Budget 2011-12: work in progress?

Colin Bullock, Contributor

The February 2010 revisions to the Financial Administration and Audit Act require the provision of significant pre-Budget information to engage the consciousness of, and feedback from, civil society. Several groups have complained of not being consulted, and it is difficult to identify a coherent and consolidated set of pre-Budget information. Any comments on the Budget before it is fully tabled (including the revenue and financing proposals) is, therefore, gazing through an exceptionally opaque crystal ball.

The Budget for the consolidated central government should be a serious management tool for the largest and most centrally important financial and economic enterprise in Jamaica. Too often, it is not afforded the seriousness and respect it deserves. In what has become almost a tradition, the initial Budget is dressed up by underestimating expenditure and overestimating revenue. We have then come to expect mid-year adjustments which have often included new revenue measures and a compression of capital expenditure to accommodate recurrent expenditure that was originally understated.

At time of writing, we have the expenditure figures for FY 2010-11 but we do not yet have the final revenue performance and fiscal out-turn. At the end of February 2010, 'Revenue & Grants' was $5.7b below Budget, with the shortfall in taxes being $2.7b. This shortfall reflected the weakening in the economy through underperformance of PAYE, GCT (local) and Customs, as well as the impact of the JDX and monetary policy on tax on interest. Recalling that the IMF conceded a 0.8 per cent of GDP increase in the fiscal deficit (to 7.3 per cent) for the fiscal year, in consideration of JDIP and the Nicole rains, the reported 'above-the-line' (non-amortisation) expenditure of $400 billion for FY 2010-11 would require 'Revenue & Grants' of about $40b in March. Considering historical patterns (a surge in March), the possibility of grant inflows and the leeway afforded by cash accounting (where expenditure is recorded when bills are paid), this increase (from about $25b per month) is not unlikely.

The expenditure budget for 2011-12, on the face of it, does not appear to be expansionary. 'Above-the-line' (non-amortisation) expenditure increases by 3.9 per cent from 2010-11, while budgeted capital expenditure is virtually flat. Despite this modesty, 'Revenue & Grants' will have to increase faster than nominal GDP if a fiscal deficit target of 4.5 per cent of GDP is to be met. (Will the IMF ease this requirement?) From political, social and economic perspectives, it appears that new taxes or higher rates are not likely. The record of negative economic growth and depressed socio-economic indicators would not suggest the efficacy of new taxes. On the other hand, pre-Budget announcements have focused largely on the institutional reform of tax administration. It appears likely then that much of the expected enhanced revenue performance will rest on enhanced administration and compliance. In this vein, the caution about overly optimistic forecasts, relative to the state of the economy, is still valid.

If revenue enhancement will be taxing (no pun intended), there are other areas of concern regarding the viability and sustainability of the Budget. I have written separately of the need to avoid the use of special funds to under-represent government expenditure and debt. Jamaica has learnt from experience that 'off-budget' expenditure is a fool's game because the debts incurred eventually have to be repaid by the central government through the same budget that the 'off-budget' expenditure sought to avoid in the first place. This then crowds out non-debt expenditure, adding to a vicious downward spiral for the creation of even more special funds.

The Budget begs the question: Will recurrent expenditure be contained, and will capital expenditure be sustained? This arises where recurrent expenditure is budgeted to grow more slowly than nominal GDP and where there are several significant structural issues still outstanding. For example, there is the matter of public-sector restructuring. With a preliminary report available from July 2010, one would have expected that the specifics of intended reform would have been clarified prior to the Budget. While we are now advised of impending action in May, we are not clear as to whether the structure of the tabled expenditure estimates is consistent with the changes to be announced. Unfortunately, the role and functions of Government were not part of the terms of reference of the committee for public-sector restructuring. In some instances, including tax administration, there is budgetary provision for institutional change.

While we move towards public-sector restructuring, there has been a statement of intent to address the rapidly escalating budgetary burden of public-sector pensions. The budgetary provision is increasing from $16b to $21b, having doubled in the past five years or so. Decisions on both public-sector establishment and pensions may involve costs with budgetary implications.

The matter of 'arrears' in public-sector emoluments has still not been settled. It is clear that there is no provision for payment of the 'seven per cent arrears' for the substantial body of public-sector workers and that it is expected that the public-sector wage freeze will continue throughout fiscal year 2011-12. It is also clear that trade unions representing public-sector workers are, for the most part, not accommodating of this position. The experience of the past few years suggests labour unrest, IDT arbitration and litigation which have often had negative budgetary consequences.

The nature of these industrial-relations disputes threatens the spirit of the nascent dialogue between the trade-union movement and the Government. This has implications for the viability of the wider social-partnership discussions that the Private Sector Organisation of Jamaica has been trying to resurrect. These discussions are also threatened by what, at present, appears to be a deteriorating state of relations between Government and Opposition in the Houses of Parliament. The weakening of trust and failure of dialogue threaten prospects for industrial peace, enhanced productivity and enhancement of budgetary revenue.

Private sector on-board

The private sector has also resurrected its proposal for consideration of comprehensive, rather than ad hoc, tax reform. While the Golding administration appears to be formally supportive, and despite last year's announcement of a freeze, the matter of import-duty waivers has again been in the news. At the same time, we await news of efforts to study the extensive system of legislated tax incentives which, with waivers, remit revenue that is a substantial percentage of revenue actually collected. Given the complexity of comprehensive tax reform, its implication for interest groups, the imperative for political will and the fact that we have not yet started, it is not inconceivable that we should take the next year merely to study the matter.again.

In consideration of all of the above, there is a serious concern that we may have yet another unfinished Budget. Revenue may depend on tax-administration reform that is not yet in place. If expenditure is understated by 'off-budget' means, it does not avoid debt. If recurrent expenditure is understated, the capital expenditure in the Budget is threatened. We are entering the budget year with several important institutional reforms that are either not yet off the ground or are still in the air. The state of political dialogue and industrial relations is not healthy.

It is of utmost importance that these issues be resolved if the Budget is to assume its proper role as the definitive and authoritative guide to the management of public finances rather than something we debate, disagree on, and then forget.

Colin F. Bullock is a lecturer in the Department of Economics, UWI, Mona. Email feedback to columns@gleanerjm.com.