A balancing act: The crisis of back-breaking debt

Dennis Morrison, Contributor

Parliamentarians completed examination of the Estimates of Expenditure for the financial year 2011-2012 last week in a charged atmosphere, and now all eyes are on Finance Minister Audley Shaw who will open the Budget Debate this week. Apart from concern about the overall size of the Budget and allocations to critical social services - education, health and national security - the public's primary focus is, usually, about whether there will be additional taxes.

But after three consecutive years of negative growth, the issue uppermost in the minds of most people is whether the Budget, and Government's overall activities, will provide impetus to get the economy moving again. Before looking at the prospects for growth and job creation, it is important to assess certain macro-elements of the expenditure side of the Budget.

First, the Estimates of Expenditure shows that debt-servicing costs are projected to be nearly 50 per cent of this year's Budget, slightly higher than last year, but a measurable reduction from three or four years ago. This is, no doubt, the result of the Jamaica Debt Exchange (JDX) programme, which we ought not to forget involved the first default in Jamaica's history, and in a context where interest rates are at their lowest internationally in nearly 60 years. But what we must pay most attention to is the fact that the additional J$32 billion required for principal and interest charges this year will eat up almost 70 per cent of the entire increase in the Budget.

Higher debt-servicing costs

To spell it out, the overall Budget is projected to increase by 9.5 per cent, moving from J$497.6 billion to J$545 billion, which means that the additional amount available for spending will be just over J$47 billion, while debt-servicing costs will go up by J$32 billion, from J$231.2 billion to J$263.3 billion, an increase of 13.8 per cent. In other words, after the relief from the JDX, debt-servicing costs are again on the rise, and while this is due to higher principal payments, we must not forget that interest charges are likely to go up later on as governments worldwide tighten their monetary policies, ending the low-interest rate environment globally.

Second, as a consequence of the rising debt-servicing costs, the central government budget will have about J$16 billion more for non-debt expenditure this year, that is, J$282 billion, as against J$266 billion last year. The greater part of this amount, roughly J$13 billion, will be for recurrent expenditure, which means that only J$3 billion more will go to capital expenditure. It is important to note as well that of the additional J$13 billion allocated for recurrent expenditure, J$8 billion will go to the wage bill, leaving just J$5 billion for all other recurrent or housekeeping expenses.

It is, therefore, not surprising that the central government budget hardly provides resources to maintain the social sectors, much more to spur growth. The tightness of the Budget is reflected in the fact that the allocations to education, national security and health have remained virtually the same in nominal terms, meaning that there will be declines in real terms. With increased demands in all of these sectors, it will require extraordinary management to keep systems going, particularly in the area of national security, where the fight against crime must be sustained.

The tightening of Government's expenditure is a direct consequence of the measures to correct the massive fiscal deficits which were feeding an unsustainable rise in the national debt, and is in accordance with the standby agreement with the International Monetary Fund. Fiscal contraction on this scale and at this rapid pace, however, restricts Government's ability to spur economic growth and, inevitably, depresses economic activity. This explains the extent and duration of the recession in Jamaica, separate and apart from the downturn in the global economy. But the local economy has now reached the point where further fiscal adjustments would worsen the decline in production and employment and push more people below the poverty line. Fiscal reforms must be combined with increased investment activity if our economy is to rebound.

With central government exerting contractionary pressure on the economy, it is left to parastatal agencies and the private sector to generate momentum. More effective implementation of projects under the central government budget is also an important element of the effort to stimulate increased economic activity. The Jamaica-China infrastructure project is expected to have a stimulative effect, and another leg of Highway 2000 is getting under way.

Driving investment

In the case of the parastatal agencies, there are a number which have the financial capacity to drive investment activity. Among them are the National Housing Trust (NHT), National Water Commission (NWC), Urban Development Corporation (UDC), Port Authority, and financial institutions like the Development Bank of Jamaica (DBJ) and the EXIM Bank. The NHT, NWC and the UDC are major generators of construction activity, which spurs job creation. But even as these agencies support private-sector activity, they cannot replace private investment in tourism, telecoms and the bauxite industry that had been the driver of job creation and economic activity prior to the recession.

In the private sector, contribution to economic growth should come from the restart of two of the three alumina plants that were closed, bringing back some jobs and generating business for providers of local services. Investment activity is, however, likely to be limited in the first instance. Energy diversification is a critical factor determining the vibrancy of this industry. The other key export sector, tourism, is set to achieve steady growth as the travel industry rebounds, but high oil prices are a significant threat. If the trends remain positive, it is likely that the Spanish hotel chains could start implementing the next phases of their resort developments.

On balance, there are some positive forces, mainly from overseas investors and some state agencies, that will provide oxygen for the economy, but the Government's fiscal-adjustment programme will continue to have a strong dampening effect on the overall economy and the creation of jobs. It is now up to the Jamaican private sector to be more actively involved in expanding the economy. The information communication technology infrastructure available in Jamaica is still not being exploited by local players to secure contracts for telemarketing, business outsourcing, and other services.

New investment drives

The private sector in other countries in the region like the Dominican Republic has been far more aggressive in taking up ownership stake in their telecoms systems and utilising those systems to attract business globally. With interest rates markedly lower, and the Government's reduced borrowing in the local market, Jamaican investors should now be looking for alternative areas to put their money. So the constraints of capital and interest rates should be less. What then will motivate them to invest in the real sector?

In tourism, we are barely scratching the surface in terms of the development of attractions, although some players have been very aggressive. With incentives in place, capital available, and the numbers of stopover visitors and cruise passengers increasing, there is a growing market. This is an area of tourism that would provide a significant number of jobs, but it needs strategic direction and public-private sector collaboration.

The other big question, of course, is how the Budget is to be financed. It may well be that through the effect of inflation and a pickup in economic activity, revenues may increase to meet the rise in expenditure. If not, the gap would have to be made up by increased borrowing or additional taxes flowing from the tax-reform measures which were signalled in the Throne Speech. In an environment where disposable incomes are under pressure from inflation, and wage freeze in the public sector for a third consecutive fiscal year, it will take a balancing act to ensure that there is equity in how the burden is shared. Necessary restructuring of the public sector in a job market that is very tight will also be very challenging.

Dennis Morrison is an economist. Email feedback to columns@gleanerjm.com.