On the trail of fiscal responsibility

Colin F. Bullock, Contributor

FISCAL RESPONSIBILITY is central to Jamaica's escape from chronic economic stagnation and economic instability (high and variable inflation and unemployed economic resources). Indeed, the Jamaica Debt Exchange would not have been necessary had there been greater fiscal responsibility.

We think of fiscal irresponsibility as a mixture of unrealistic budgeting, creative accounting (including arrears and deferred financing), weak expenditure controls and ineffective tax administration that result in missed fiscal targets, increasing fiscal deficits and public debt and a displacement of productive public- and private-sector expenditure. Broadly speaking then, fiscal responsibility would entail the reversal of these trends.

The effort to capture fiscal responsibility begs an identification of the major players in the process of fiscal deviation. There has been much focus on the beleaguered public servant, who has to answer to the Public Accounts Committee (PAC) of Parliament for breaches of the Financial Administration and Audit (FAA) Act and the Public Bodies Management and Accountability (PBMA) Act, as identified by the Auditor-General. There has been increasing focus on the role of the management and boards of public bodies. These bodies have generated substantial unprogrammed drawings from the public purse. The political directorate, the legal and administrative framework and the empowerment of the public servant have received less attention.

The pre-existing framework

The unfortunate conclusion may be drawn that Jamaica is only now introducing a framework for fiscal responsibility. As in other cases, it is not that a legal framework does not exist, but that there may be loopholes, inadequate administration and observation in the breach. It is instructive that the main vehicles for fiscal responsibility are amendments to the long-standing FAA and PBMA Acts. These pieces of legislation identify the powers of "the Minister" (of Finance), financial secretary, accountant general, auditor general, boards of public bodies, and internal and external audit. The legislation carefully defines the budgetary and expenditure processes, disposition of fiscal revenue, borrowing, audit and remedies for breaches. Public servants have struggled for fiscal responsibility including defining procurement processes, pursuing public-enterprise responsibility and mandating proper investment of monetary surpluses.

The legislation and its administration have not been effective in securing fiscal responsibility. Legislation does not speak to fantasy in budgeting (overestimating revenue and underestimating expenditure). It allows for deferred financing (spending while pretending not to). The auditor general does an excellent job in uncovering breaches but staffing is inadequate relative to the breadth of the public sector.

Internal audit has not always been effective. The financial secretary acts on recommendations of the auditor general to impose penalties for financial losses due to administrative breaches and the PAC offers public airing, potential embarrassment for the public servant and further enquiry and sanction. The PBMA Act has been particularly ineffectual because breaches have to be reported to the attorney general for court action, a process which, if initiated, rarely finds its way to court.

Enhancements to fiscal-responsibility framework

The International Monetary Fund (IMF) is pleased that Jamaica has met all performance criteria at March 31, 2010, and has made progress in structural reform. The two main areas of structural reform agreed by Government relate to fiscal-management and financial-sector regulation. The structural fiscal reforms include modernising tax administration, rationalising central-government employment, rationalising ownership management and reporting of public enterprises and the use of fiscal-responsibility legislation to enhance public-sector financial management (The Jamaica Debt Exchange was a prior condition for programme endorsement by the IMF).

Fiscal responsibility law (FRL) "will expand the coverage of the budget to all general government institutions; enshrine the principle of no spending without budget appropriations; require approval by Parliament of the corporate plans of public bodies and strengthen their oversight by the Ministry of Finance, including their ability to borrow; strengthen reporting and auditing requirements; and introduce appropriate sanctions and enforcement mechanisms to ensure proper compliance with the FRL". The new FRL "will also introduce a medium-term framework approach to fiscal policy". The authorities also plan to create a central treasury-management system" to simplify cash management and reporting and minimize interest income losses.

The January 29, 2010, Act to Amend the FAA Act spoke mainly to refining, not removing, definitions of credit agreements and deferred financing. The February 23 Act to Further Amend the FAA Act had more substance. It spoke to sharpening the powers and responsibilities of the minister the financial secretary and the auditor general. Central to this amendment is the insertion of a new Part VII 'Fiscal Responsibility Framework'. Here, the minister is held responsible for presenting, with the budget, a fiscal policy paper to include a macroeconomic framework, a fiscal responsibility statement and a fiscal management strategy.

The macroeconomic framework is to give an overview of the state of the economy, and an assessment of the prospects for economic growth including medium-term projections. The fiscal responsibility statement is to include the minister's opinion of prudent levels of fiscal balance and debt, proposed fiscal-policy measures and a declaration that he will "adhere to the principles of prudent fiscal management". The fiscal-management strategy is to assess and project Government finances, outline plans for economic development and explain how plans and policies conform to the Fiscal Responsibility Statement. There should be targets for fiscal indicators and analysis of any past-year deviation from targets. The auditor general is to report to Parliament on the fiscal policy paper, regarding its "conventions and assumptions" and reasons given for past deviations from target.

The only quantitative targets in law relate to zero fiscal balance, debt/GDP of 100% or less, wages/GDP of below 9% by March 3, 2016, to be followed by maintenance or improvement. This is followed immediately by a convenient escape clause that the targets "may be exceeded on the grounds of national security, national emergency, or such other exceptional grounds as the minister may specify in an order subject to affirmative resolution".

A report on economic and public financial performance is to be laid in the House twice per year. A tax-ependiture statement, showing waivers, exemptions and other revenue foregone is also presented with the Budget. Wage agreements are to be consistent with the state of public finances.

The amendments to the PBMA Act appear to be less substantial. There are adjustments to the requirements for the presentation of corporate plans with explicit responsibilities for "the responsible" (sector) minister and for the minister to table consolidated budgets of selected public bodies along with the central-government budget. There is stronger articulation of the role of boards, executive management (performance agreements recommended) and auditors and a requirement for the minister to table an annual report of action taken by the attorney general for remedy of breaches of the PBMA Act.

Remaining Challenges in the Search for Fiscal Responsibility

It is worthy of note that the FRL seeks to clarify, sharpen and strengthen the powers of the minister. It should not be lost, however, that there is a simultaneous deepening of the responsibility and accountability of the minister.

Attention is paid to enhancing the role of internal and external auditors and enhancing the role of the auditor general. Parallel with this is an imperative to strengthen the administrative capacities of public-financial management. Central treasury management is yet to be articulated. While the ultimate responsibility of the minister is enshrined in law, the capacity to oversee and report on a broad spectrum of the expenditure, revenue and integrity of ministries, departments, agencies and public bodies must be dependent on a strengthened and empowered Ministry of Finance, Accountant General's Department and revenue agencies. Without empowerment, there can be no true accountability.

Rigid timetables

The reform of public enterprises has to be sensitively managed. The divestment process has suffered from setting rigid timetables that weaken the Government's negotiating position. From delays in divestment and sociopolitical considerations, the Government is still operating entities, the losses of which will be extremely difficult to cauterise. At the same time, the Government has to detail its rules of engagement with public commercial enterprise to balance financial prudence with managerial creativity and efficiency.

National mechanisms for fiscal responsibility cover a spectrum from legislated annual targets with sanctions, to provisions for greater informational and policy transparency (shaming the Government into doing better). Jamaica's FRL falls between both ends of the spectrum. On the one hand, the only hard targets in law are for 2016, there is no legal consequence for failure and there is a broad escape clause. There is, however, near-term support from the IMF agreement.

The provisions for fiscal transparency, through FRL, represent significant improvement. Perhaps, due to time, the current Budget fell woefully short of meeting those provisions. It would be consistent with the spirit of the law for Government to move quickly to rectify these deficiencies. At the same time, the transparency provisions of the FRL fall short of the best international examples. It fails to provide for pre-Budget disclosure for public discussion. It also fails to require an outline of upside and downside risks to economic forecasts. Deferred financing is still allowed and there is neither tax-expenditure budget nor articulated plans to rationalise incentives.

In the final analysis, however, information is useless if the shareholders do not read or are disinterested.

Colin F. Bullock is a senior lecturer in the Department of Economics, UWI, Mona. Colbul3@gmail.com