Earl M. Bartley, Contributor
BASED ON the uptick of investment in manufacturing, tourism, construction and mining, and the achievement of a modest one per cent to two per cent growth in the previous two years, I had concluded that the economy had bottomed out and was now showing weak but recognisable signs of resurgence.
I felt also that if this resurgence was sustained, the Government's targets for growth of two per cent to four per cent per annum for the next three years, and the elimination of the then $17 billion fiscal deficit over a four-year period could be realised. Now it seems that the Government's projections have veered off target, and the economy is about to slip into a deeper quagmire of debt and stagnation.
Finance Minister Omar Davies has explained this off-target performance as due to the continued effects of the 9/11 incident and the prolonged slow-down in the United States economy, reducing our exports, in particular, bauxite and tourism. He has also cited the incidents of flooding, reducing local agricultural production. The argument of certain Jamaica Labour Party (JLP) spokesmen that the Government might have misstated its expenditures and revenues to present a 'pretty picture' of tidy fiscal management for the recent general election may also have some credence to it.
Whatever the causes, the fact is that many of the Government's projections are now off-target with the worsening of the fiscal deficit from $17 billion or five per cent of GDP to a projected $30 billion or nine per cent of GDP being the most pressing.
Few indices of the Government's fiscal performance over the past seven years are generating confidence that it will be able to readily restore balance to the economy.
SOME INDICES OF GOV'T FISCAL PERFORMANCE J$ MILLION
The figures (See table) show that while revenues were growing at an average of $6 billion a year during the latter half of the 1990s, revenues have been flat over the past three years. Expenditures on the other hand, have been twice to one-and-a-half times as high as revenues leading to a chronic and growing dependence on debt financing to meet budgetary needs. Borrowing now finances 50 to 60 per cent of expenditures up from 37 per cent in 1997/98. Correspondingly, debt service has grown from 41 per cent to 64 per cent of expenditures.
The deteriorating fiscal deficit the gap between recurring revenues and expenditures is one of the main tributaries feeding debt into the chasm between general expenditures and revenues which, after improving for five years to a ratio $1.54 spent for every $1 of revenue, has again slipped to a 2:1 ratio. Many Jamaicans, having sacrificed over the past decade for the economy to achieve macroeconomic balance are now wondering what new sacrifices they will have to bear.
Four categories of measures are probably being considered by the Government. These are: (1) revenue increases; (2) expenditure cuts; (3) debt rescheduling and borrowing; and (4) growth. We will examine the possibilities for each of these in turn.
REVENUE INCREASES
Up to $1 billion in increased revenues from bauxite and tourism could be realised from an upturn in the U.S. economy. In addition, the Government will likely try to broaden the tax net and increase tax compliance. Both of these measures are somewhat akin to net fishing. It is hard to say how much fish you are going to catch. Mike Surridge, head of the Revenue Protection Division, has estimated that some $2 billion in customs fees are now being evaded. With more thorough collection methods, a greater portion of these fees may be collected, possibly 50 per cent or $1 billion.
More direct revenue enhancers are increases in the income tax and General Consumption Tax (GCT). With corporate income tax and personal income tax now averaging 33 per cent and more than 20 per cent respectively, Jamaican income tax rates are now viewed as being at the upper limits for a developing country. Though such a measure could further depress consumption and aggregate demand, chances are the Government will likely seek to raise GCT by two or three percentage points to 17 per cent or 18 per cent. This could yield an additional $4 to $5 billion per annum. In all, increased taxes could yield $6 to $7 billion.
EXPENDITURE CUTS
It is widely acknowledged that the bureaucracy of the Jamaican state is too big and bloated. The number of persons employed by the state is currently 102,000 or approximately 10 per cent of the labour force, compared to 89,000 or 9.2 per cent in 1995. The state now consumes 16.3 per cent of GDP, up from 11.5 per cent in 1995. It is significant that the state sector has become larger and more bloated since the Government launched the "Public Sector Modernisation Programme" in 1996, though one of the stated objectives of that programme was the "rationalisation of the size and scope of the [state] sector."
Now, as for the private sector in the 1990s, the public sector will have to be 'structurally adjusted' to bring down costs, and to regain the confidence of the international credit rating agencies and multilateral lending institutions. The Government may have to reduce public sector expenditures by 5 to 10 per cent, which could mean the elimination of 10,000 to 15,000 positions within that sector through attrition or redundancies over the next two years. Several agencies will have to be merged, and others abolished entirely.
Many of these changes will probably not be introduced until after the local government elections, but cutbacks in public sector expenditures are a must. Savings from these expenditure cuts could amount to $10 billion to $15 billion per year.
DEBT RESCHEDULING
AND NEW BORROWING
With the public debt at 141 per cent of GDP and debt service consuming 62 per cent of expenditure, the country has long exceeded the prudent limits for borrowing. Yet even with tax increases and expenditure cuts that could produce increased revenues and savings of $15 billion to $20 billion per annum, the Government will only be half-way home in reducing the fiscal deficit and will still need to come to the market for $80 billion to $90 billion of loan financing to cover expenditures not the least of which is for debt service.
The interesting question is whom will the Government borrow the money from? The Government would naturally like to obtain low interest, long-term, multilateral loans. Over the next one or two years however, many of these agencies will be taking a wait-and-see attitude towards the Government, watching to see how seriously it goes about cutting expenditures and putting its house in order. At most, I believe the Government will be able to access only about US$400 million from multilateral and foreign lenders.
The bulk of its requirements some $70 billion to $80 billion the Government will likely seek on the domestic market. Such high levels of borrowing will continue to keep local interest rates in the high teens and continue to squeeze out private enterprise, who now have access to only about 40 per cent of domestic credit.
GROWTH
Because of continued high government borrowing, squeezing out productive investments, and keeping interest rates high and favouring investment in government paper rather than the real sector, economic growth will continue to elude the Government. Further reinforcing high interest rates, inflation might start inching up due to the programmed devaluation of the Jamaican dollar, which seems to be contemplated in the Government's pledge to the IMF to increase the international competitiveness of Jamaican products by 25 per cent over the next few years.
Even the two per cent real growth adding an incremental $400 million to GDP that was promised during the election campaign, is likely to be too little too late at this stage. Nothing short of 4 to 6 per cent growth is likely to be able to close the fiscal gap and begin to fill the chasm between revenues and expenditures. I do not see the Government achieving those growth rates, with 17 per cent to 20 per cent interest rates and with a cowering private sector, many of whom have decided that the best way to meet the global challenge is to find something to buy and sell goods, currency, or paper rather than retool, improve quality, and push forward into the global market.
Moreover, the Government itself has shown little inclination to extend its facilitatory role to developing and sponsoring an alternative manufacturing vanguard in the communities that will move speedily into resource processing, creating new products and employment, and generating hope, revenues, and foreign exchange.
Considering that Government policies seem unable to generate significant growth in the medium term, and to reverse stagnation and create employment, or to reduce the massive indebtedness of the country, I believe that the Government has lost control of its economic policies. That being the case, all that is left to be played out are the political consequences of these policy failures.
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