VZCZCXRO6510
RR RUEHGR
DE RUEHKG #0693/01 0971755
ZNR UUUUU ZZH
R 071755Z APR 06
FM AMEMBASSY KINGSTON
TO RUEHC/SECSTATE WASHDC 2576
INFO RUCNCOM/EC CARICOM COLLECTIVE
RUEHSJ/AMEMBASSY SAN JOSE 1812
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 03 KINGSTON 000693 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/CAR (WBENT), WHA/EPSC (JSLATTERY), 
EB/IFD/OMA (JUNCKER) 
 
SANTO DOMINGO FOR FCS AND FAS 
 
TREASURY FOR L LAMONICA 
 
E.O. 12958: NA 
TAGS: ECON EFIN JM
SUBJECT: JAMAICA'S FISCAL POLICY 2006/7: MORE OF THE SAME? 
 
REF: A.) 05 KINGSTON 2797 
 
     B.) 05 KINGSTON 1256 
     C.) KINGSTON 418 
     D.) KINGSTON 633 
 
THIS MESSAGE IS SENSITIVE BUT UNCLASSIFIED.  PLEASE HANDLE 
ACCORDINGLY. 
 
¶1. (SBU) Summary:  The GOJ expenditure budget for FY 
2006/7 is expected to be announced on April 12.  Against 
this background, emboffs met with Ministry of Finance 
(MOF) officials on March 30 to discuss the GOJ'S fiscal 
program.  The GOJ, as expected, will miss its FY 2005/6 
balanced budget target (ref. A) due to low revenues 
resulting from external shocks, administrative reform 
delays, and poor tax compliance.  The officials stated 
that the reduction of the debt-to-GDP ratio remains a 
priority, but privately acknowledged that spending on 
social and physical infrastructure will also be prominent 
in the new budget, due in part to the likelihood of a 
general election this year.  Finance Minister Omar Davies 
will have to strike a balance between fiscal discipline 
and election year spending in order to please both his new 
political master, Prime Minister Portia Simpson Miller, 
and the agencies who have kept Jamaica's credit rating 
attractive to institutional investors.  End summary. 
 
--------------------------------------------- 
Fiscal accounts suffer from sluggish revenues 
--------------------------------------------- 
 
¶2. (SBU) Emboffs met on March 30 with three MOF officials: 
Acting Deputy Financial Secretary Darlene Morrison, Acting 
Senior Director of the Fiscal Policy Management Unit, 
Courtney Williams, and Senior Macro Economist, Richard 
Bailey.  After outlining the budget process, Williams told 
emboffs that a number of external and domestic shocks 
combined to dampen GOJ'S fiscal operations during the 
year.  He noted that the fiscal program had been on track 
during the first quarter (April-June), but that these 
factors subsequently derailed it.  (Note: Williams 
privately told emboff that the data suggests that the 
fiscal deficit for 2005/06 could be in the region of three 
percent of GDP, one percentage point above the revised 
target. End note.) 
 
¶3. (U) The rising cost of oil actually reduced GOJ 
revenues because it is subject to a fixed tax, rather than 
an ad valorem one.  This, coupled with falling demand, led 
the GOJ to table a new energy policy in March 2006 which 
included, inter alia, a value-added tax on gas.  Williams 
noted, however, that the issue was politically explosive, 
and pointed to three gas riots since 1979, the most recent 
of which followed the planned introduction of just such a 
tax in 1999.  An impact study showed that this unrest cost 
the country almost three percent of GDP, much more than 
the incremental tax benefits would have provided. 
 
¶4. (SBU) Weather conditions contributed to higher-than- 
expected inflation.  Viewed amidst fixed incomes, this 
resulted in reduced consumption and in turn a fall in 
consumption- and income-based taxes.  At the same time, a 
number of revenue improvement measures - especially new 
tax measures - scheduled for the first fiscal quarter were 
not implemented until December 2005.  Williams stated that 
preliminary indications are that these measures are 
beginning to take effect, and that improved results should 
be expected in the coming fiscal year. 
 
-------------------------------- 
Tax compliance a major challenge 
-------------------------------- 
 
¶5. (SBU) Given a recent MOF report showing a tax 
compliance rate of 58 percent, emboffs asked the officials 
to comment on the extent and impact of the problem on 
revenues.  Morrison pointed out that compliance was a 
major component of administrative reform, with the intent 
to establish a taxpayer registration number (TRN) to 
combat tax evasion.  However, she also stated that 
enforcement must improve; while punitive laws exist they 
are not being vigorously applied.  Morrison opined that 
judges did not appear to understand the gravity of the 
problem, generally applying only minimal fines to tax 
 
KINGSTON 00000693  002 OF 003 
 
 
evaders. 
 
¶6. (U) She also acknowledged that private sector auditors 
are far more sophisticated than their public sector 
counterparts, and are able to outwit them during audits. 
This prompted the GOJ to seek the assistance of Canadian 
forensic auditors for training.  Morrison said that the 
tax department would welcome any assistance from the USG 
in order to improve tax compliance and enforcement 
procedures.  Post will report septel with specific 
suggestions for outreach. 
 
¶7. (SBU) Williams said that the GOJ actually detected 
increased tax avoidance and evasion following the 
implementation of new tax measures in April 2005 (ref. B), 
indicating that Jamaica has reached its "taxable limit." 
Emboff therefore asked the MOF team whether they were 
considering tax consultant Ethlyn Norton-Coke's proposal 
to increase consumption taxes and reduce or eliminate 
income taxes.  Morrison stated that the proposal was being 
considered, and that the new Director of Taxation, Vinette 
Keane, was focused on broadening the tax base.  Williams, 
who has privately been dismissive of Norton-Coke's 
proposal, reiterated the regressive nature of her 
suggestion and its potential impact on society's most 
vulnerable groups.  He noted that both U.S. and European 
countries were generally moving away from regressive 
taxation regimes. 
 
-------------------------- 
New Budget, Old Priorities 
-------------------------- 
 
¶8. (SBU) With debt servicing costs accounting for almost 
70 percent of the expenditure budget, Econoff asked the 
MOF officials to comment on the current debt-to-GDP ratio, 
as well as whether debt repayment would remain the major 
priority in the new budget.  Williams stated that the 
ratio was in the region of 140 percent, and that MOF's 
medium-term target was 100 percent, compared to the 
international benchmark of 60 percent.  Given Jamaica's 
recent history - notably the GOJ bailout of the financial 
sector following the crisis of the mid-1990s - he said 
that 100 percent was a more reasonable target. 
 
¶9. (SBU) Morrison pointed out that while the reduction of 
the debt-to-GDP ratio remained the priority, physical and 
social infrastructure projects will also feature 
prominently in the 2006/07 budget, an indication that this 
could be an election year, as political observers have 
increasingly suggested.  She further revealed that the GOJ 
would not pursue a balanced budget this year due to the 
continued recovery of the economy and the need to increase 
capital spending for rehabilitation purposes.  In 
addition, the GOJ will spend a significant sum on capital 
projects associated with the 2007 Cricket World Cup (CWC - 
ref. C).  The current prediction is that the GOJ will aim 
for a fiscal deficit of one percent of GDP. 
 
¶10. (U) When asked about the possible impact of the CWC on 
fiscal operations, the officials hoped that consumption 
and corporate taxes would increase, thereby raising 
additional revenue to offset the increased debt.  However, 
given heavy GOJ borrowing to finance these capital 
expenditures (and also the new Memorandum of Understanding 
(MOU) with the public sector: ref. D), emboffs raised 
concerns about high interest rates.  Morrison asserted 
that interest rates were actually expected to trend down, 
particularly with moderating inflation.  Williams admitted 
that falling inflation could be stymied by the ongoing 
drought, which led to a series of bush fires in 2005, 
affecting agriculture production and causing a spike in 
food prices.  Regarding the MOU, Morrison assured emboffs 
that it would be concluded before the budget presentation 
on April 12. 
 
------- 
Comment 
------- 
 
¶11. (SBU) Williams is a close Embassy contact with a 
reputation for candor, so it is reasonable to accept his 
analysis that the GOJ will miss its revised fiscal deficit 
target of two percent of GDP.  Nevertheless, his 
 
KINGSTON 00000693  003 OF 003 
 
 
prediction of three percent will not impact significantly 
on investor sentiment, as most observers have anticipated 
this.  Of greater concern is that the GOJ will likely 
provide for a deficit of only one percent of GDP for the 
upcoming fiscal year, predicated on the need for increased 
capital spending to fund rehabilitation and infrastructure 
associated with Cricket World Cup 2007.  This target is 
overly ambitious.  With hints of an early election, CWC 
costs that may exceed expectations, and with weather 
experts predicting another stormy summer, this deficit 
target could be significantly exceeded.  Any such 
deviation could lead international agencies to reduce 
Jamaica's rating, prompting among other things an increase 
in the rate at which the country can raise funds on the 
international capital market.  Against this background, it 
is clear that the tax structure and enforcement regime is 
in need of complete reorganization.  While this would be 
political suicide prior to a general election, one can 
only hope that whichever party emerges victorious will 
recognize this vital need if Jamaica is to continue its 
climb out of the economic doldrums.  End comment. 
 
JOHNSON