Keith Collister, Business Writer

Minister of Finance Dr. Omar Davies signalled Thursday in his Budget presentation that he wants to stimulate meaningful discussion on major policy issues, leading to a national consensus on the way forward, particularly through achieving a social partnership.

But he also took a swipe at his "critics at home", as he called it, who "pontificate" on the "excessive cost of Government", saying he had no apologies about the $89 billion to be spent on wages and salaries.

And, referring to the large increase in capital expenditure in the budget, Davies accused analysts of having taken only a "superficial look at this proposed expenditure of $39 billion on projects", denying it was a sign of "wild spending" during an election year.

Transparency and accounting purposes

Instead, he argues that $14 billion of this sum represents expenditure which took place in the past and is now being brought on to the budget for transparency and accounting purposes.

According to the minister, the $14 billion was split $5.3 billion for projects "executed using the deferred financing methodology"; $3 billion representing expenditure on road construction activities financed using PetroCaribe funds; $3 billion for Consolidated Fund payments, with the remainder representing debts which Finance had taken over from public sector institutions in order to "clear up their books."

He argued that the $14 billion should be subtracted from the total for capital, making actual 2007/08 spending two per cent of GDP less than the deficit target of 4.5 per cent, as nearly half of the amount is accounted for in the previous year.

He was, however, concerned by rising pension costs, which moved to the $10.9 billion or 1.4 per cent of GDP for this fiscal year. This was due to the significant improvement in base pay for civil servants translating into significantly higher pension payments and growing life expectancy.

Reduction in inflation rate

Addressing last year's developments, the minister emphasised the key importance of the fall in the rate of inflation, which was only 5.8 per cent for calendar year 2006 but slightly higher at 6.6 per cent for the fiscal year.

He argued that this reduction in the inflation rate had played a major role in facilitating completion of negotiations for MOU II, and had also allowed the fall in the rate of interest on the benchmark six-month government Treasury Bills from 13.18 per cent at the end of March 2006 to 11.64 per cent at the end of March 2007.

This fall in domestic rates was complemented by the Government of Jamaica (GOJ) achieving its lowest ever coupon of eight per cent on a 32-year Eurobond issued in March 2007, priced to yield 8.125 per cent, which compared favour-ably to the 30-year eurobond issued in February 2006 which carried a coupon of 8.5 per cent and was priced to yield 8.55 per cent.

Growth in GDP for 2006 was a 'moderate' 2.5 per cent, but was still the highest growth rate in 11 years, said Davies.

The finance minister said the fall in debt servicing from $219.6 billion to $203.6 billion had created some 'fiscal space' as it meant that, in percentage terms, servicing represented only 53.5 per cent of the budget, down from 59 per cent in the fiscal year just ended.

Structure of the budget

This budget has been structured against the background of the outturn for fiscal year 2006/07: GDP growth of 2.8 per cent, inflation of 6.6 per cent and the deficit of approximately 5.4 per cent of GDP.

The medium-term targets going forward are GDP growth of three per cent in the current year and 3.5 per cent in 2008/09, and inflation of seven per cent and six per cent for the respective fiscal years.

To finance the programmed deficit of 4.5 per cent of GDP, Davies advised that the Govern-ment needs revenue and grants of $241.4 billion, of which tax revenues represented $215.9 billion, up 14 per cent over the 06/07 outturn.

A very limited tax package of $1.7 billion or 0.2 per cent of GDP will be achieved through increasing the special consumption tax rate on cigarettes by 20 per cent, expected to yield $500 million for the fiscal year, and imposing an environmental levy equivalent to 0.5 per cent of the CIF value of all imported goods, expected to yield $1.2 billion.

keithcollister@cwjamaica.com