The Banks and the new administration seem to agree on tax cuts, small as Timor Leste's tax base is. President Jose Ramos Horta has floated the idea of radical tariff and income tax cuts, and 'Healing the Nation' supports such an approach. The objective is increased private foreign investment.
However Timor Leste has no highly competitive industries, so slashing taxes is unlikely to result in increased foreign investment. New investment, e.g. in tourism, will be far more dependent on political stability, improved infrastructure and improved public health. Experience elsewhere shows that market access, clear rules and the above mentioned conditions are far more important than low tax rates.
On the other hand, abolishing corporate income taxes (while popular with corporations) will place greater reliance on the Petroleum Fund and aid programs. Nevertheless, it seems the new government may be headed in this direction.
Xanana's alliance faces the challenge of maintaining and developing the very sound initiatives of the country's first independent government in education and health. These initiatives include the abolition of school fees at primary and lower secondary levels and the introduction of school meals. These meals are important for undernourished children, so they can concentrate in class.
This program, which began in three districts in 2006, needs further investment and development. However pressure from within the alliance to divert funds into a range of pet projects, plus World Bank advisers arguing for greater reliance on 'user pays' regimes, could subvert the modest but steady growth in enrolment numbers.
The World Bank supports the idea of using revenue for ‘Conditional Cash Transfers’ (CCT), a sort of micro-dispersal of state funds to families, with social objectives attached. The macroeconomic idea is to provide an stimulus to effective demand. However, such moves are likely to be wasteful, undermining state investment in badly needed education, health and infrastructure.
There are many ways in which public moneys can be wasted. There are demands from a wide range of veterans and their families, which might either be sifted through carefully or conceded en masse. The Church is likely to demand public funds for its social projects. The diverse members of the loose alliance will have their own demands. With an anticipated narrowing of the tax base, greater reliance on the Petroleum Fund and wasteful expenditure could push the country down the ‘resource’ curse’ road. A small country should invest its limited income carefully.
Cuban assistance in health and adult literacy has been remarkable. Apart from the 300 Cuban health workers in Timor Leste, 800 Timorese students are now studying medicine with the Cubans, 700 in Cuba and 100 in Timor Leste. The current Cuban offer is for up to 1,000 medical scholarships. This collaboration, which began in 2003, is the largest health aid program in the entire Asia-Pacific region, and very good deal for the country. Within ten to fifteen years, East Timorese graduates will replace all the Cuban doctors.
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