Keith Duncan | Tax reforms – Can we afford it?

As we near the high stakes and consequential September 3 general election, the manifestos have been finally revealed to the public, we see major tax reforms being unveiled by the People’s National Party (PNP) and the Jamaica Labour Party (JLP).

Both parties have posited that these tax proposals will be funded from the budget with no new taxes or increases in the existing rates of taxation.

TAX REFORMS

The JLP has indicated a gradual approach to increasing the threshold to $2m along with a phased approach to shifting from direct to indirect taxation towards an income tax base rate of 15 per cent, albeit without providing a definitive timeline for the latter. They have estimated the cost of this proposal to be $28B to $44B annually and that they will continue with the policy of no new taxes and will be funded from the budget.

Meanwhile, the PNP has estimated the cost of the increase in the threshold to $3.5m to be $55B, with implementation beginning in FY2026/27. The most recent adjustments have indicated a revenue loss to the government of approximately $4B to $5B for every increase in the threshold of $100,000. The further movement to $3.5m is projected to result in the removal of an additional 127,000 persons from the PAYE system.

The PNP has said that this revenue loss will be funded from a forecasted growth in tax revenues of $140B to FY2028/29, as well as, the discretionary expenditure included in programmes forecasted in the Budget over the same period.

RIGIDITY OF THE BUDGET

In FY 26/27, the expected start date for the implementation of these tax reforms, the GOJ in its Fiscal Policy Paper has forecasted a fiscal deficit of $34B. In the following year a fiscal deficit of $33.8B is targeted. See Table 1

EXPENDITURE CATEGORIES - FY 26/27

The categories of expenditures forecasted in the GoJ Fiscal Policy paper for the FY 26/27 are:

Public Sector Compensation-$526B

Public Sector Salaries have seen a material growth of over $250B from $241B in FY 21/22 to $495B in FY 25/26 and forecasted to increase to $526B in FY 26/27. The Public Sector Unions and Bodies are in ongoing negotiations with the GOJ, pushing possibly for larger increases than have been forecasted in the budget. This is a huge risk that must be managed.

Programmes – Total spend $364B

The PNP has put forward that this element of the expenditures is discretionary. The PNP will have to look carefully at the breakdown of this Programmes Budget as the expenditures contained here are recurrent expenditures which have a level of permanency and may not be as discretionary as the PNP has indicated.

Programmes are defined as recurrent expenditures in the Fiscal Policy Paper as highlighted in the table below. The expenditures are classified by functional areas which cut across all government MDAs and in the main represent the operational expenses and the procurement of services by the the GoJ in addition to subsidies to major Public Bodies, social assistance, among other expenditures. These recurrent expenditures are relatively rigid and the GoJ would have limited degrees of freedom to reduce these expenditures as they basically represent the funding of the government’s day-to-day operations. See Table 2

A further breakdown of the major programme expenditures are highlighted in the table below which gives an indication of their inflexibility. The government’s recurrent expenses are dominated by several fixed costs, The largest allocations among the recurrent items include subsidies to tertiary institutions including UWI and UTech, recurring expenditures of the Ministries of National Security, Education, Health drugs and operating expenses, the maintenance of roads, Waste management, Justice-Courts , transportation subsidies, Drugs among others. It would be a major task to reduce expenditure in these areas. See Table 3

Capital Expenditure-$75.6B

Jamaica is playing catch up with its infrastructure. We hear the consistent cries for water and roads, public transportation, broadband Internet and irrigation, among a slew of other infrastructure demands.

Capital Expenditure drives growth and productivity and is not an area that Jamaica should be looking to decrease but to increase in order to deliver basic services to our citizens.

Growth in Tax Revenues and Expenditures from FY 25/26 to FY 27/28

Tax revenues are forecasted to grow by $124B from $949B in FY 25/26 to $1,073 trillion (T) FY2027/28. However, the lion’s share of this anticipated growth is driven by a forecasted inflation rate of 5 per cent over this period which also impacts the expenditure side of the budget which grows by $105B over the same as the price of goods and services procured by the GOJ would also see the same 5 per cent inflationary increase to prices.

The bulk of this $124B increase in Tax Revenues would therefore be accounted for in the $105B growth in expenditures.

Growing GDP faster than forecasted

It has also been suggested that we could see faster GDP growth rates exceeding the average one per cent growth rate forecasted in the Fiscal Policy Paper. Of course, this would be desirable, however, there is no magic bullet that is going to propel Jamaica out of the average 1-2 per cent GDP growth range in the immediate short-to-medium term. Therefore, it would be difficult to make assumptions around a higher growth rate driving greater tax revenues in the short-to-medium term.

Upward revision to GDP

The PIOJ recently announced a reduction in the debt-to-GDP figure for March 2025 to 62.4 per cent owing to an upward revision in GDP as a result of adopting the latest System of National Accounts (SNA) methodology. The Fiscal Commissioner later confirmed that this could mean the country achieving its 60 per cent debt-to-GDP target, or lower, by the end of the current fiscal year.

INCREASING DEFICITS – WRONG SIGNAL

Despite this positive development the exact cost of both tax proposals are huge and the fiscal space is just not available to accommodate. For any major shift to be accommodated, the revenue losses would have to funded by increasing the deficit significantly, increasing debt and interest costs to finance this debt. Jamaica’s fiscal deficit would increase from $34b to close to $100B in FY 26/27, that is from a projected one per cent of GDP to approximately three per cent of GDP, which has negative implications for Jamaica’s fiscal credibility with the International Rating agencies and Capital markets who have demonstrated strong confidence through their purchasing of GoJ debt at favourable interest rates.

The PNP and the JLP will have to provide a feasible timeline for a phased implementation of their respective tax reforms, and with feasible revenue and expenditure measures that conform to the fiscal rules and ensures sustainability of Jamaica’s fiscal health.

Jamaica should not squander the gains and must maintain our fiscal discipline, further embed macroeconomic stability and provide a platform for growth in the best interest of the citizens of Jamaica.

Keith Duncan is chairman of Fiscal Advisory Committee and CEO of JMMB Group. Send feedback to columns@gleanerjm.com