KING
My brother's first car was a clunker - an old, yellow Ford Anglia with its pretentious tail fins that could not be started with the ignition.
You had to give it a shove. Then while it was rolling, jump in and 'punch" it - releasing the clutch while stepping on the gas, and praying that the engine would jump to life.
Momentum
If you were lucky, it did. Once it started, momentum took over. It wasn't pretty, but it was the only way to get anywhere with the old clunker - effort, luck, and patience.
Our economy is something of a clunker as well. Our Government owes more than $1 trillion. The Budget presented in April forecast revenue that was $79 billion short of expenditure. And matters have worsened since.
If the revenue shortfalls of the first fiscal quarter are extrapolated to the full year, the deficit will just surpass $100 billion - a massive 9.0 per cent of GDP.
At this rate, our fiscal accounts and debt are unsustainable - they will keep widening and growing. And our economy has not exhibited meaningful growth in nearly two decades. Is there a way out?
Maybe what we need is a big push, a little luck, and a lot of patience.
The big push will come from broad tax reform and a small collection of tax measures capable of raising revenue efficiently - that is, at low cost - and simultaneously promoting a better climate for investment and economic growth.
At present, ministers can waivetransfer taxes, import duties, and GCT at their discretion and without limit.
Putting even a liberal cap on this discretion could easily recover $6 billion. Simply carrying out the application of GCT to the currently exempt items announced by the finance minister but withdrawn two weeks later could bring in $4.5 billion on each of the domestic and imported items.
The petrol tax, a highly efficient tax since it cannot be evaded, could be raised another $3.25 per litre to bring in another $3 billion.
Finally, a modest rationalisation of the public sector can cut the wage bill by two per cent, which would yield $2.5 billion.
All of the above will contribute $21 billion to closing the fiscal gap. But still a long way to go.
So we will need some luck. The current compliance rate for GCT is only 65 per cent - low precisely because the presence of exempted goods facilitate evasion.
Without exempted goods, the compliance rate will rise dramatically. A 10 percentage point improvement will yield $17 billion. Since a part of the current shortfall is due to the economic contraction that the PIOJ is estimating at 4.5 per cent, recovery once the global crisis recedes will automatically bring in around $13 billion, while saving $2 billion more as interest costs fall.
Finally, there is the prospect of genuine economic growth. Removal of the obvious distortions in the tax code will be good for GDP growth of at least 5.0 per cent. That willautomatically generate additional tax revenue of $15 billion.
Whether we see all of the compliance improvement, the recovery, and the growth cannot be known. It will take some luck. But the assumptions are not Herculean and the scenario is plausible.
That still leaves revenue some $36 billion short of expenditure - around 3.0 per cent of GDP. And the trillion dollar debt would remain.
Then what? Patience. With the smaller deficit, lower domestic interest, and a less arbitrary and convoluted tax code, economic growth of more than three per cent per annum can be expected.
A little high school math will reveal why no money has to be set aside for debt repayment. Since the fiscal deficit would be 3.0 per cent, that is the rate at which the numerator of your debt to GDP ratio is rising. Once GDP is growing by more than 3.0 per cent, the denominator is rising faster.
The debt to GDP ratio will therefore fall every year, even though the government is continuing to increase its borrowing. With sufficient patience, the debt to GDP ratio will eventually fall below the 80 per cent threshold for investment grade sovereign debt.
Result
The result is growth and debt reduction, without paying off even a penny of the debt.
Yes, it does depend on a fair amount of luck. But it's our best hope to get us out of the fiscal and economic malaise of the last dozen years.
My brother has long replaced the Anglia with more reliable and comfortable transportation. It is long past time for us to do the same. But it begins with a push, without which nothing happens.
Tax reform, anyone?
Dr Damien King lectures in economics at the University of the West Indies.
damien.king@uwimona.edu.jm