Costly consequences of credibility concerns

Darron Thomas, Guest Columnist

After laying out some three supplementary budgets in fiscal year 2010-2011, the credibility of the estimates of expenditure for fiscal year 2011-2012 presented on April 21, 2011 has immediately been questioned. The approximately $48-billion nominal increase over last year's revised figure of $497 billion crudely keeps the real budgeted amount unchanged. It may, however, be the case that the consequences of being incredible are too great, such that the Government will have no choice but to stick to the presented Budget.

Already, there is a feeling that the International Monetary Fund (IMF) wants to see the Government acting a bit more fiscally responsible/prudent in its spending. Against this background, one would think that in preparing the Estimates of Expenditure, no effort would be spared in ensuring that the IMF will have no cause to question the Jamaican Government's commitment to the conditionalities outlined in the February 4, 2010 Standby Agreement (SBA) between the Government and the IMF.

A breach of these conditionalities, or failing IMF tests, would result in dire consequences for Jamaica. As such, any strategy which puts the current IMF programme in jeopardy is an extremely risky strategy for a government, which, it has been argued, has gone into preparation mode for an election that is constitutionally due next calendar year. Of course, failing an IMF test may result in no further disbursements under the SBA. This would threaten, if not immediately evaporate, the stability which the Jamaican currency has enjoyed for as long as the current IMF agreement has existed.

Additionally, such a failure would potentially preclude Jamaica's access to the international credit market at the interest rates it now enjoys. This would have the effect of causing an already near-impossible-to-sustain debt burden to balloon certainly above 140 per cent of gross domestic product (GDP), and would ultimately break the back of the economy. Couple this with the fact that the Jamaica Debt Exchange (JDX) extended maturities on many instruments which will become due in the near future, and the natural conclusion is that the Government would be remiss to have outlined an incredible budget which would make future IMF disbursements questionable.

It is worrisome, however, that capital expenditure accounts for only 4.5 per cent of GDP. To increase this worry, of the approximately $60.4 billion allocated for capital expenditure, more than 10 per cent, that is, some $7.24 billion, is legacy cost in lieu of the Air Jamaica and Sugar Company of Jamaica divestment programmes. Of course, divestment of state assets will release the Government from its contingent liabilities and should, therefore, augur well for narrowing the fiscal deficit in the future. Jamaica, however, needs to be mindful of the employment fallout which may result from local labour being replaced by foreign workers as international players seek to maximise profits and, in the process, outsource labour needs.

While this year, overall capital expenditure, as a per cent of GDP, remains constant over last year, and last year was a jump from 3.6 per cent in 2009-2010 to 4.5 per cent in 2010-2011, we need to be cognisant of items such as the legacy cost highlighted above. It is spending on capital items that will assist in fostering an enabling environment where businesses and individuals can thrive. Consequently, Jamaica needs to find ways of increasing this spend, while not exacerbating the fiscal conditions. It is also very important that capital expenditures are devoted to business enterprise facilitation and the creation of maximum value through the promotion of the production of commodities which are non-rival and internationally competitive. Non-rival goods include entertainment, sports and, for example, the creation of new knowledge. These activities, one would note, need only be produced once, but can be sold to an infinity of consumers, provided the demand exists. The huge revenues generated from the broadcast of the Jamaica-Mexico World Cup football qualifier on November 16, 1997 is a neat example. More generally, Jamaica's productive activities should be channelled in the direction of the knowledge economy.

Tempered language

With a claim that no new taxes are programmed, while using much more tempered language, it is hard to disagree with Opposition Spokesperson on Finance, Dr Omar Davies, when he says, "The Government's projection of a $44-billion increase in taxes through compliance is not credible ... . The 21 per cent growth in PAYE does not make sense ... . A growth of 39 per cent in corporate tax collection is not credible, nor is a 29 per cent growth in GCT collection." With the economy floundering, and even the best credible projections of growth suggesting no more than two per cent, in the absence of a major tax overhaul, none of these revenue projections should be above the 10-15 per cent range in terms of increases. As with the Budgets of the last two years, the Government will find itself in a position of major challenges if it rides on the hope of achieving the revenue outcomes that Dr Davies so vehemently refutes.

An interesting point to note is that the deficit from this proposed Budget is above J$150 billion (much closer to J$200 billion), which suggests that achieving a balanced Budget by fiscal year 2014-2015, as outlined in the medium-term framework (MTF), is also a more difficult proposition going forward. Furthermore, experts have called for an extension of the current IMF programme which expires early to mid-2012. This must be given serious consideration, as the non-existence of an IMF programme may decimate access to certain cheap sources of funding.

While we cannot, in perpetuity, roll over debt, it seems a continuation in this mode is inevitable, at least in the near term. In light of this, reduced access to cheap financing will dig Jamaica deeper into the hole she already finds herself in. While time still allows, let us work to ensure that the Budget is credible and that Jamaica will have the necessary breathing room to allow it the space to recover and bolster production and free itself of the economic dilemma with which all Jamaicans must grapple.

Darron Thomas is a lecturer in the School of Business Administration, University of Technology, Jamaica. Email feedback to columns@gleanerjm.com and darron.thomas@gmail.com.