33.3

 
 
-          Mr. Speaker, people are suffering in Jamaica today.  Fathers and mothers are struggling to keep food on the table and send their children to school.  Farmers are trying their best with high prices for inputs, unpredictable weather and low prices for their produce and the Taxi man can’t make ends meet.  His expenses are:
                  Earns /day       $6,000
                  Gas                  $3,500
                  Owner’s fee      $2,000
                  Take home       $500
 
-          The value of grants to PATH beneficiaries is shrinking with devaluation.  People are hurting and reeling from punishing price increases from downtown to uptown.  These punishing price increases across all sectors is marginalising the middle and working class and making the poorest of the poor more poor.
 
-          Interest rates are beginning to point in the wrong direction again, threatening the stability of the real estate market and the opportunities from small business expansion.  This is after we brought interest rates to the lowest period it has been for over 20 years.
 
-          The unemployment rate is rising again.  The unemployment rate was 13.7 percent at the end of October 2012 versus 13 percent when the Jamaica Labour Party left office. This is moving in the wrong direction despite this government’s promise of JEEP. The unemployment rate among young people was 35.3 percent in October 2012, 4.2 percentage points higher than the 31.1 percent reported for October 2011.
 
-          And for the 5 consecutive quarters that this Government has been in charge, the economy has declined in every quarter.
 
-          Not surprisingly, business confidence fell in the December quarter last year to its lowest in four years.
 
-          The Jamaica Conference Board said that in the December quarter “Consumer confidence remained flat when compared with the previous quarter, but was less buoyant than before, having discarded the optimism they expressed at the top of the year following a change of government.”
 
Some say that the IMF might be too little, too late.
 
-          Too little as there could be a negative outflow of funds to the IMF in the near term, and too late because the other multilateral flows may not be at a sufficiently rapid pace to adequately augment the decline in the NIR.  This is so as the IDB and the World Bank will require unique performance measures of their own to trigger loan disbursements.
 
-          In the meantime, ill-conceived taxation has been imposed without an informed framework, sharply increasing import fees, placing a burdensome 167 percent increase in property taxes on those who are tax compliant (which is likely to increase the delinquency rate), while re-imposing higher stamp duties and transfer taxes, corporate taxes, dividend taxes and assets taxes on businesses that would otherwise use these funds for expansion and job creation.
 
-          In consequence, consumer and business confidence is down, purchasing power of consumers is down, and the economy continues to decline.  Last year, we were told “it tun up till it bun up” now “it a dry up”
 
-          And while we boast that cutting the size of the Cabinet represents mere symbolism or “optics”, we can’t find money to send a little water to drought-stricken sections of the island while crops wither on the vine and rural folk are losing their livelihood.  That’s not “optics” that’s real people suffering!  The savings from the “optics” of a smaller Cabinet could truck water to suffering people.
 
-          There is no doubt that poverty has increased over the past 15 months.  The government must hasten the publication of the Jamaica Survey of Living Conditions, for which there has been no report since 2010.
 
 
3.      THE EXPENDITURE PROGRAMME
The government trumpets that the Expenditure Programme is reduced by $81.0 billion to $521.0 billion compared with the revised Budget for 2012/2013 of $602.0 billion.
 
This cut in expenditure of course is in part due to the deferment of debt payments to a future date under the NDX, with some $90.0 billion less being required to be rolled over this year compared with last year, and $10.0 billion less in interest payments compared with last year. By the way, the Finance Minister said that the NDX would save Jamaica $17 billion a year in interest costs.  What happened to the $7 billion difference Minister?
 
You are better than Brer Anancy.
 
In this Budget, we also saw where the public sector wage bill, despite a wage restraint agreement, moved from roughly $147.0 billion to approximately $158.0 billion. 
 
We did not hear this government talk much about efficiency gains in the government bureaucracy or concrete plans to make the government deliver business and social services in a more cost effective way. 
 
This appears to be a Budget to keep the inefficient government bureaucracy going, not one to facilitate growth.
 
The clear and present danger also is that the public sector will have less resources by way of programmes to discharge its duties during the fiscal year.  This will inevitably mean more contraction in the delivery of services.
 
And while in nominal terms, the non-debt side of the Capital Budget has been increased by some $6.3 billion -  the total of $44.7 billion represents a relatively paltry sum that can hardly be expected to be any significant driver of growth in the economy.
 
And it is therefore for this reason that the Opposition is concerned at the outrageous raid on the resources of the National Housing Trust which should be set aside to sharply ramp up the delivery of housing solutions, and thereby serve as a stimulus package to drive the construction industry, which is an important tool in spurring economic growth.
 
I will return to this subject in a discussion on options for stimulating growth in the economy later in this presentation.  I will show you how to find the fiscal space to use the NHT funds for the purposes for which it was intended.
 
Two (2) of the Ministries that can help to drive growth are the Ministries of Transport, Works and Housing and the Ministry of Agriculture.
 
In the case of the Works Ministry and despite the introduction of the new MIDP Programme, this Budget has only increased from $15.3 billion last year to $15.9 billion this year.  And in the Agriculture Ministry, this has seen a sharp cut from $3.310 billion last year to $2.879 billion this year, a cut of $431.0 million.
 
So where is the budget to support a growth agenda?
 
Rather, what we hear as a growth agenda is a few legacy projects left behind by us, such as, the North-South Highway and the Logistics Hub. These projects, while important to the economy, are not sufficient to secure a vibrant growth agenda. 
 
 
Selected Public Sector Entities -  Will Continue to Compromise the Budgetary Process
Mr. Speaker, since 2005 I have been speaking about the public bodies and their negative implication for the budgetary process. In 2010 we amended the Public Bodies Management and Accountability Act to establish a Fiscal Responsibility Programme in this regards. In summary, this means that the budgets for the Public Bodies now have to be approved by Parliament under a consolidation process, that is, at the same time as the Central Government budget.
 
Selected public bodies have increased our debt ratios significantly, in particular, at the time of privatisation. As you all know, and as the Minister of Finance has acknowledged, these institutions have increased the government’s stock of debt significantly in recent years. We have dealt with some giants, such as, Air Jamaica and Sugar Company of Jamaica. But we have remaining giants that now need to be dealt with.
 
1)      NHT – We are Still Concerned
Mr. Speaker, we have requested an Actuarial Review of the impact of the withdrawal of $11.5 billion per year for 4 years from the NHT. However, I would like to make some brief comments on this matter. Currently, the entity has a cash balance of $24.7 billion, including, investment in Government Securities of about $20 billion.
 
The planned aggressive outflow of cash from the NHT calls into question whether the NHT will have sufficient funds to pay $11.5 billion per year to the Government and still have sufficient funds to execute its capital programme of $45 billion for the same period.
 
Mr. Speaker, we have already stated our concern on this matter and here we are re-stating our concern again. The Minister needs to be clear as to whether the plan for the NHT is to sell any portion of its mortgage portfolio to fund the withdrawal of $11.5 billion given these projections.
 
2)      National Water Commission made $1.9 billion in losses in 2012/2013.  The NWC has an accumulated deficit of $19 billion, including Pension liabilities of $16.6 billion. Mr. Speaker, the Minister needs to advise us on the solutions. This can derail the Central Government plan for a Balanced Budget.
 
3)      CAP – This disaster created by the forward selling arrangement created by the then Minister of Finance is a matter of great concern.  It made losses of US$68 million in 2011/2012 and US$34 million in 2012/2013.  The accumulated deficit is now US$249 million and is projected to be US$269 million or $26.9 billion in 2013/2014. This madness cannot continue. What is the solution and when are we going to be presented with the solution?   And what is the status of the privatisation programme?
 
4)      JUTC – In 2011/2012 losses- $2 billion; 2012/2013 losses $1.5 billion; projected 2013/2014 $964 billion losses. Accumulated deficit 15.4 billion as at 2012/2013.
 
5)      NROCC – Losses in 2012/2013 - $6.2 billion.  Projected for 2013/2014 is$6.6 billion. Mr. Speaker, hear this, the accumulated deficit is now $35.5 billion and is projected for $42 billion in 2013/2014.
 
These entities with a combined accumulated deficit of over $100 billion can compromise the budgetary programme that we are now embarking on. We need to hear from government what are the solutions and when will these solutions be implemented.  If we do not manage these entities now, we will face PAIN again in the very near future.   Mr. Speaker the management and the eventual outcome of these entities will affect the CREDIBILITY OF THE MEDIUM PROGRAMME AGREED WITH THE IMF.

4.      THE REVENUE PROGRAMME
The Revenue and growth projected for FY2012/2013 was $361.3 billion, the outturn was $344.7 billion (-16.6/-4.6 percent) after a second tax package had to be imposed midstream of the Budget.
 
For this fiscal year, an ambitious target of $407.1 billion, representing an 18.1 percent increase (62.4B) over the actual outturn for FY 2012/2013, has been set.  This has of course been enhanced by the most barefaced and rapacious raid of people’s housing benefits – in effect a diversion of funds – while there exists an annual deficit of housing solutions for NHT contributors of 6,000 units.
 
It has also been enhanced by a raft of new taxation that when combined, are bound to militate against investment in plant and equipment and other job creating enterprises, and the real estate market. The Minister should be encouraging the sale of houses by reducing transaction taxes instead of increasing them.  The large-scale construction and sale of houses ought to be an important plank of any economic growth agenda.
 
The combination of increased import costs from collapsing all fees into the GCT base and introducing a new customs administrative fee while re-introducing higher corporate taxes, increase in Stamp Duties and Transfer tax, an assets tax and dividend taxes, will severely retard the productive sector from new investment and expansions.
 
Mr. Speaker, the introduction of a half-baked customs administration fee imposed in panic, has left mass confusion at Customs.  The President of the Customs Brokers’ Association has described the situation as “untidy” leaving everyone “in stress”.  And the shocking increase in import costs combined with the administrative bungling must be addressed by the Minister as a matter of the highest priority.  It’s a nightmare down there!
 
A ‘Bang Belly’ Economy
In this Expenditure and Revenue Programme, the Government has targeted a Primary Balance of 7.5 percent and virtually a Balanced Budget.  There are only two ways to achieve this:
 
(1)   Create the environment for large-scale investment that generates growth and revenue, or
 
(2)   Severely contract expenditure and impose high taxation which combined creates compression in the economy. 
 
The Government has chosen this latter route, with the addition of the raid on public sector entities as an added feature.
 
They are counting on this raiding of the surpluses in public sector bodies to achieve this.
 
In this fiscal year the Government is planning to take approximately $32 billion (gross transfers) from the public bodies in comparison with $26 billion in 2012/2013.  This is coming from $20 billion when we left Government in 2011.
 
The expenditure side of the public bodies are expected to decrease from approximately $300 billion in 2012/2013 to $280 billion in this fiscal year.  This will be the first time in over a decade that expenditure in Public Bodies will be reduced. 
 
This is a ‘bang belly’ theory of economics, where you don't use economic policy to drive economic growth by building muscle that in turn generates incremental returns from a well oiled economic engine, you instead rely on this raid and on ill-conceived revenue windows that themselves are hostile to investment and growth. So you end up with a ‘bang belly’ hope of a balanced Budget without building sustainability and long term competitiveness.
 
In consequence, in the short term you might, with the best luck in the world, end up balancing the books but without growth, expansion and job creating wealth creation, you are not balancing peoples’ lives (stated objective of the Prime Minister). There is no nutrition in a bang belly economy to make a better life for the people.

So we deprive people of housing benefits and claim that we balance the books from a no growth bang belly economy. We have no coherent incentive-driven tax policy that can drive growth, but we want to suck out revenue without a corresponding mechanism to encourage investment and earnings to create new revenue streams. That's a bang belly economy that may achieve short term gains but will guarantee long-term pain because we will not balance peoples’ lives that are ravaged by joblessness, substandard housing solutions, high cost of living and marginal incomes.

The surest sign of a ‘bang belly’ economy is one in which there is no growth yet we declare high primary surpluses and low deficits. How is that typically achieved? Not by runaway growth from new investment and expansion but by relentless compression in the economy and raiding the public sector entities, robbing them of their ability to adequately perform the role for which they were created.

The last time we had a balanced budget was under the JLP Government in the 1980s when the economy achieved annual average 6 percent growth between 1986 and 1990 after a period of structural adjustment after the debacle of the mismanagement of the 1970s under the PNP.

For the remainder of this presentation I will chart a course for moving from a bang belly, no growth economy that is sucking out the lifeblood of what remains and instead show the way back to 6-10 percent growth rates.
 
 
5.      THE MEDIUM-TERM PROGRAMME AND THE GROWTH AGENDA
With a ‘Bang belly’ economy that is predicated on an ill-conceived Revenue Programme, and in proceeding further to discuss the Medium-Term Programme and prescriptions for growth, it is important therefore that we discuss the role of the multilateral institutions in the programme of restoration going forward.
 
Despite the imminence of a new agreement with the International Monetary Fund (IMF) and further expected support from our other multilateral partners, let me state categorically that the Medium-Term Programme that is presented and approved by the IMF, does not, in and of itself, guarantee the success of the Programme.
 
Indeed, of even more fundamental importance is the fact that it does not guarantee the long-term restoration of economic health and a trajectory towards high growth rates once again.
 
The Government will have to initiate a raft of creative and thoughtful measures that can increase competitiveness by a combination of bold structural changes (far beyond what is agreed with the multilaterals), aggressive investment promotion, and the unlocking of dormant assets which can be converted to become a part of the growth agenda.
 
One thing is for sure, we cannot get to a path of debt reduction and sustainable growth unless this government is prepared to take the critical decisions now that will yield the results that can dwarf the modest growth expectations of this Medium-Term Programme.  Only a week or so ago, we note that the IMF cut its 2013 growth projections for  the Jamaican economy by a-half of what it estimated in October 2012, only six months ago, from 1 percent to 0.5 percent.
 
I find it pathetic that our Minister of Finance is even now publicly admitting that the modest 1.0 percent growth target for this year will be “challenging”?
 
Equally, I can state to the Government and to the IMF.  You cannot at once demand a high primary surplus of 7.5 percent over the medium term, while at the same time demand that supply-side incentives and stimulus must be abandoned.  It is contradictory and incongruous. 
 
This dog just will not hunt. 
 
The acceptable path to achieve a high primary surplus is to maximise revenue and this can only be done by facilitating high investment, high employment, a cultural change in our work ethics, foreign exchange earnings to reverse the adverse balance of trade and build foreign exchange reserves and runaway productivity and growth in the economy.
 
The Programme as laid out cannot accomplish this.  It is replete with minor repairs and half measures, including a dysfunctional tax system, delayed implementation of a public sector pension contributory scheme that will do further damage to the fiscal accounts, a watered down MOU with the public sector that only makes whimsical and gratuitous references to productivity increases, and a woeful lack of focus and direction in relation to charting a serious growth agenda that has specific, measurable performance objectives.
 
Mr. Speaker, on all these issues which I will now discuss in turn, one thing is sure, we have to take charge of our destiny by going far and beyond the boundaries of the IMF and other multilateral institutions.
 
Tax Reform
Real game-changing Tax Reform – fundamental Tax Reform – is a key cornerstone of building competitiveness in the economy, and the Government has watered down the original Green Paper that was tabled by the previous administration.  We tabled this in the Parliament in June 2011 after much consultation with the various sectors.
 
The guiding principle set out in that Green Paper was to sharply reduce import and consumption taxes (with some exceptions on import taxes to protect local industries), while significantly widening the tax net to include most taxpayers.
 
In respect of placing GCT on basic foods, the plan was to design a comprehensive conditional Cash Transfer Programme in an enhanced social safety net to take care of the most-needy in the society.
 
Mr. Speaker, make no mistake about it, failure to make radical reforms to the tax system that widens the tax net, elevates compliance and spreads the burden among everyone while increasing the tax take and incentivising the productive sector, are important features of a growing economy that results in a stable and predictable environment for investment, job creation and economic growth.
 
Make no mistake about it, the greatest enemy of the poor is not a wider tax net.  The wickedest punisher of poor people is the increased cost of living from failure to stabilise the exchange rate and the economy which has been a failure of this Government over the past 15 months.
 
I also wish to warn the Government not to submit to the dictates of the multilaterals to unilaterally eliminate tax waivers without putting in place an appropriate substitute, whether in the form of the promised Omnibus Incentives legislation or an acceptable interim measure.  The idea that the summary elimination of tax waivers will lead to a corresponding increase in revenue is at best a naive, reckless and false conclusion.
 
Failure to deal with this could lead to the closure of some industries including the still fledging ICT sector and tourism that require incentives that are comparable to what is being offered by other countries in the region and Asia.
 
The ICT sector is an excellent example of how we are fiddling while ‘Rome burns’.  In 2005, Jamaica and the Dominican Republic employed roughly the same number of people in the Business Process Outsourcing Business, at 5,000 jobs each.  Today, eight years later, while Jamaica has grown to 14,000 jobs in the sector, hampered no doubt by the ugly spectre of the lotto scam, the Dominican Republic now has over 40,000 persons employed in the sector – and they don’t have the advantage of being an English-speaking country.
 
This has been achieved by an aggressive investment promotion strategy with a duty-free and profits tax-free regime, recognising that the benefit to the country is jobs, jobs, jobs, and its consequential multiplier effect and positive benefit to the country.
 
Mr. Speaker, we must as a matter of urgency, implement the game changing policies to grow this sector in earnest.
 
Equally, other countries in the region are growing their tourism sector at a rapid pace by collecting the taxes at the back end by way of consumption taxes, while freeing up the investors from the need to front load the payment of taxes at the point of entry for critical inputs into the sector.  The same strategy has to be employed to get manufacturing vibrant again, especially export manufacturing.
 
Tax Administration
Tax Administration needs urgent and aggressive overhaul.  We need an injection of technology, expertise in forensic interdiction capabilities as well as strong political will to rid Jamaica of the cancer of tax evasion and tax avoidance.   The cancer has taken root and is spreading like wildfire, further compromising the revenue. 
 
We started the process by engaging the US Treasury Department and the IRS, as well as establishing the TAJ as a semi-autonomous revenue authority.  It’s time to move to the next stage.
 
Public Sector Reform
This is another critical structural benchmark needed for a competitive economy that is being mishandled while the Government of Jamaica has signed a Memorandum of Understanding with the Unions.  It is not entirely clear to me that under this MOU, they will be able to fully implement the recommendations of the Public Sector Transformation Unit (PSTU) that called for a phased reduction of 10,000 workers over five (5) years resulting in a saving of $50.0 billion.
 
But the issue goes far and beyond this initial saving.  By far the more critical issue is how do we lift the productivity of the public sector?  How do we make our public sector more responsive to service delivery?  And how do we do so within a context of wage restraint where there are new converts to the idea that “you can’t make blood out of stone”? (Lambert Brown)
 
How do we engender a spirited willingness to serve, to expedite and speed up processes for our private sector and ordinary citizens?  How do we remove the roadblocks and long-held cultural impediments to a productive work force in the public sector?
 
We can use the example of tax administration.  How can we reduce the transaction time for paying taxes?  How do we put a friendlier face on tax collections and use technology in more online payments?
 
And isn’t it time to work out of the box and facilitate all kinds of tax payments via bill payment services?
 
And why can’t our PATH beneficiaries collect their benefits at a Bill Payment Office or from an outlet that sells lottery or cash pot instead of spending a chunk of the money they will collect for transportation to journey to a distant location?
 
In this computer age, isn’t it just a matter of integrating software into technology that already exists?
 
Why can’t we just get up to 21st century speed and make it happen?  Isn’t it time we really just start to make it easier for the businessman and the ordinary citizen to get a break by reducing the frustration level?
 
Over the past year, how can business people feel motivated and energised to invest in Jamaica when they have been bombarded by a raft of tax increases, higher cost of electricity, devaluation and shortage of foreign exchange and simultaneously trying to wade through an unresponsive public sector bureaucracy?
 
We had started some of these programmes, such as, filing tax returns electronically, and the process of modernising Customs, amongst many other initiatives, but we now, collectively, need to push these reforms through with the greatest sense of urgency.  Time is not on our side. 
 
Mr. Speaker, isn’t it time we take full charge of our destiny?
 
Pension Reform
Mr. Speaker, what is the compelling reason why the Government has seen it fit to delay the implementation of Pension Reform for a further 3 years?  Why have we not started the Contributory Pension Scheme now?  Let’s recall that the government had announced that this would commence on January 1, 2013.
 
It is curious that while there is no reference made to this delay in the fiscal Policy Paper, it is mentioned as a clause in the Memorandum of Understanding between the government and public sector unions.
 
Will this delay not lead to an estimated Pension Bill of $35 billion in 3 years rather than the $25 billion now?  Why?   
 
Mr. Speaker, by 2016, the projected payment is a 39.0 billion, which I believe is a conservative projection.
 
In 2009, the Pension payment was $13.8 million, which has now increased to $25.3 billion, a whopping increase of 92 percent over a period of 3 years.
 
Mr. Speaker this is an increase of 31 percent per year.  This is not sustainable and we need to refocus on dealing with this matter now! Not three years from now.
 
The Government in 2010 was responsible for 28,000 pensioners and will be contractually responsible to pay 88,000 workers in the future, if eligibility requirements are met and the size of the public sector remains the same. 
 
The cost of pension has been increasing as a percentage of GDP moving from 0.4 percent of GDP in 2010 to approximately 1.7 percent of GDP in 2012.
 
Mr. Speaker, our objective of pension reform must be:-
 
1)      To reduce the impact on the fiscal account
 
2)      Improve the payment to the pensioners. The average pension payment is $30,000 per month. The minimum is $400 per month
 
3)      To simplify the system; currently there are 30 pieces of legislation.
 
This is a monster awaiting us in the future and needs to be addressed urgently or else all the gains and the pain we experience now will be lost in the future. I urge the Government to reconsider this delay and let us collectively discuss the Green Paper presented by the previous Government. 
 
Energy Policy
A third critical cornerstone to a competitive economy is the urgent reduction of energy cost to everyone, industry, commercial users and householders alike.
 
Our high cost of electricity militates against production, job creation, export competitiveness, security, our children studying at home, the cost of locally produced food and beverage, the cost of food storage. 
 
We have been delaying critical action in this area for too long. Successive Governments have to share the blame. We have been discussing LNG while Haiti has started to implement it.
 
We therefore await the outcome of the recommendation of the OUR but I believe short-term mitigating measures are needed and I will address this shortly.
 
 
6.      SOME PRESCRIPTIONS FOR GROWTH
Mr. Speaker, I have shown that the Medium-Term Programme that has been agreed between the Government and the IMF cannot achieve a high primary surplus without inflicting great pain without significant gain.
 
Mr. Speaker, we must use creative means to push the envelope of economic development so that while we have PAIN, we can quickly, turn the corner to experience collective GAIN when we do this!
 
Some measures that I will now suggest are not by any means a complete alternative, but as a signal of some of the creative things that can combine to yield significant benefit to the economy.  I propose them, armed with the experience as a former Finance Minister who along with my Prime Ministers and colleagues
 
-          Brought over US$3.0 billion into the economy from IFIs, most at interest rates lower than 2 percent, despite many in this Honourable House and outside saying such an achievement was not possible.  In 2010 alone, we front-loaded over US$1-5 billion into the economy;
 
-          Single digit interest rates.  The lowest it has been in over 2 decades;               
 
-          The Junior Stock Market;
 
-          Reduction of Transfer Tax and Stamp Duties;
 
-          Elimination of Stamp Duties on Loan Transfers increasing loan portability;
 
-          Introduced a Fiscal responsibility Framework;
 
-          Kept the dollar stable for 2 years in a row despite the worst global crisis in 80 years.  And left an economy growing at an annual rate of 1.5 percent;
 
-          Increased confidence in the business community. 
 
 
With a trade deficit now standing at US$5.0 billion, and shortage of foreign exchange looming, the urgency to earn foreign exchange must now be put in the front burner.
 
Now, I propose the following:
 
(1)   Formulation and Development of a new National Export Development Strategy
We must begin to co-ordinate export promotion activities in the national interest. A common method that other countries have used to encourage investment in the export sector is the system of tax holidays. We need to review our existing Export Industry Encouragement Act within the context of the new proposed Omnibus Incentives legislation. We give tax holidays now to foreign companies coming to Jamaica.
 
The benefits are enormous if we can have foreign exchange flowing into Jamaica from a sustained increase in our exports.  AND, studies have shown that, medium and small-to-medium sized enterprises (MSMEs) are more flexible in dynamically changing export markets. Therefore, we have to promote our MSME’s as well.
 
(2)   Agriculture
Agriculture is an important part of the growth agenda by way of import substitution and export of fresh and processed goods.  A good example of this is the Irish potato industry.
 
§  Irish Potato Production
The Minister of Agriculture has spent a lot of time talking about Irish potato production, giving the impression that the former government damaged production levels by bringing in bad seed potatoes.
 
The Minister of Agriculture knows that government does not import seed potatoes.  Neither this nor the government before.  You should also know that it’s under Minister Tufton that put increased standards in place to ensure that the private companies that import seed potatoes comply with higher standards.
 
When the PNP administration took office in 1989 Irish potato production was at 17,000 tons and in 2007 when you left potato production had dwindled to 4,000 tons, and over the 4-year tenure of the JLP administration, Irish potato production went back to over 15,000 tons, and now in your 15 months, the decline has started again, with a projected 20 percent reduction in production this year?
 
These are facts.  Let us do what is necessary to keep this vital industry growing.
 
§  Agro Parks
On the issue of Agro Parks, we fully support this concept.  We believe in a value-added approach to agriculture, where farmers’ output can become agro processors’ input with branded products such as sauces and spices.  This is key to sustainable export agriculture.
 
We support the farmers and Agro-processors of Jamaica.  In fact, let’s be clear, these Agro Parks that the Minister and Finance Minister speak of as a growth strategy was conceptualised and developed by the JLP government.  Just a minor note you failed to mention in your announcements.
 
Like so much of the government’s economic strategy, these Agro Parks seem to be an announcement without implementation.
 
Agro-Invest, the agency of the Ministry of Agriculture to implement this programme, now seems to be having problems.  In the last 3 weeks 5 persons have been dismissed from Agro-Invest, and our understanding is that the implementation of these agro parks is now in virtual disarray.  Let us get it right and not miss this opportunity to grow export-agriculture.
 
§  Sugar Transformation
While some $2.5 billion has been set aside for the Sugar Transformation project, the government has so far failed to honour certain obligations with the new investor COMPLANT, which could threaten the US$100 million investment in a new sugar refinery and threatening the very viability of a company that is the largest employer of workers in Clarendon?
 
 
(3)   Energy Support Fund
In a recent study done by the JPS, they have concluded that substantial savings can be achieved by using more energy efficient technologies in Jamaica, noting that electricity consumption  could be reduced by 26 percent among residential customers, 23 percent among the commercial sector and 12 percent for industrial customers over a 20-year period.
 
In addition to the need for ramped-up energy conservation initiatives, the JPS should move aggressively to advertise its special discount rate for manufacturers, of 25 percent reduction for use of electricity in off peak hours.
 
The government should now create a special Energy Support Fund using PetroCaribe funds, the Government’s 25 percent profit share from the Jamaica Public Service Company Limited, and dedicate it to providing a combination of grants and low cost, long-term loans to the tax compliant small and medium-sized manufacturing sector for retooling for energy efficiency.
 
The increased production and tax revenue that will be yielded from this initiative will go back to the fiscal accounts to replenish the subsidy while stimulating job growth and foreign exchange earnings.  It is a temporary exercise that would be terminated when overall energy costs are reduced.
 
The present level of 25 percent line losses at the JPS, 15 percent of which is due to theft, and which has grown by 3.2 percent in the past year is unacceptable as it militates against lower prices for compliant customers including businesses.  It just cannot continue like this.  At the same time, for those who have lost their electricity connection to the grid because they simply cannot pay as a result of the hard economic climate bearing down on them, this government needs to work with the JPS to find creative ways to deal with that problem.
 
Recently, the NWC applied to the OUR for a rate and tariff increase, including, a request for the PATH Programme to assist the needy in paying their water bills. We need to go one step further... we need to do the same with the JPS. In the future if we cannot find a mechanism to help the needy with their JPS bills it will result in increased theft of electricity as well as depriving our children of the opportunity of studying with proper lighting. 
 
(4)   Special Foreign Exchange Window
Open a special Foreign Exchange Window at the Bank of Jamaica for certified tax compliant manufacturers, to obtain their needed foreign exchange at the official rate and in the quantities they need, subject to appropriate audits to ensure that strict integrity of the system.  We must find a way to give preference to our manufacturers and exporters rather than allowing the speculators to hoard foreign currency.
 
(5)   Complete FINSAC Report
The government must stop this naked and barefaced attempt to cover-up the production of the FINSAC Report of the Commission of Enquiry into the collapse of the financial sector during the 1990s.  During the past year since my call for this Report, more lives have been lost.  One elderly couple in Mandeville sadly hanged themselves leaving a suicide note: “thanking FINSAC for doing this to them”. 
 
In the name of decency and respect for every family that has suffered so horribly in this matter, I warn the government, find the extra 10-15 million to complete and publish this Report.  This is not “optics”, this is one tragic episode in our history that is at once a human tragedy as it is a massacre of the entrepreneurial and productive sectors of the economy which is why we are so indebted and unproductive today.
 
The government has an obligation to put closure to the FINSAC crisis, by publishing the Report and dealing with residual issues relating to its operations.
 
I am convinced that we need to put FINSAC behind us and to assure our people, including, the many local investors that never again will we impose on them the cruelty of a FINSAC.  We must allow people to close this horrible historical episode so that they can proceed in having more confidence in the future of the Country and its Government. It is a psychologically important activity to ensure future investment by local investors which will lead to growth.
 
The very integrity and sense of decency of this government is on trial in this matter.
 
(6)   FINSAC/NHT
While people need houses the government now propose to raid $11.5 billion from the NHT, which will use up all its cash surpluses in 2 years ($24.7B), and which will impact mortgage rates and grant funding by the NHT.
 
The government has an opportunity to convert the $14.3 billion debt it owes the NHT from statutory deductions by giving them land in exchange that can be used for housing development.  Assets at FINSAC can also be pledged to the NHT to rebuild their capital base.  This capital replenishment is necessary as based on the NHT’s own projections, they will have a negative cash flow for most of the 4-year period of the raid.  Therefore use land and FINSAC assets for capital enhancement or the NHT would have to sell receivables and other assets in order to maintain predictable and positive cash flows.
 
 
(7)   Transfer FINSAC Assets to the NHT
Divest remaining JRF/FINSAC assets to the NHT, as part payment for the RAID, by
 
-          Transferring the remaining residual assets held by FINSAC to the NHT.
 
-          Acquire residual assets held by JRF in a no cash deal, whereby JRF keeps a smaller portion of remaining assets and transfers the remainder to the NHT for ownership and management.
 
-          Since a large portion of the remaining JRF/FINSAC assets are commercial and residential real estate, this fits more neatly in the NHT’s core business, for which they can then programme a business-friendly and culturally appropriate work out plan with each creditor.
 
-          The assets transferred to the NHT would offset possibly as much as $10.0 billion, thereby enhancing the balance sheet of the Trust, while offering an opportunity for a more favourable resolution plan for existing creditors.
 
-          By placing assets of $10.0 billion into the NHT, this will now create a corresponding fiscal space for increased expenditure on housing solutions by the NHT. 
 
-          Equally, by transferring land to the NHT to partly compensate for outstanding statutory deductions of $14.3 billion owed to the NHT by the GOJ, additional fiscal space can also be created to allow the NHT to spearhead the virtual doubling of housing solutions from 6,000 to 12,000 new units per year in partnership with the private sector, while increasing the affordability of houses.  It is estimated that 75 percent of NHT contributors cannot afford a mortgage of $4.5 million.
 
(8)   Review CARICOM Trade Agreement
The adverse trade balance between Jamaica and CARICOM is a cause for great concern.  While it is acknowledged that the higher cost of electricity in Jamaica is a serious impediment to competitiveness, there are issues which arise which are relevant to the moment and calls for a review of the Agreement.
 
Among these is the question of resolving the claim that importers into Jamaica from CARICOM are oftentimes in flagrant violation of the Rules of Origin on which lies their ability to have duty-free access to Jamaica.
 
Equally, given our serious Balance of Trade deficit of US$5.0 billion, combined with our foreign exchange shortage, an uncertain future on the PetroCaribe Funds, the Government should consider suspending the CET for a specified period.  This is allowable under the Treaty of Chaguaramas.
 
(9)    Ramp-up Investment Promotion
Mr. Speaker, we need to focus on selling the country in a very strategic way and, as such, we need to have a close working relationship between the Ministry of Foreign Affairs and JAMPRO.  We also need to consider the redeployment of many of our diplomatic and commercial activities to emerging markets, including, Latin and Central America.   We must now start seeing our foreign affairs activities as primarily marketing the country’s goods and services through investment and export promotion strategies.  JAMPRO should have a permanent unit in every Jamaican embassy and Consulate worldwide.
 
 
(10) Set a time-frame for the abolition of the Corporate Surtax, the Assets tax and the dividends tax
 These taxes are contradictory to the growth agenda, particularly, if they remain in force for too long.  Minister you need to revert to the earlier position that the Surtax will be a short-term tax. In respect of the Assets Tax, you need to be mindful that financial institutions will shrink their balance sheets to avoid the tax. If the financial institutions shrink their balance sheet, it could result in less credit available which is needed for the growth agenda.  While I recognise the need for revenue you need be mindful of the market reaction if these taxes remain a permanent feature.
 
(11)  Crime Management
You know Mr. Speaker, one of the biggest hindrances to growth is crime and violence. Businesses have to close earlier than they normally want to.  They have the additional burden of private security costs and extortion. The World Bank recently estimated that crime and violence costs Jamaica more than US$400 million (approximately J$40 billion) each year. And that if Jamaica could reduce its crime rate to levels such as that of Costa Rica, it could see economic growth in excess of 5 percent, that is some 10 times better than 0.5 percent the IMF is projecting for 2013. We cannot just wait on divine intervention. We must act on many fronts simultaneously.
 
 
 
 7.       CONCLUDING REMARKS
Mr. Speaker, as I conclude, let me state that the credibility of this Budget and the Medium-Term Economic Programme are at stake.  This is driven by the government’s reluctance to deal with transformative structural reform as well as to rein in the negative debt trajectory of public sector entities. 
 
While the government sets unrealistic fiscal targets it fails to look at how dormant assets can be creatively put to productive use.
 
And while we all believe that we need to restore HOPE, setting unrealistic targets that cause PAIN without GAIN, only lead to long-term frustration.
 
Mr. Speaker, we must stop giving lip-service to the principle of good governance.  We must provide sincere, purposeful and responsible leadership that charts a vision of success for our country by not only saying where we are going but in practical terms laying out the pathway to get to our destination.
 
As I close, Mr. Speaker, I want to remind Jamaicans that “Fortune favours the brave.” This is a well known proverb that seeks to give reassurance that we will be favoured by fortune if we carry out our plans boldly, with courage and confidence.
 
Our country’s destiny is our destiny and it is not a matter of CHANCE.  It is a matter of CHOICE.
 
We can create meaningful Tax Reform, if we take charge of our destiny.
 
We can build a strong, vibrant and productive public sector, if we take charge of our destiny.
 
We can restore the economy to healthy levels of growth and foreign exchange earnings, if we take charge of our destiny.
 
We can sew seeds and reap corn, and don’t raid and rob the barn, if we take charge of our destiny.
 
 We can nurture and educate our children and build a peaceful and prosperous society, if we take charge of our destiny.
 
Mr. Speaker, we need to be encouraged by our own sense of national pride, respect for our national symbols and a collective national sense of purpose.  Let us look to our National Pledge as a source of inspiration for us to take charge of our destiny.  I quote in part:
 
                        “I promise to stand up for justice, brotherhood and peace,
to work diligently and creatively, to think generously and honestly, so that Jamaica may, under God, increase in beauty, fellowship and prosperity and play her part in advancing the welfare of the whole human race.”
 
May God bless you all, and may God bless Jamaica.
 
 



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