Can Jamaica get down to business?

BY KEITH COLLISTER

Sunday, February 05, 2012

IT is too early to describe the new government as "slow out of the blocks", as it is the first 100 days that is used as the international benchmark to assess whether a new ministerial team has "hit the ground running". The yardstick in assessing the performance of the People's National Party's first 100 days will be the preparation of the budget, and the start of the negotiations with the IMF, although the negotiations themselves are likely to go beyond this time frame.

This weekend's cabinet retreat, one month into the life of the new government, will have as its central focus the state of Jamaica's finances. For the period April to December, the central government fiscal deficit is nearly $6.5 billion more than the $48.9 billion projected, but this disguises the true extent of the problem.

Revenues and grants are $15.4 billion below budget, of which nearly $14.6 billion reflects a deficiency in tax income, offset by spending being almost $9 billion below budget. Two-thirds of this under spending against budget is capital, with the remainder being split between programmes and wages. Significantly, interest costs of just under $83 billion are marginally, by just over $320 million, above budget. This suggests that the period following the Jamaica Debt Exchange (JDX), when interest costs were substantially below budget, has come to an end. Despite the welcome clarification by the finance minister, Peter Phillips, that there has been no change of policy on interest rates, and his confidence in his current economic team, our local financial market remains jittery, with a high demand from investors for variable-rate, rather than fixed-rate instruments.

The overall fiscal deficit, which would include overruns on projects and the losses of the government entities outside the central government, is likely to be substantially worse despite the attempts of the former government to reduce these off-budget liabilities. The overall situation is similar to the situation facing the incoming Jamaica Labour Party government in September 2007, which appeared to be facing a likely deficit approaching seven per cent of GDP, compared with the 4.5 per cent deficit originally budgeted, as a result of unbudgeted expenditures of approximately two per cent of GDP.

More worrying, the prolonged period of economic weakness over the past four years of the so called "great recession" is clearly having an impact on tax receipts, which appear to be increasing at a rate slightly below inflation, or falling in real terms. This is in contrast to most of the past decade, when tax receipts increased above the rate of inflation, allowing Jamaica to generate the primary surpluses required to afford our then relatively high interest rates. In short, like many other debt-stressed countries today, Jamaica can no longer tolerate significantly higher interest rates as a way to defend the dollar.

A closer look at the shortfall in tax revenue reveals that it is pretty much across the board, with underperformance of just over $3 billion in company taxation, and with PAYE income tax nearly $1 billion below budget despite the recent sharp increase in the public sector wage bill due to the payment of outstanding back pay. Production and consumption taxes are over $2.8 billion below budget, driven almost entirely by local GCT which is over $3.6 billion below budget. Finally, international trade revenues are over $6 billion below budget, reflecting weakness in customs duty, GCT and SCT on imports.

Our economic weakness means that only a thoughtful and revenue positive tax reform can provide real growth in revenues, as an attempt to simply tax weak sectors more is likely to backfire. In view of the need to complete the budget process and IMF negotiations, the latest date for submissions to the Parliamentary tax committee would need to be by the middle of February, so as to allow a short period of discussion before the completion of the white paper on tax reform, itself coming just a few short weeks before presentation in the budget. The government would also want the submissions, particularly from the private sector working group, led by Joe Matalon, before travelling to Washington on February 17 to begin their negotiations with the IMF and other multilaterals.

Unfortunately, the issues facing Jamaica remain remarkably similar to those outlined in the national planning summit "Jamaica Tomorrow", organised by the Private Sector Organisation of Jamaica in November 2007, just two months after the election. Four of former Finance Minister Audley Shaw's five main economic policy themes (the one exception being energy) were presented at that seminar. The papers included the topic of debt reduction, bureaucracy reduction (which should be a key part of an agenda for public sector reform), tax reform and investment promotion (part of job creation). Despite strenuous efforts, including the successful JDX, these critical economic reform issues remain essentially the same as outlined in my article "Jamaica gets down to business" in December 2007 for the respected regional investment magazine Latinfinance. The challenge for the new government will be to make progress on these very difficult issues in an unforgiving international economic environment. Success will require the highest level of leadership and management available in Jamaica.

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Can Jamaica get down to business?