Economist Dr Peter John Gordon. - File

As policymakers weigh strategies to bring Jamaican's trillion-dollar debt under some control, economist Dr Peter John Gordon is suggesting that the elimination of costly tax incentives to businesses would be a good start.

Instead, Government should redefine the tax structure, Gordon said Tuesday as presenter at the first in what the Jamaica Chamber of Commerce (JCC) has launched as an annual conference series on the economy.

"This thing about giving incentive is not a good idea," said the economist, a research fellow at the Sir Arthur Lewis Institute of Social and Economic Studies and former director of the economic research and planning division at the Planning Institute of Jamaica.

Gordon will take up his new posting at the University of the West Indies in another week, the institute said.

Tax rate

Instead, he suggests that the tax rate be equalised across all economic activities.

"The same amount of tax must be paid for each dollar of income earned, irrespective of where that income is earned," said Gordon.

"It must be recognised that when the government gives an incentive to one sector it is simultaneously giving a disincentive to others. It might encourage growth in the preferred sector, but at the same time it is stifling growth in those sectors which have not benefited from its incentives.

The JCC's two-day forum continues today with a focus on exports. Tuesday's discussions were centred on the debt, and included two other speakers - Opposition spokesman on finance and former finance minister Dr Omar Davies, and Alexander Livshits, director of international and special projects of United Company of Rusal, the largest owners of bauxite/alumina assets in Jamaica and across the globe.

Livshits, who is also former minister of finance of the Russian Federation, suggested that Jamaica shift more from direct taxation to collect a greater portion indirectly.

He mooted a four to five percentage point increase of the current General Consumption Tax rate, which now stands at 16.5 per cent on most goods and services, concomitantly with a reduction in income tax rates now at 25 per cent for individuals and 33.33 per cent for companies.

This measure, he said, currently decreases the current budget deficit by about 20 per cent.

He went further to suggest that Jamaica consider implementing a progressive tax scale that would impose higher rates on the wealthy, while shifting some of the burden from the lower income groups.

Jamaica over the past years, in an attempt to promote a more business-friendly environment and encourage investment in the country, has developed a fairly complex scheme of incentives that policymakers are reportedly already giving consideration to simplifying.

Hotels, for example, get a 10-year tax holiday on property renovations and new structures.

Tourism, manufacturing, creative industries and other sectors enjoy different levels of tax exemptions under the Foreign Sales Corporation Act, for exports to the United States as incentive for cross-border trading.

Tax relief

The act also provides relief from the Common External Tariff and the GCT on equipment, machinery and materials coming into the country and also allows for up to five years' income tax relief.

Once a company is recognised as an 'approved shipping corporation' it may also receive tax relief and concessions on import duties for up to 10 years.

"By giving incentives, the Government is saying that they know what the future holds and if they are wrong it will come with a huge cost," said Gordon.

Jamaica's total debt level now stands at $1.3 trillion with the problem worsening as revenues continue to fall below target while interest and principal repayments balloon.

Jamaica borrows internally and externally for budgetary support, which includes heavy debt-servicing charges - the bill this year is about $325 billion in interest and amortisations.

At the end of August Government spending had outpaced revenues and grants by $60.5 billion for the fiscal year to date.

But this level of debt is merely a symptom, according to Gordon, with the fundamental problem being expenditure and taxation patterns.

Gordon defined the prescription for containing Jamaica's high level of debt as one in which overall expenditure is reduced.

"The recurrent expenditure should be reduced with redistribution of the share to wage and salaries and interest payment shifting in favour of programmes," said Gordon.

"The current distribution is not growth-friendly," he added.

Programmes currently account for just about 24 per cent of recurrent expenditure while the item wages and salaries fluctuates between 35 and 40 per cent, and interest payments are usually above 40 per cent, reaching a high of 51 per cent in fiscal year 2003/04, Gordon said.

Cutting budgetary expenditure

"The most difficult, but inevitable task for a public debt manager is cutting budgetary expenditure. It involves revision of all investment projects - some of them may go on, some delayed, some cancelled for good," added Livshits.

Davies meantime advocated for a more credible debt management strategy, saying the assumptions under which the budget was crafted overestimates revenue and underestimates expenditure.

sabrina.gordon@gleanerjm.com