Jamaica’s Surplus Question

By: Caribbean Journal Staff - July 24, 2015

What’s the right target?

By Dennis Chung

CJ Contributor

THE primary surplus on the fiscal accounts can be defined as what is left to service debt after the government considers its revenues and expenditure on running the country. So wages, social programmes spending, and general spending on maintaining the country is taken out of revenues, and what is left is called the primary surplus.

This has been the topic of debate over the last week after five US lawmakers wrote to President Obama and asked him to lobby the IMF to ease up on the primary surplus requirement of 7.5 per cent of GDP. The purpose of lowering the target from 7.5 per cent to around 6.5 per cent would have the impact of allowing for more expenditure in the economy, which implies that there would be more money available for programmes, capital expenditure, and wages. The argument, of course, is that it would help to cushion some of the hardships being experienced by many Jamaicans.

Some people have suggested that lowering the primary surplus requirement from 7.5 per cent to around 6.5 per cent of GDP would also result in greater growth. They have pointed out that Jamaica has the largest primary surplus requirement globally, and that even Greece is not required to run such a large primary surplus, which effectively reduces the amount of government spending in the economy.

But what is the truth about the primary surplus and its effect on growth, and consequently reducing the hardship being experienced by many? Will it also allow the Government to provide greater wage increases, as some have argued? And more importantly, what is the best solution to the primary surplus that will ensure sustainable growth and development? The most important consideration is that of sustainable growth and development, and not just to think about short-term impact solely.

Letter to Obama

Last week, I was on a radio programme discussing the primary surplus level and if there was any merit in the letter sent to Obama by the legislators. The point I made is that even if the primary surplus is reduced from 7.5 per cent to zero per cent of GDP, this by itself does not guarantee growth, and, in fact, in the past we have run primary surpluses which are much lower than 7.5 per cent, and with much higher fiscal deficits. After doing that for many years we still have not seen sustainable growth rates, and since the 1960s the only respectable levels of growth we have seen occured from 1986 to 1990.

So between 1972 and 2014 (42 years), we have seen only four years of any sustained growth above say four per cent. And over those four years this was influenced primarily by a debt to GDP that climbed to 212 per cent in 1984. There is therefore no evidence that allowing greater funds for government expenditure will guarantee any sustainable levels of growth, and in fact it has worked against us as we have funded the increased government spending through debt, which has put us where we are today.

Even if we were to reduce the primary surplus requirement today, it would mean that we would have to do so either by:

1) increasing tax revenues (through compliance measures or increased economic activity). In other words, not really decrease the absolute primary surplus amount but increase the fiscal revenues; or

2) increasing debt.

Option 2 is certainly not desirable, as it would mean a reversal of what we have achieved so far and would result in a longer period of adjustment and potential hardships.

Option 1 is therefore the desirable one, and is where we need to focus.

Increasing tax revenue through compliance measures is the preferred option, especially as we see that the Greek problem is significantly caused by a low level of tax compliance; which is why what they are doing now will not work until they address the tax compliance problem. This is something that the TAJ has been working on. But the problem is that the tax policy has been more focused on targeting already compliant taxpayers and asking them to pay more — not going after those who are not in the tax net. That policy has only served to discourage capital and new investments, which in effect has resulted in low growth levels.

The focus on squeezing more and more out of investors that are already tax-compliant ends up discouraging capital investments and causing growth stagnation.

This makes revenue from increased economic activity difficult. We have seen that every tax package introduced since 2004, with the exception of one, has not achieved the targeted revenues. The reason is simply because policy is geared at increasing revenues from those who already pay taxes, rather than expanding the net and encouraging capital investments. The result is a largely service economy with capital outflows greater than inflows over the last 42 years.

Lack of water hitting GDP

Another example of the lack of accountability that has caused loss of GDP growth is the management of the water situation by the NWC. Everyone knew from last year that the drought would be worse this year, and even with that knowledge the NWC failed to plan to address the situation. The result is that this year the drought may cost us about one per cent of GDP, as it did last year.

Therefore increasing fiscal expenditure by reducing the primary surplus requirement can actually cause us to reverse our gains if we do not change the way we look at policy, how we spend, and accountability.

There is an argument for increasing government expenditure to provide short-term stimulus, and therefore one could argue for a relaxation of the primary surplus target. But this must be done in a controlled environment and with the understanding that sustained growth will only come through increasing productivity and changing the way we look at policy. In fact, changing the attitude to capital (with policy), public sector accountability, and value for money fiscal spending will all have a greater impact on growth, even without changing the primary surplus percentage.

At this time of the programme, however, there is an argument for relaxing the primary surplus percentage as this would provide the short-term stimulus needed to drive economic activity. The impact of this, however, will have less effect than if it had been built in at the start of the programme, as it means pulling activity up from a lower level than it was before.

Dennis Chung is a chartered accountant and is currently Vice President of the Institute of Chartered Accountants of Jamaica. He has written two books: Charting Jamaica’s Economic and Social Development – 2009; and Achieving Life’s Equilibrium – balancing health, wealth, and happiness for optimal living – 2012. Both books are available at Amazon in both digital and paperback format. His blog is dcjottings.blogspot.com. He can be reached at drachung@gmail.com.

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