Building bonds and sharing the burden

This article is contributed by the Caribbean Leadership Re-Imagination Initiative at The University of the West Indies. The Initiative is chaired by Dr Canute Thompson, one of the co-founders.

Member of Parliament Fitz Jackson is to be commended for beginning a conversation on bank fees. No doubt it is the hope of every customer who has to pay these (suspected exorbitant) fees that the conversation will result in some definitive action in favour of the customer.

While we await the outcomes of the deliberations in Parliament, including a report from the Bank of Jamaica (BOJ), the Caribbean Leadership Re-Imagination Initiative would like to make a contribution to the public discourse via this medium.

Sharing the Burden

It is somewhat of a strange occurrence that despite the Jamaica Debt Exchange and National Debt Exchange, which saw banks giving up a few percentage points in their agreed rates of interest, there has not been a fall in the profits of banks. Sagicor is perhaps the only large financial entity that reported a cut in its profits as a result the NDX. The question that must be asked is: "What percentage of the robust performance of our financial institutions (which has seen profits increase yearly) is attributable to user fees, as against growth in the volume of business?"

The October 2013 Interim Report of the Bank of Jamaica on Bank Fees confirms that "fee income (excluding fees for loans processing) increased over the last three years and now accounts for a larger percentage of total revenue, with 19.5 per cent for the nine months up to September 2013 up from 16.6% (2012), 13.6% (2011) and 14.9% (2010) [p.7]". The report posits that this increase in the total contribution "... is attributable to a combination of reduced interest income reflective of the lower interest rate environment over the past three years (following JDX in 2010)" [p.7].

So if the improved performances of the financial institutions were largely attributed to increased user fees, as has been reported, and that these increases were imposed to counterbalance the 'sacrifices' made in relation to JDX/NDX, the question that has to be asked is: Are the financial institutions committed to sharing in the sacrifices the country must make to help us out of our economic distress? The meaning of 'sacrifice' may need re-examination!

But the issue of how the economic burden is 'distributed' across sectors of the society is larger than whether financial institutions are carrying a fair share.

Whither Trickle-Down Economics?

The Government's projection for the revenues it would raise from taxes in the current fiscal year will not be realised by a far margin. Shortly after the news of this projected shortfall was announced, there was a report of the possibility that GCT would be imposed on petrol. We are yet to know whether this will happen.

But while the Government is failing to meet its tax revenue projections, it continues to give up millions in tax waivers. The growing bus company, Knutsford Express, which recently listed on the Junior Market, will be relieved of some of its tax burdens for five years. Had it been successful in listing before December 31, 2013, it would have enjoyed this benefit for 10 years. It would be helpful to know how many companies are in this preferred position and approximately how much revenue the Government is giving up by these (might we say) 'fiscal rules'.

The practice of tax relief for businesses grows out of the theory of 'trickle-down' economics. This theory was popularised by Margaret Thatcher and Ronald Reagan in the 1980s to the 1990s. The basic tenet of this theory is that the economic growth of countries depended on the creation of an environment that was 'friendly' to businesses. This 'business-friendly' environment, according to the doctrine of Thatcherism and Reaganomics, requires financial-market-friendly, ownership-oriented, low-tax policies.

With low (or none for sometime) taxes, businesses would invest. With investment would come jobs, and with jobs, there would be more people available to pay individual income tax, according to the theory of trickle-down economics. Also central to this theory is a minimalist role for the State, reflected in one of Reagan's diktat that "too much government is the problem".

Questions We Must Ask

But if trickle-down economics works and if giving tax breaks leads to investment, we must ask for the evidence of this. Maybe the BOJ (with help from the Ministry of Finance) could include an analysis of this in its report. Ideally, this report should tell us other things such as:

(a) How many companies are given tax relief on future earnings each year?

(b) How many persons are employed by those companies?

(c) How much income tax is paid by employees of those companies?

(d) What is the ratio of company tax foregone to income tax gained (specifically with reference to those companies that get tax relief)

Jamaica has already signed on to an economic programme. This programme includes the granting of tax relief to companies such as Knutsford Express (and we wish that company well). But is this sustainable? Can Jamaica afford this? For companies that are locked in, many are locked in for 10 or five years. Can we afford to remain locked in?

One of the mistakes we have made as a country is that of presuming that interventions designed to stimulate growth and development must remain in place in the same form forever. That is one of the critiques of the high-interest-rate regime that was introduced in the 1990s. To his credit, the late Michael Manley introduced 'free education' in the 1970s. That was a welcome move. It was necessary to correct ages of imbalance in the society and to provide the society with a larger pool of talent to facilitate development. Had that not been done, hundreds of thousands of Jamaicans would not have received a high-school or university education. But we have found that we could not afford this forever. We often pointed to Barbados and asked why we could not be like them. Barbados has now entered a new world. They will be laying off 3,000 public-sector workers.

So we come back to the question of tax relief for (the rich) companies. Can we afford it? But, more important, do they benefit the country? So we end where we began: Are we sharing the burden of economic sacrifice equitably? If we are not, we will fail to build bonds of goodwill in our land.

Email feedback to columns@gleanerjm.com.