EDITORIAL - Dr Phillips' dilemma

Peter Phillips, it is widely expected, will tomorrow announce that he has either withdrawn, or substantially varied, his proposed transaction tax in the face of criticism from political and other interest groups, but without any serious or qualitative defence of the measure or any real evidence that it is genuinely unpopular.

This newspaper understands Dr Phillips' dilemma. With the need to close a J$2.25-billion gap in the Government's Budget, the proposed tax would have been extremely efficient - easy to collect and with little economic and bureaucratic cost to the authorities. Because it is hard to evade, it means that the Government could keep the tax low. Indeed, with the finance minister's proposal, most people would pay less than one-tenth of one per cent on their bank withdrawals.

But Dr Phillips has another difficulty that would cause him to forego the apparent efficacy of this tax. He needs to maintain consensus around the need for economic reforms, including the programme of fiscal consolidation that he has pursued under Jamaica's agreement with the International Monetary Fund (IMF). Over the next three fiscal years, the Government has to achieve a primary surplus of 7.5 per cent of gross domestic product as part of the strategy to reduce the country's debt to around the equivalent to GDP, down from the current 139 per cent. This requires having public-sector workers continue to accept wage freezes, or moderate future demands, while keeping the private sector onside for this and other policies. Such groups now oppose the transaction tax.

Whatever the adjustments made by Dr Phillips - and it shouldn't preclude shaving from proposed expenditure the 0.4 per cent of the Budget represented by the tax - the developments of the past three weeks highlight three important factors to which the finance minister and the Government, more generally, must pay attention about continuing to build consensus around the necessary economic reforms.

The first relates to the issue to which we have already alluded: the Government's poor communication of its economic policies and tax strategies. Dr Phillips failed to make an effective case for the tax, and the Government's most effective 'salesperson', when the market is the broad mass of Jamaican people, Prime Minister Portia Simpson Miller, appeared peripheral to the process.

overhaul the process

Second, the Government has to get on with what Dr Phillips agrees is the need to overhaul the process by which Jamaican Budgets - including the formulating of tax measures - are crafted. There is need for wider discourse and debate on the process, thus greater transparency, ahead of the delivery of the Budget, on funding arrangements being contemplated by the Government.

But more critical in the current circumstance is the need for Dr Phillips to accelerate the programme of tax reform to bring more people into the net. This newspaper believes that this should include recruiting people from abroad, who are removed from the domestic environment and local personalities, to help manage the tax system. Indeed, it begs explanation why a mere 10 per cent of the firms registered in Jamaica file tax returns; only five per cent report taxable income; and that outside of the pay-as-you-earn employees, only a handful of the estimated quarter-million other workers who should be on the tax rolls actually are.

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