Keith Collister, Business Writer
The Minister of Finance is likely to have had a very challenging job in preparing the budget to be tabled in Parliament on Thursday, faced with the task of plugging what must now be a very familiar financial gap.
Revenues and expenditures, respectively, are significantly higher and lower than projected for the year so far.
A critical factor in the likely outcome for the 2007/08 budget will, of course, be our financial starting point at the end of the fiscal year.
In assessing this, it is also helpful to look back even further to fiscal year 2005/06 to understand where we are coming from. The government had originally targeted a balanced budget for that year, which was revised to a 2.0 per cent deficit. The year ended with the fiscal deficit above the revised target, at 3.3 per cent of GDP.
The original programmed deficit for the current fiscal year 2006/07 was 2.5 per cent of GDP, which itself was a higher projected deficit than the previous year's revised target, which was also missed.
It is worthy of note that according to the Ministry of Finance for the first eight months of the year to the end of November, the deficit was ahead of target at $28 billion rather than the projected $29.9 billion for that period.
December's fiscal numbers were significantly worse than most local and international analysts (including Bear Stearns) had expected, as was January's whose deficit of $38 billion was nearly $7.4 billion more than planned.
This was driven by a combination of lower than budgeted taxes, and higher than expected salaries (plus retroactive wage payments) and domestic interest payments, raising the question of whether domestic interest rates had been expected to fall more quickly and significantly than has occurred so far.
Final quarter
The final quarter of the fiscal year is always the strongest as it includes corporate tax receipts, so that the deficit usually falls significantly in this period.
However, this year it appears that the projected deficit of approximately $21 billion dollars will also be missed, with the actual deficit likely to approach $28 billion dollars, or around 4 per cent of GDP, at the fiscal year end in March.
If this estimate is accurate, the deficit will not have fallen in the final quarter as in past years. More notably, the deficit will exceed last year's deficit and break a four year trend of declining deficits. Even this 'official' number will be an underestimate, however, as it will not include delayed payments, both for goods and services, and items such as the repayment of interest to pension funds.
The Government delaying payments for goods and services is not exactly new in Jamaica's history, so to get a true picture of our position when the budget is tabled we would need to know whether the arrears in this area are larger than in previous years. Judging from the comments of the main pension industry players however, the practice of delaying tax refunds of pension fund interest, while also apparently not new, may have been relied upon to a greater extent this year than in previous periods.
Revenue growth
In the critical area of tax revenue, which amounted to about 87 per cent of total revenue projections, the Minister forecasts revenue growth for this current fiscal year at a very aggressive 20 per cent last year. This was to be driven by a 10 per cent projected growth in nominal GDP, augmented by aggressive revenue enhancement measures.
Our projection estimates a significantly lower growth in tax revenue, of about 16.5 per cent or nearly $183 billion rather than the $195 billion originally projected. Part of the revenue shortfall may be due to the fact that nominal GDP growth of 8.4 per cent (roughly the sum of GDP growth of 2.6 per cent and calendar inflation of 5.8 per cent) is currently significantly less than the projected nominal GDP growth of 10 per cent.
It should be noted that, here, we are not exactly comparing apples with apples since this analysis is based on calendar year and not fiscal numbers for which final figures are not available. However, assuming 5.8 per cent as the low point for inflation makes this a favourable assumption from the Government's perspective.
keithcollister@gleanerjm.com
