Author: ChrisRam

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Clico and immunity

Introduction
Perhaps it is the constant stream of news coming out of Trinidad about Commissions of Enquiry, referring files to the Director of Public Prosecution or about police investigations in that country. Or perhaps it is the knowledge that Clico Guyana is partly responsible for the sorry state in which the NIS finds itself, or that the individual who directly contributed to the loss to this country of close to seven billion Guyana dollars walks free, or the unsatisfactory conduct of the liquidation of the company, or the fact that so far my request to the courts for access to relevant files has come up with nought.

Then we have the rounds of telephone interviews being given by politicians to the newspapers and speeches made at hugely expensive dinners in which words like crisis at the NIS or the resolution of the Clico debacle are regarded as taboo. After all, the self-employed could not care two hoots about whether the NIS sinks or swims or whether anyone is held responsible for the failure in which so many authorities are in an incestuous game to protect each other.

To square the circle we have the political opposition which has spent inordinate energy on the “symbol” of Rohee. It is now close to four years since I wrote an open piece in which I said that the parliament must do something about Clico and suggested a number of measures they should consider.

In that call I noted that the National Insurance Scheme (NIS) alone is exposed to Clico for well in excess of six billion dollars or more than 20% of the funds accumulated by the NIS over its forty years of existence. I pointed out that members of Parliament ought to be aware that under the National Insurance Scheme Act any temporary insufficiency in the assets of the (NIS) Fund to meet its liabilities has to be met from appropriations by Parliament. In other words, they would have to approve the money to be funded by taxpayers. The politicians’ response has been less than adequate.

Red ink
Shortly before the call on the National Assembly, I had written about the widening financial instability enveloping Guyana as a result of Clico and Stanford and wrote that when the dust settles, the taxpayers, NIS contributors and beneficiaries, members of pension and medical schemes and depositors in Clico and potentially in Hand-in-Hand Trust (HIHT) and the New Building Society could lose collectively several billions from the fall-out in the financial sector. Of these only the NBS came out largely unscathed since its own $70 million loss had nothing to do with the Clico or Stanford.

Let me briefly fast-forward to today. As of now, while several pension funds and the NIS are still holding anywhere between six and seven billion dollars of worthless paper, the majority of Guyanese including the several politicians have quietly recovered most of their money and some of them began counting their blessings around this time last year. They are not going to open their mouths, while when they do it amounts to nothing, and the private sector is only willing to repeat all kinds of platitudes or safe criticisms sent with signals to the government that this is for show only.

Part of the problem with Clico is that the approach to Clico from the very beginning has been without resort to facts, a point made ad nauseam over the years. Some of it was clearly carelessness or laziness. For example, when the President assured the nation on February 5, 2009 shortly after the collapse began that Clico’s assets were sufficient to meet its liabilities he was repeating a company line without having read the December 31, 2007 analysis showing that 81% of the company’s assets was invested in related parties, all of which were under various degrees of threat (SN February 7; Business Page Feb 8 2009).

Collective failure
But it was partly skin-saving as well since Clico was a collective failure of a number of institutions and individuals. In transactions that came under the supervisory lens of both the Commissioner of Insurance and the Bank of Guyana, no one it appeared noticed or felt competent to deal with a company that issued “insurance policies” with premiums running into billions of dollars having a statutory fund of less than fifty million dollars. As pressure mounted on the President and on those with direct responsibility for the sector, the President in his typical style threatened prosecution against the directors and management of Clico if fraud were found. That threat could not be serious for the simple reason that the President knew that the sole Guyanese director and officer was the company’s CEO who would have been the decider over who should be favoured in getting their money back from the fast sinking ship. That is one secret that never saw daylight.

We knew from the newspapers here that the government of Trinidad and Tobago had moved against CEO Lawrence Duprey and finance specialist Andre Monteil for civil and/or criminal conduct in the collapse of the insurance giant Clico and its parent CL Financial. I reported that a civil lawsuit was brought by Trinidad’s Central Bank and Clico against Duprey and Monteil for alleged mismanagement and misappropriation of Clico assets and that Attorney General Anand Ramlogan had directed that all files coming out of the probe into the collapse of insurance giant Clico should be forwarded to Director of Public Prosecutions (DPP) Roger Gaspard to determine if criminal charges should be laid against Duprey and Monteil.

The story is different in Guyana because of the political and personal relationships that control Guyana. The key players in the Clico saga three years ago were President Jagdeo, Finance Minister Dr Ashni Singh, Clico’s CEO Ms Geeta Singh-Knight all of whom currently hold and enjoy various forms of public office, and Ms Maria Van Beek, former Commissioner of Insurance who left the country following an attempt on her life.

Complicity
They all knew but did nothing about the company breaching the provisions of the Insurance Act and compounded its unlawful conduct by failure to comply with a demand/request by the regulator to repatriate the Statutory Fund. They did nothing of consequence.

It is not as if there are no penalties. Section 19 of the Insurance Act provides that any person who contravenes any provision of the Act, or any of its regulations or any direction or requirement made by the Commissioner of Insurance, is guilty of an offence. Unlike the normal presumption in law where the prosecution has the burden of proving beyond reasonable doubt the guilt of the accused, the Insurance Act shifts the burden to the “person” to prove that s/he did not knowingly commit the offence of omission or commission.

In what in normal circumstances would be real noose-tightening, the law goes on to provide that where an offence is committed by a company – in this case Clico – and the offence is proved to have been committed with the consent or connivance of, or to have been facilitated by any neglect on the part of, any director, principal officer, or other officer or an actuary or auditor of the company, he, as well as the company, shall be deemed to be guilty of the offence. Ms Singh-Knight was both a director and principal officer of the local company and most certainly it would have been to Ms Singh-Knight that the Commissioner of Insurance would have been addressing correspondence and directions.

Playing a supporting role then was the Central Bank Governor who failed to appreciate the nature of the product that Clico was offering and the Bank’s responsibility to regulate it.

One big happy family
Now we have moved on to phase 2 in a liquidation that breaks many of the rules, some players have changed. Ms Van Beek has gone and her place has been taken by a lawyer Ms Tracy Gibson whose supervisory responsibility of the insurance sector is conflicting with her unlawful role as an assistant to the liquidator. Mr Jagdeo is busy with his accolades and ventures while Dr Singh remains as Minister. The Bank of Guyana has seen its Governor appointed liquidator over a company to the demise of which his Bank contributed in no small measure. Ms Singh-Knight has been promoted and for all practical purposes granted a pardon, Chartered Accountant Mr Maurice Solomon is another unlawful assistant liquidator to Mr Williams while Senior Counsel Ashton Chase is the attorney. Mr Solomon in turn has been appointed a liquidator of Caribbean Resources Limited, one of Clico’s big debtors. Given that tens of millions of dollars of fees are being paid out by cheques signed by Mr Solomon and Ms Gibson one might have expected some better accounting with the reporting of the transactions under the liquidation and compliance with the Companies Act.

Conclusion
It is not that some people are receiving moneys outside of the law that bothers me. It is that a responsible and competent liquidator has a duty to look for wrongdoings by the company prior to the order for liquidation. Mr Williams is an extremely decent man in the best tradition of that word. But inexperience alone does not explain his unwillingness to date to have pre-liquidation transactions and conduct reopened for examination.

I am sure our private sector leaders read the regional pages of the Stabroek News. The news coming out of Trinidad and Tobago must surely suggest to them that an enquiry into Clico for possible criminal conduct is long overdue. We have been duped before by President Jagdeo who responded to calls for action on Clico by insisting on a similar investigation into Globe Trust. When his bluff was called he changed tack – no investigation into Clico in consideration for no investigation into Globe Trust. What a clever deed!

Let us hope that the next leader of the private sector to speak at a function will at least recognise the twin issues of Clico and the NIS.

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Things we have not noticed – conclusion

Introduction
This week I continue to raise questions on matters we may not have noticed in areas of public finance and management in Guyana. If former President Bharrat Jagdeo is rightly credited as the mastermind for the circumventing the financial provisions of the constitution and the financial laws, the credit for the execution of any schemes go to his choice as Minister of Finance, Dr Ashni Singh. Dr Singh as an accountant and former deputy Auditor General has used all his knowledge to confuse all and sundry over the Consolidated Fund and its sub-fund the Contingencies Fund, and other funds known and unknown.

Minister Clement Rohee should justifiably feel aggrieved that he is the only Minister of this government to have been targeted with a no-confidence vote in the National Assembly. After all, Dr Singh must at least have been aware of the deception over the rate of the VAT and the $4 billion for which Irfaan Ally was taken before the Committee of Privileges in the last Parliament while he, Dr Singh, was creatively spared by the then Speaker. He was central to the Clico debacle which has not been followed by any investigation into the serial illegalities that continue to this day; is solely responsible for the annual abuses of the Contingencies Fund; would have played a major role in moving more than $30 billion, yes thirty billion dollars, in dormant bank accounts without proper accounting; and is the minister with responsibility for the state of the National Insurance Scheme. And let us not forget that he is the Chairman of the NICIL Board that has been central to the breaches of the constitution and the inappropriately named Fiscal Management and Accountability Act. NICIL under him is several years in breach of the Companies Act and basic rules of accounting but he continues merrily on. Mr Rohee has every reason to think that there has been some goat in his past.

No more lottery accounting
We can assume that the Minister of Finance has had no hand in the decision to have Mr Ramson offer opportunistic advice on the lottery funds, but he clearly has no problem with the discontinuance by the Audit Office of the annual reporting of the funds collected and how they have been spent. It would be excessively charitable, however, to believe that he has not been consulted and has played no part in ensuring that his colleagues who were targeted for budget cuts earlier this year remain funded, parliament or no parliament, cut or no cut.

However assiduously, and at times clumsily, Attorney General, Mr Anil Nandlall, has rushed to position himself for entry into the Guinness Book of Records for the highest number of cases brought by an attorney general against his own parliament, the responsibilities and the powers of the minister of finance make his office the next most important one in the land. For that reason, while we just cannot afford not to notice the things the does, he and his government, with the help of a hardly working parliamentary opposition, a media that is at best poorly informed, a conflicted and handicapped Audit Office under an unqualified Auditor General, an equally unqualified Accountant General and a Finance Secretary with his own challenges and biases, have made sure he is the only brainer in the country, to use a word he employed recently to disparage his hosts at a public function.

As a specific example, how else does one explain the failure by the Audit Office, the National Assembly, the Public Accounts Committee and the press to demand an explanation for the non-tabling of a mandatory annual report on tax holidays granted by the Minister of Finance? There is sufficient anecdotal evidence that tax concessions alone cost this country about a half as much again as the taxes we collect, to make us take the Minister’s cavalier attitude to tax holidays a matter of substance and seriousness. Yet we as a country choose not to notice. We must have lost our marbles along the way.

Unrestrained powers
Who in the political opposition, the wider National Assembly or the Economics Affairs Committee have taken the time to consider and understand the powers the laws give to the Minister to grant all forms of tax concessions without any disclosure or accountability? I am convinced that the reason tax reform is not on the agenda is that it might expose the lawlessness as well as the ease and impunity with which even illegal concessions can be granted to friends and family alike. We have all forgotten that it is now one year since President Ramotar set up a Tax Review Committee while ensuring that it would not function. As the GMA, the Chamber of Commerce and the Private Sector Commission head into the fund-raising activities and the fun of the cocktail circuit, maybe one of their leaders would ask about the fate of that committee as well as the state of the NIS.

But let us stick to the question of taxes and see the extent of the powers of the Minister of Finance in addition to the power to grant tax discretionary holidays.

The Minister of course has powers to make laws under what is referred to as delegated legislation, and should have these tabled in the National Assembly and published in the Official Gazette. While this tool is seen as useful in enhancing the efficiency in public administration and is available generally to all ministers, the proliferation of such subsidiary legislation has aroused increasing scrutiny. As a result, countries around the world and more recently Australia have introduced legislation to regulate when and how such delegated legislation is used.

I thought it might be useful in an article of this nature to separate the powers of the minister of finance into those that have been used to help in curbing corruption from those which enhance public financial management in Guyana.

The incumbent has done nothing on corruption other than to challenge the Transparency Institute and question Guyana’s place on the Corruption Perception Index. He has centred procurement in his office, and his ministry was the biggest defender of Fip Motilall who cost this country so much.

The incumbent has to consider himself the luckiest man alive for not having been subject to a motion that he be brought before the Privileges Committee of the National Assembly.

Tax laws
Let us now look at some of the powers of the office granted to him by various laws. The Minister can effectively make laws to provide that the interest payable on any loan charged on the Consolidated Fund or guaranteed by the government is exempted from the tax; to approve as a mortgage finance company any company which has entered into an agreement with the government whereunder the company agrees to finance housing development; for the introduction of a presumptive tax on the income from self-employment of individuals who have annual turnover from self-employment of less than ten million dollars (not done); for the introduction of a minimum tax on the income from self-employment of individuals whose annual turnover from self-employment exceeds ten million dollars (not done); exempting under defined circumstances the income of non-resident shipping companies; deciding which sectors and products receive export allowances; designating the allowable expenditure for development of agricultural land; designating the central authorities for transacting diamond business; providing for minimum tax on self-employed professionals (not done); exemption from filing returns by persons whose income comes mainly from employment or interest (not done); specifying the books and records to be maintained by persons carrying on any business; appointing an agent in the UK for the purpose of facilitating the assessment of the income of persons residing in the United Kingdom (a clear throwback to the days when England was the Mother Country); appointment of the Board of Review (which has not been done for several years); making and revising Double Taxation Agreements (which has not been done for nearly two decades); entering into agreements with other countries for the exchange of information for the prevention of evasion or avoidance of income tax and the carrying out of those agreements (not done); prescribing the times for the payment of taxes by companies; and providing for the remitting wholly or in part of the tax payable by any person or category of persons on such income, in respect of any year of assessment, and in accordance with such conditions as may be specified in the regulations.

And that list is under the Income tax Act only.

Under the Corporation Tax Act the Minister can declare as exempt the income of any institution established for the encouragement of thrift or any income arising from investments of any fund or scheme established for the provision of annuities to designated persons.

But his real opportunities for acting in the most unaccountable and irresponsible manner lie in his power to grant tax holidays and two other lesser known provisions of the laws, one in the Income Tax Act and another in the VAT Act. Under the Income Tax Act, the Minister has the power to reduce the rate of withholding tax on any distribution or payment for the purpose of giving effect to any agreement relating to tax between the government and any person not resident in Guyana. Neither the GRA nor the Commissioner General has any say in the matter but must simply do as the Minister says. Nor is there any reporting of the exercise of this discretionary power.

And under the VAT Act, in order to zero-rate a supply of goods and services, all the Minister has to do is sign with a person an investment agreement for which there is no definition, specified contents or penalties for non-compliance with any promises by the investor.

Additionally, the Minister of Finance makes all the delegated legislation under the Value-Added, Excise and the Customs Acts and appoints directly or indirectly all the members of the Revenue Board which exercises wide policy-making powers over the administration of all the revenue collecting agencies.

These are enormous powers that are hardly regulated, if at all. True, the Financial Management and Accountability Act has certain guidelines on the charging of expenditure on the revenue of the country; how sums due to the revenue be remitted; and the authority for the remission, concession, or waiver of taxes.

Conclusion
The Minister has shown himself time and again to be irresponsible and willing to bend and if necessary to circumvent the law. There is hardly a qualified accountant in the traditional public service, and both the posts of Auditor General and the Accountant General are held by unqualified persons. It is not the ideal environment in which the Minister of Finance is a Dr Ashni Singh. Rather than allowing Deodat Sharma to misdirect them with petty cash issues, the PAC must make a concerted effort to rein in the excesses of Dr Singh which have cost this country tens of billions.

The Economic Affairs Committee has work to do.

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Things we have not noticed

Introduction
Following, but not as a result of last week’s column addressing the parlous state to which Cabinet Secretary Dr Roger Luncheon has brought the National Insurance Scheme, I had two very interesting conversations, one with a business leader and the other with an MP. In advance of consultations to be held with the actuary on his draft report on the eighth five-yearly actuarial report on the NIS, they both wanted to know my thoughts on the report’s findings and recommendations. Both seemed not to be in the least bit uncomfortable to admit that while they had last week’s Sunday Stabroek they did not get around to reading the newspaper or the full-page column on precisely that topic. We can only guess about their contribution to a consultation for which they would have been so hopelessly unprepared on a matter of such grave national importance, a matter that has been the subject of several articles over a recent two-week period.

It is even worse. By now we all should have been aware that the government of which Dr Roger Luncheon is the Cabinet Secretary and the Board of the NIS of which he is the Chairman, did not implement the recommendations contained in the sixth and the seventh actuarial reports on the Scheme at December 31, 2001 and 2006. But the two persons I spoke with apparently did not know about the parlous state of the Scheme, while my politician friend was bold enough to ask seriously but rhetorically, how did we “allow that?” Perhaps our politicians have been reading too much Lewis Carroll.

A second issue on the NIS is the location of the consultation. Now you would expect that anyone consulting with the actuary would want to meet with him outside of the framework of the NIS Board or its chairman. But that kind of liberal and rational thinking would in Dr Luncheon’s eyes be too dangerous. The consultation had to take place with Dr Luncheon, whose leadership of the Scheme is not insignificantly responsible for its parlous state, at Luncheon’s office and under his chairmanship. Dr Luncheon may strike many as a bumbling incompetent but he remains a dangerous practitioner of artful politics. The idea to hold the consultations on his turf and in his presence was clearly designed to control any criticisms of his government’s abominable management of the Scheme, now facing its worst crisis in 42 years.

Even as we ponder the serious medicine prescribed by the actuary to address the crisis the NIS faces, my hope is that the media would now ask the private sector as well as the political parties and the trade unions in particular, for a report on the consultations. As I indicated last week, I am particularly concerned that if the recommendations are accepted the burden of the adjustments would be felt mainly by the workers of the country.

Now you see it, now you don’t
Today’s subject seeks to raise questions on other matters we may not have noticed. It touches on the disproportionate sharing of the benefits and burdens of the taxation system and the inequality it has spawned in the vast disparity of wealth among those who are part of the power structure and those outside of it. This column has addressed such disparity time and time again and for emphasis captioned a column on January 29 of this year drawing attention to the US system under the topic, “If Mitt Romney was in Guyana, his 13.9% tax rate would have been lower.” The reason is that our tax system favours the employers, those with capital over the workers, who often struggle to make ends meet and who at the end of their working lives which the actuary now says should be extended to sixty-five have nothing but an NIS pension to look forward to. I will deal with that disproportionality next week and look at how different types of income are taxed differently in Guyana.

For starters, let us look at the system of remission of duties granted by the government which was reported on each year in the annual report of the Auditor General up to 2005.

There is a lot to argue with on whether some of the figures do not defy the logic of the reported performance of the economy during the six years. The wild swings between 2003 and 2005 seem to make little sense, but that is really not relevant here, except perhaps to reflect the quality of some elements of the work done by the Audit Office. As for the revenues of the country and their impact on the resources available to spend on education, health, security and infrastructure, it matters little whether the authority to grant remission of duties since 2003 is vested solely in the Commissioner General as the Audit Office seems to think.

But even if the Audit Office is correct, and regardless of where the range of authority lies, there should surely be some formal manner in which the body vested with the powers of remission reports to taxpayers and the National Assembly on the extent and value of remissions granted. If the power is vested in someone else, the one person who should insist on the publication of the information is the Minister of Finance who has constitutional responsibility for the national budget. Any taxes required to meet public expenditure which are borne, if at all, at lower effective rates by one segment of the population, must inevitably be met by those who do pay. But coincidentally or otherwise, the Audit Office ceased to report on remissions from the time Dr Ashni Singh became Finance Minister.

Dr Singh and tax remissions
Dr Singh has been egregiously reckless on the expenditure side of the Budget, misdirecting public funds to NICIL of which he is the Chairman, making unlawful withdrawals from the Contingencies Fund for which he is solely responsible, and authorising the transfer of billions of dollars from the 2000 series bank accounts which requires statutory authority. Under the Jagdeo presidency – and quite possibly still – spending outside of the authority of an Appropriation Act became normal with not even a hint of protest from the Finance Minister. After his role in the unlawful granting of concessions to the former President’s friend, it is difficult for anyone to believe that he is any less careless with the country’s tax revenues than he is with its expenditure.

Yet, our laws give the Minister of Finance enormous powers to give away tax revenues, over what may appear to be a small range of taxes but which have substantial fiscal implications. We start with the first and perhaps best known concession, the tax holiday. Under the Income Tax (In Aid of Industry) Act, the Minister of Finance has discretionary powers to grant an exemption from corporation tax with respect to income from new economic activity of a developmental and risk-bearing nature, or from dozens of economic activities. Without putting too much of an emphasis on it, the ease with which Mr Jagdeo and Dr Singh amended the law for friends shows how elastic and discretionary the law is.

And bear in mind that in approving tax holidays, the Minister is also extending exemptions from Property Tax and the Capital Gains Tax act.

Here again there is a silence feeding the appetite of the conspiracy theorists. Tax holidays can extend from five to ten years and cost billions. So the law requires some accountability. Under the Investment Act the Audit Office is required to carry out annual audits of the tax holiday incentives granted by the Minister, but the Audit Office has failed in its obligations under section 38 of the Investment Act to have laid in the National Assembly such a report for any year. The deadline for this is six months after the end of each financial year.

I have repeatedly raised this omission with no reaction from anyone. Surely the Public Accounts Committee has a duty to deal with this blatant disregard for the law with the potential of massive cover-up of tax giveaways. All to the detriment of those who pay taxes.

To be continued

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From recklessness to inanity: the state of the NIS

Introduction
Dr Roger Luncheon, Chairman of the National Insurance Scheme (NIS) and chief spokesperson for the Government is denying the reality of the parlous state of the NIS. His amazing comments and pretended reassurance that “the scheme is healthy… I intend to draw pension for a good lil while,” seems to be a reaction to the findings of the independent actuaries as contained in the Eighth Actuarial Report of the National Insurance Scheme (NIS). By law, the NIS is subject to a five-yearly review by actuaries whose principal task is to determine whether the Scheme is operating on sound financial and actuarial bases and whether it provides adequate and affordable levels of income protection. Such reports invariably include recommendations on steps required, where necessary, to bring the Scheme back to viability, or where its assets and income far exceed its actual and actuarial liabilities, to reduce the over-funding by a reduction of rates.

This applies to all schemes – private and public – and the recommendations of the actuaries are taken seriously and acted upon promptly. Not so with the NIS under Dr Luncheon.

The responsibility for the failure to deal with the recommendations arising out of the 6th and 7th actuarial reports at December 31, 2001 and 2006 has been murky and confusing. In each of their annual reports since 2004 the directors have admitted to being “in the process of reviewing and implementing the recommendations.” So when Dr Luncheon tells the press that “The board was rather selective with regards to the recommendations [in the 2001 and 2006 actuarial reports] that it endorsed and implemented,” he is more disingenuous than dishonest.

Duplicity and its consequences
The truth is that the decision to implement or not the recommendations of the actuaries lies not with the directors but with Cabinet. Indeed Dr Luncheon gave a hint of this when he added to his comments that “the government is also exploring a new intervention, such as putting to parliament sustainable measures, to keep the NIS from failing.”

But such duplicity and delay have consequences. As Ram & McRae wrote in their Focus on Budget 2012, the actuaries became so frustrated about the failure to implement their 2001 recommendations that they felt it necessary to restrict a full menu of recommendations, given the outlook of the Fund and the concerns regarding some benefit provisions.

They added that if the limited recommendations were implemented, “then other changes may be considered later.” Ram & McRae concluded that that huge warning signal was missed by the entire Board of the NIS.

Dr Luncheon’s denial is not the only dangerous absurdity to have emanated from him. He actually found it possible to say that his government considers any decision on the Scheme in the same manner as it considers same-sex marriage or the decision on the death penalty!

The Government can choose to tolerate this level of banality in its midst but clearly Dr Luncheon is very bad news for the NIS in particular and ought to have been removed years ago.

Deficit sooner rather than later
One of the reasons for acting promptly on recommendations made by the actuaries is that delay prolongs the underlying problems and exacerbates their consequences to the point that when a solution is finally accepted, the medicine is much bitterer than it might otherwise have been.

A painful example of such a situation is evident in the warning contained in the 2006 Actuarial Report which had projected that total expenditure in 2014 would exceed total income for the first time in the scheme’s forty years, and that unless contribution rates are increased, the Scheme’s reserves would be exhausted by 2022.

But Luncheon and his mindless men and a few women went merrily along their do-nothing path, the result of which is that we are now confronted with the revelation by the actuaries that the NIS experienced just such a deficit ($371 million) in 2011, and is facing an even larger deficit in 2012.

This means that something has gone dramatically wrong in the past couple of years to make a bad situation egregiously worse. And that thing is the NIS’s failed investment in CLICO of close to six billion. Even after the unlawful transaction involving the CLICO head office in Camp Street Georgetownm the NIS is left with a $5 billion hole in its balance sheet and no income from more than 20% of its investment.

The painful medicine
The actuaries are now recommending strong measures that would hurt the beneficiaries of the Scheme who are mainly persons over the age of sixty and who would otherwise be expecting to receive a pension after decades of contributing to the Scheme. Here are the principal measures recommended and my comments thereon:

1. Increase the contribution rate from 13% to 15% no later than January next year.

Some of the relevant considerations are whether the increase should be borne in the same ratio between employers and employees or some other ratio; whether the two percentage point increase should take place at once or staggered; or whether there should be any increase at this time.

We can expect a series of consultations with the business community of which one member has already come out against any increase, and the labour unions. It is unlikely that the sugar workers will agree to such an increase even as they battle the employer for more take-home pay.

The workers and their advisers should avoid being misled into believing that this is the maximum increase they may have to face over the next few years. Pages 32/33 set out two contribution scenarios to meet the funding objectives of the Scheme. In the first case the contribution rate goes up to 19% in 2019 and in the other the contribution rate is a more modest 16.5%.

From a purely financial perspective the government might welcome the immediate increase to 15% of insurable earnings. This will bring in new revenues with no immediate outflows in the form of pension or other benefits payments, particularly if it can cajole the unions to accept this and recommendation 2 below.

In any case, if we stick to form, do not expect this recommendation to be acted on before Budget 2013.

2. Increase the wage ceiling to $200,000 per month.

The increase is close to 40% of the current insurable earnings and again, will bring in additional cash inflows with very little immediate benefits to the contributors. For each employee who earns more than $200,000 per month, the increased contribution will be over $11,300 per month of which the employer will pay $6,800 and the employee $4,500 more per month, both assuming that the share of the contribution split remains at 7.8% for the employer and 5.2% for the employee.

3. Freeze pension increases for two years or until the contribution rate is increased and finances improve.

This recommendation is a three-edged sword in which the key players are the pensioner, the employee and the employer. The question is who decides that the finances have improved and what is the yardstick to measure that improvement.

The consequences of a freeze are enormous for those who rely solely on the NIS pension for survival. A freeze means that the pensioner might move from three meals per day to just two or even less.

4. Move up the pension age from 60 to 65 in a phased manner.

The situation gets worse. If this recommendation is accepted, the worker will now be working and contributing to the Scheme from the age of 16 to 65 – 49 years – and will receive pensions from the NIS for a mere few years – unless the life expectancy increases dramatically.

We have to wait and see what the 2012 census tells us but the 2002 census reported that while the numbers of those 65 years and over have risen proportionally, from 3.9 per cent in 1980 to 4.3 per cent in 2002, they are still small in number.

It is true that the census data do not correspond to NIS pensions, since these are also paid to persons no longer living in Guyana, but the numbers cannot be that large.

The financial and actuarial consequences of this increase will be a significant increase in contributions income over the life of every member of the Scheme corresponding with a similarly large decrease in pension payments to them.

And there will be other implications such as the compounding effect on public servants who now retire at 55 but have to wait another five years for their NIS pension. They will now have to wait ten years.

5. Make changes to old age benefit provisions such as:

The actuaries recommend a revision of the pension accrual rates so that the maximum 60% benefit is attained after 40 years of contributions instead of 35; lifting the number of years over which insurable wages are averaged for old age pension calculations from 3 to 5; and amending the basis for pension increases from the minimum public sector wage to price inflation with a limit.

Each of these will have the same kind of effect – increasing the contribution income to the Scheme and reducing the value of the lifetime benefits which the contributing worker will receive.

The actuaries do however make some recommendations of value to beneficiaries. They call for the equalization of the benefit rules for males and females where differences still subsist and for increasing the minimum survivor’s pension to 50% of the minimum old age pension and up the maternity grant to at least $5,000.

Conclusion
The workers of the country are being called upon to pay for the inertia, intransigence and, dare I say it, the stupidity of the government for more than ten years, aided by the perpetual breaches by the directors of their statutory and fiduciary obligations.

And amid all this the only private sector response I have heard so far is the shameless admission that the private sector will increase its evasion of their obligations under the NIS Act, as we witness with the VAT Act, the Income Tax Act and the Corporation Tax Act.

The failure to address the weaknesses in the NIS over the past ten years has guaranteed that there is no easy option. The workers will have to pay and suffer.

Those who are responsible such as the Finance Minister, the Chairman of the NIS Board and his band of directors are never going to be called upon to answer for their dereliction.

The NIS is a national tragedy. Let us now see how the unions and in particular the government-leaning Federation of Independent Trade Unions of Guyana (FITUG) respond.

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Obama and the fiscal cliff

Introduction
Proving that true honeymoons are for first timers only, President Barack Obama returned the morning after the night before to his office/home at the White House and was immediately confronted with some of the immediate challenges he would face the second time round. There is no bigger a challenge than what is referred to as the ‘fiscal cliff,’ a combination of tax increases and spending cuts which are scheduled to go into effect January 2013 and thereby result in a corresponding reduction in the budget deficit.

In an address three days after the elections, President Obama claimed, with considerable justification, that he and his opponent Mr Mitt Romney had proposed to the electorate two competing visions for the reduction of the ballooning fiscal deficit and the national debt. Obama’s “vision” explicitly included the requirement that those whose income exceeded US$250,000 per annum contribute a bit more in the form of higher taxes. Mr Romney on the other hand had campaigned for a 20% across-the-board reduction in tax rates financed in part by the removal of tax-shelters such as charitable donations and mortgage interest deductions.

The new opposition
With the political system and culture of the US being what they are, Mr Romney is now part of the political history of that country. With no elected national, state or party office, Mr Romney’s brief role as leader of the Republicans now falls on John Boehner, the Speaker of the House of Representatives. Mr Boehner too claims a popular mandate for his party which retained control of the House, helped by what is euphemistically called re-districting led by his party and/or the courts. Speaking one week before a scheduled meeting with President Obama this coming Friday, Mr Boehner said that any deal to avert the fiscal cliff should include lower tax rates, the elimination of special interest loopholes and the revision of the tax code.

Both Obama and Boehner could soon learn of the catastrophic consequences of fighting at the edge of a cliff–higher taxes, a rise in the rate of unemployment and the country falling back into recession. One would think therefore that all this pre-meeting talk is no more than bravura and that both sides – already buffeted by their respective media friends to hold out – will see the need for some compromise. In my view Obama has a much stronger mandate and need not demonstrate the excessive caution with which the cloud of re-election overshadows the acts of first-term presidents.

Bush 2
The debate really goes back to the Bush 2 era when tax rates were reduced, when the economy was in surplus and when there was no war. The reasoning of President George Bush was that there could be no better time for the reinforcement of the supply-side doctrine pronounced by the patron saint of the Republican Party, President Ronald Reagan. But soon came 9/11 and two costly wars in Iraq, since ended by Obama, and Afghanistan which Obama is committed to end in 2014.

President Obama came into office in 2008 with a pledge to reduce the deficit and the national debt. In fact, just the opposite has taken place with the national debt increasing by more than $5 trillion during his first presidency. Mr Obama sought to explain – and the electorate appears to have accepted – that the increase was largely due to the wars and the policies of his predecessor. Duly excused if not forgiven, Mr Obama must now keep good on his promise not for his legacy but for the stability of his country and the world’s economy.

The price of failure
Meanwhile, Boehner is playing the kick-the-can-down-the-road game and has suggested that no real decision be taken for another year while the Congress and the Senate work on tax reform. Obama, emboldened by both the presidential as well as the popular vote last Tuesday seems ready to take on the Republicans in what might seem to be a test of wills and of principle. It is hard to understand why and how the Republicans, still to recover from a presidential loss that has left them shell-shocked, would be willing to take the country over the cliff for the cause of tax increases on the top 1% of the population. Hopefully, Boehner, who demonstrated a spirit of compromise in discussions with Obama in his first term, will be able to take that further on this occasion. While there are some who attribute blame to Obama for the failure of those discussions, Mr Boehner now has to win over the leadership of his own party in which failed VP candidate Paul Ryan, a supply-sider has a strong influence, if not being the principal contender.

So what in fact will happen if there is no agreement between Obama and Boehner? First the tax side. In addition to some tax cuts which have already expired but which are up for renewal in 2013, there are many specific changes which will automatically take place, some of which are too detailed for this column. In essence, however, the Bush-era tax cuts are set to expire, which will bring the tax system back to 2001 levels; President Obama’s 2 per cent payroll tax cut holiday will expire, and a series of other temporary tax cuts for businesses that Obama enacted will end.

Some groups in the US estimate that more than three out of four Americans will see some form of tax increase next year with the Bush tax cuts alone affecting 100 million persons. The Tax Policy Center estimates that the average US household would face an average of a $3,500 rise in their annual tax bill.

No hyperbole
This does not appear hyperbolic since some of the taxes cut across the board and will affect lower and middle-income groups. These are the very people whose cause Obama has championed since his days as a community organiser and who voted him a second term. The loss of the Earned Income Tax Credit, a refundable credit and the “payroll tax holiday,” a 2 per cent Social Security tax cut on the first $110,000 in wages together with the expiration of the Bush tax cuts, as well as tax and college credits will have real effects. It would be an unpleasant pill for Obama to swallow in the face of the hard line taken by his political opponents.

At the higher end, taxpayers will be hit with the Bush era tax rate changes. The two top tax brackets are set to rise from 33 and 35 per cent to 36 and 39.6 per cent respectively. Additionally, the capital gains and dividend tax rates will rise from 15 per cent while the 15 per cent dividend tax rate will equal income tax rates.

As I said above, some columnists, including Paul Krugman, a Nobel Laureate and New York Times columnist are advising Mr Obama to hang tough, that this is not the time to negotiate a “grand bargain” on the budget that snatches defeat from the jaws of his hard fought victory. His advice that Mr Obama should let the Republicans take the responsibility for driving the car over the cliff has risks, including the impact on the poor and the middle class, but Obama would no doubt recall that when Speaker Newt Gingrich did something not dissimilar on spending during the Bill Clinton presidency, the cost to the Republicans was considerable.

Mr Krugman argues that a stalemate would hurt Republican backers, corporate donors in particular, every bit as much as it hurt the rest of the country. As the risk of severe economic damage grew, Republicans would face intense pressure to cut a deal after all.

He takes a slightly less catastrophic view of the consequences of the cliff, pointing out that it is not like the debt-ceiling confrontation where terrible things might well have happened right away if the deadline had been missed. He argued that this time, nothing very bad will happen to the economy if agreement is not reached until a few weeks or even a few months into 2013.

And what about the cuts?
Following the failure of the debt ceiling debacle, the US House of Representatives appointed a Joint Committee on Deficit Reduction under the authority of the Budget Control Act of 2011 with the mandate to find a way to cut spending by $1.2 trillion over the next ten years. Unlike so many other committees which are often set up to fail, this super-committee had no such option: if it could not come to an agreement, there would be a trigger – an automatic $1.2 trillion in spending cuts would occur, half from domestic spending and the other half from the Department of Defence. The automatic spending cuts will see the first $110 billion in cuts starting January 2, 2013.

This means that the Defense Department will see per cent across-the-board cuts, while “discretionary” programmes or those that do not have earmarked funds will face cuts of about around 8%. Certain to face cuts is the government-run health care programme for seniors which would face a 2 per cent cut in Medicare payments to providers and insurance plans.

Even as a visitor to the US myself, I find it hard to say how these cuts will affect even an area with which I am familiar, given the way the individual states and the federal government operate. But it is a fair bet that across the country, infrastructure, schools, public health and homeland security would be victims of the cuts.

There are some programmes that are exempt from the cuts. Specifically identified are Social Security, Medicaid, supplemental security income, refundable tax credits, the children’s health insurance programme, the food stamp programme and veterans’ benefits, while the White House has also said military personnel would be exempt from the cuts.

Conclusion
Some months ago the US Congressional Budget Office (CBO) projected that falling over the fiscal cliff could lead the US economy into a “significant recession.“ It estimated that the economy would shrink by 2.9 per cent in the first half of 2013 and by 0.5 per cent for the whole year and that the unemployment rate would increase to 9.1 per cent. It is now 7.9%.

There are those who argue that this is a lame-duck presidency – the period between two elected officials – and that nothing should be done now. Obama is unlikely to agree. Whether he will act like his predecessor George Bush did, boasting that he had won political capital which he was prepared to spend, remains to be seen.

Next Friday’s discussion between President Obama and Speaker Boehner should be a good pointer.