Cedric Wilson, Contributor
It is not easy to for a government to come up with a good budget in a small, vulnerable economy where resources are terribly scarce and citizens are more than willing to block roads in protest when they are disgruntled. Furthermore, the prospect of economic recession in the US economy and the menace of rising oil prices make the task even more difficult.
A good budget is not simply about sound economic policies and accurate forecasting; it must take into account people's comfort level. To avoid the wrath of the people, the finance minister should observe two principles: avoid new taxes and be optimistic. Yet, the paradox is that economic growth, particularly after a long period of stagnation, seldom springs from an approach that elevates safety above all else. Courage and a measure of risk are the raw materials of transformation.
Former finance minister Omar Davies learnt the hard way in 1999 when he announced a hike in the tax on gasolene. For three days, the island was brought to standstill as enraged Jamaicans rioted. When the smoke finally cleared, the cost associated with the loss of production and infrastructural damage was put at $10 billion. On top of that, the beleaguered minister had to swallow his spittle and roll back the tax.
Finance Minister Audley Shaw, while still in Opposition, assured Jamaicans in no uncertain terms that he had what it took to "grow the economy" and "put the people to work." That left him with very little option other than to expand the budget. The $497 billion budget announced by Shaw represents a 23 per cent hike over the 2007-08 budget, but when adjusted for inflation, it translates to a five per cent increase in real terms. The Budget may, therefore, be considered to be expansionary.
One-time opportunity
Expansions in government expenditure are traditionally funded from two main sources: an increase in taxes or more debt. Of course, with the public debt now above $1 trillion and an effort on the part of the Government to contain the deficit, more borrowing is the less attractive of the two. Shaw, however, is aware that he has some room in which to dance. This is his first Budget presentation and Jamaicans are willing to give the new administration a chance to demonstrate that they can deliver what was promised. Shaw will never have this opportunity again.
Tax revenues are set at $263 billion, an increase of almost 20 per cent. The additional revenue inflows are expected from increased taxes on tobacco, motor vehicle licence, and motor-vehicle examination fees. Plus, there is an effort to get a greater proportion of self-employed individuals and unregistered businesses to pay their taxes. Indeed, too many Jamaicans get away from paying taxes and it undermines the Government's capacity to adequately address some of the social infrastructure necessary for development.
The finance minister has declared an amnesty to encourage tax evaders to pay up, and they should. Nevertheless, the true test of the effectiveness of this strategy will not be measured by the amount of tax evaders that pay up willingly, but rather by the extent to which the Government gets the unwilling to comply.
On the principle of optimism, Shaw, in his presentation to Parliament, had that in abundance. Optimism is a little bit like playing music while taking exercises. Performance tends to improve when the sound is positive and the beat pulsating. In a sense, mass psychology is a big part of macroeconomics.
If people believe their income will increase, they will begin to spend their pay cheques before they get it. If people feel they are richer, they will start building their dream house on the basis of that perception. There is nothing better for economic growth that when people spend money. As such, even if things are hopelessly grim, it is, more or less, anathema for any government to admit to it openly. Governments and central banks only concede that a recession is on after everybody, including the dead, knows. The fact is, pessimism when fed into the collective mood of a people can turn a bad situation into a catastrophe.
Upbeat about his budget
Indeed, the finance minister was upbeat about his budget. However, it was done against the backdrop of "rapidly rising oil and agricultural commodity prices, a severe tightening of international credit markets and a sharp housing downturn in the United States." Notwithstanding, sufficient weight was not given to these factors. Consequently, a growth rate of three per cent and an inflation rate of nine-10 per cent was forecast for the fiscal year.
A recession is on in the US economy. Even the chairman of the Federal Reserves, Ben Bernanke, has reluctantly admitted to it. A US recession will probably affect the economy in three ways. The earnings from tourism are likely to decline, since the majority of the tourists to the island are from North America.
Second, inflow of remittance should decline with job cuts across the US. And there might also be stagnation or even decline in exports to that market since the US is Jamaica's main trading partner.
Rising oil and commodity prices could lead to cost-push inflation and a further depreciation of the Jamaican dollar. In making the presentation, Shaw carefully omitted mentioning the renegotiation of the memorandum of understanding (MOU) among public sector workers. There seems to be some splintering among the group of public sector workers that participated in the previous MOU and this has implications for the overall increase in the Government's final wage bill. Then, given the estimated 19 per cent inflation rate experienced in the last fiscal year, it is likely that workers in general will be pressing hard to keep pace with price increases, and this will push inflation. That aside, Shaw and all Jamaica should pray that the hurricane season passes without any incident.
Taking everything into account, the Budget presentation was good, except that a growth rate of 1.2 to 1.5 per cent and inflation rate in the region of 14-16 per cent seems more realistic.
It was Mark Twain who said "the man who is a pessimist before 48 knows too much; if he is an optimist after it, he knows too little." Shaw is definitely an optimist and he does not seem like a man who knows too little. But, given the wit and respect associated with Mark Twain, it seems only natural to conclude that he is less than forty-eight.
Cedric Wilson is an economist who specialises in market regulations. He may be contacted at conoswil@hotmail.com.
