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PUBLIC AFFAIRS - Budget built on sand?
published: Sunday | March 30, 2008
FILE
Christopher Tufton (right), minister of agriculture, in conversation with James Harmon (left), deputy director the US Agency for International Development (USAID), and Bradley Finzi-Smith from Food For the Poor, at a Rural Economic Agricultural Programme project at the St Dorothy's Anglican Church hall in Church Pen, Old Harbour, St Catherine, last month. The minister needs to rethink some of his plans for the sector.
Don Robotham, Contributor
The Jamaica Labour Party (JLP) government has presented its first budget. The Budget proposes a total expenditure of J$497 billion. In real terms, this represents an increase of five per cent over last year. Last year, the Jamaican economy grew by 1.5 per cent, if as much. So, we grow by 1.5 per cent but we increase government expenditure by five per cent. Welcome to Jamaica! One Love!
The big question before us is whether and to what extent this new Budget will be inflationary. Already, under this government, inflation has leapt up to 18 per cent for 2007-2008. With this projected five per cent increase in expenditure, which is likely to be much more in the end, where will inflation be this time next year? In this Budget, there will be a significant increase in the projected budget deficit. The projected deficit is 5.5 per cent but at our current rate, where is the budget deficit likely to be this time next year? It is more likely to be closer to seven per cent of GDP.
How far we have come! In the 2005-2006 Budget, the minister of finance initially projected a balanced budget, eliminating the deficit altogether. Needless to say, this was not achieved and the deficit turned out to be 3.3 per cent. In the following budget year of 2006-2007, the projected deficit became 2.5 per cent. In fact, the outturn was about 3.7 per cent. Who would have dreamt that in 2007-2008, we would be congratulating ourselves on achieving a budget deficit projection of 'only' 5.5 per cent! What all these figures are telling us is that we are on a slippery slope downwards.
Just to give another example. The Budget provides J$123 billion to pay interest on debt in the coming year. This represents a real increase of five per cent over last year. So, we promptly take the opportunity to increase expenditure by five per cent. This will require us to borrow at least US$300 million. What sort of game is this?
Flawed thinking
At a fundamental level, the Government's entire thinking about the economy is flawed. At one level, they seem to get the message which the detailed numbers convey about the shortfalls in resources. At another level in their overall strategic thinking, they seem simply not to understand. We are dealing here with an economy which is decrepit. In much the same way as Commissioner of Police Hardley Lewin has declared the police force to be largely decrepit in its present form. Just as Commissioner Lewin's strategic thinking is informed by this concept, the Government's Budget is in dire need of a similar concept with respect to the economy.
What an increased budget deficit means is increased debt to finance the deficit. It means more transfers to owners of this debt, therefore, increased economic inequality. It also means increased inflation. This in turn translates into devaluation. All of which adds up to no economic growth. Which means more social decay. Which means more youth frustration. In other words: more crime.
Budget deficit and inflationary policy issues seem to many to be arcane and technical and full of jargon. In practice, they are at the core of our economic and social challenges. The budget deficit is the accounting measure which most accurately captures the failures of out there in our real economy. It tells us how little is all our tourism and alumina and sugar and banana really worth in comparison to the goodies which we want to consume but do not produce! Pay close attention to the budget deficit because it is the best measure of our general economic failure and the hard choices we have to make.
Government is hedging
For example, no offence meant to Chris Tufton who obviously means well, but his ideas on food security in Jamaica have a fanciful 1970s quality to them. As the PNP discovered on the food farm projects of the 1970s and Mr Seaga discovered at Spring Plains, the technological transformation of Jamaican agriculture is no simple matter. The human resource and other infra-structure required to accomplish this is simply not present in the Jamaican countryside as yet.
This Budget looks remarkably like one of those Omar Davies presented in the 1990s. The new MOU settlement is just below 18 per cent. The public-sector wage bill remains bloated beyond all justification. The real increase to the security budget is two per cent, which will go largely to repairs of stations and vehicles. At the same time, the Government seems determined to honour its election promises in the area of health, at least. The real increase in the health budget is about 11 per cent. Education is a different matter as it does not look to me as if there is a significant real increase. It is also intending to provide increased short-term relief to the poorest sections of the population. But all such measures run counter to the compelling economic necessity to reduce our budget deficit and to cut Inflation. The Government is hedging.
The problem here is not the goal of helping the poorest groups in society. That is vitally necessary. The problem is attempting to do this in an inflationary manner. If your economy is not growing and you wish to increase expenditure in a non-inflationary way, then you have to redistribute existing resources from one group in the society to another. At this point, financing the Budget becomes a very serious political and social issue of the highest importance. Otherwise, you borrow or print money.
In true Jamaican fashion, we seem to be opting to evade the issues yet again. We have chosen the latter alternatives. If you are going to apply new subsidies, then these must be financed in a non-inflationary manner. In other words, impose some new taxes.
The prime candidates here are our comically low property taxes and financial services. But for obvious political reasons, the Government (and probably the Opposition) are unlikely to propose such a course. We prefer to incur more debt financing and to increase inflation with all their dire consequences than to bite the political and social bullet of increased taxation. It will be critical, therefore, to see what the minister of finance and the Opposition spokesman on finance come with when the financing side of the Budget takes centrestage.
Low-resource measures
Cutting our budget deficit means that we should forget about significant new resources for security, education and the youth. Such resources simply do not exist. The security strategy for this year must focus on low-resource measures - primarily the transformation of the force.
This approach to our finances is a harsh one, but global economic realities are getting harsher by the day and are unforgiving. Recession is a reality in the United States. The devaluation of the US dollar continues apace. Oil prices are now firmly over $100 per barrel. Global rice prices went up 30 per cent this week, and shipping costs continue to soar. The announcement by the Government that energy policy will be at the centre of their activities is therefore, greatly to be welcomed. We simply cannot continue with an oil bill heading towards US$1.5 billion.
But the Government must understand that a problem of such magnitude cannot be solved bureaucratically. Managerialism won't work here. Tough, consistent leadership by example from the top will be essential, otherwise these policies will have zero credibility. The sight of politicians zooming up in gas-guzzling SUVs to champion energy conservation is too ludicrous for words. Likewise for efforts from the Mercedes and BMW set to exhort people to take the bus. Some drastic steps will be required from our leadership for energy conservation to be taken seriously by the Jamaican people.
The Opposition's response
All of this raises the question of what the Budget responses of the Opposition are likely to be. I hope they realise that the time for gloating over the failures of the JLP's pre-election promises has passed. It has already been clearly established that all that was electioneering rubbish.
It is now time to move on to a more constructive stance. Of course the Opposition must present a detailed critique of the Government's Budget numbers, especially pertaining to the revenue- and deficit-reduction targets. The real expenditure and financing costs seem greatly understated to me. The pressures for increased inflation from such a budget could be severe. But the Opposition has a duty to go further. It must show that it has a deep grasp of the problems of the country and a broad vision of how to advance.
The Opposition must try to be constructive and put forward credible suggestions to improve our dire economic situation. In the same vein, the Government will not get away with any more chatter about whether they inherited a so-called 'unbudgeted' commitment of $16 billion from the PNP. They must take full responsibility for this 2007-2008 Budget and not imagine that they can palm off blame on the previous regime. This is no time for demagogic point-scoring. Too much is at stake for the usual silly games of desk-pounding to be played by either side.
published: Sunday | March 30, 2008
FILE
Christopher Tufton (right), minister of agriculture, in conversation with James Harmon (left), deputy director the US Agency for International Development (USAID), and Bradley Finzi-Smith from Food For the Poor, at a Rural Economic Agricultural Programme project at the St Dorothy's Anglican Church hall in Church Pen, Old Harbour, St Catherine, last month. The minister needs to rethink some of his plans for the sector.
Don Robotham, Contributor
The Jamaica Labour Party (JLP) government has presented its first budget. The Budget proposes a total expenditure of J$497 billion. In real terms, this represents an increase of five per cent over last year. Last year, the Jamaican economy grew by 1.5 per cent, if as much. So, we grow by 1.5 per cent but we increase government expenditure by five per cent. Welcome to Jamaica! One Love!
The big question before us is whether and to what extent this new Budget will be inflationary. Already, under this government, inflation has leapt up to 18 per cent for 2007-2008. With this projected five per cent increase in expenditure, which is likely to be much more in the end, where will inflation be this time next year? In this Budget, there will be a significant increase in the projected budget deficit. The projected deficit is 5.5 per cent but at our current rate, where is the budget deficit likely to be this time next year? It is more likely to be closer to seven per cent of GDP.
How far we have come! In the 2005-2006 Budget, the minister of finance initially projected a balanced budget, eliminating the deficit altogether. Needless to say, this was not achieved and the deficit turned out to be 3.3 per cent. In the following budget year of 2006-2007, the projected deficit became 2.5 per cent. In fact, the outturn was about 3.7 per cent. Who would have dreamt that in 2007-2008, we would be congratulating ourselves on achieving a budget deficit projection of 'only' 5.5 per cent! What all these figures are telling us is that we are on a slippery slope downwards.
Just to give another example. The Budget provides J$123 billion to pay interest on debt in the coming year. This represents a real increase of five per cent over last year. So, we promptly take the opportunity to increase expenditure by five per cent. This will require us to borrow at least US$300 million. What sort of game is this?
Flawed thinking
At a fundamental level, the Government's entire thinking about the economy is flawed. At one level, they seem to get the message which the detailed numbers convey about the shortfalls in resources. At another level in their overall strategic thinking, they seem simply not to understand. We are dealing here with an economy which is decrepit. In much the same way as Commissioner of Police Hardley Lewin has declared the police force to be largely decrepit in its present form. Just as Commissioner Lewin's strategic thinking is informed by this concept, the Government's Budget is in dire need of a similar concept with respect to the economy.
What an increased budget deficit means is increased debt to finance the deficit. It means more transfers to owners of this debt, therefore, increased economic inequality. It also means increased inflation. This in turn translates into devaluation. All of which adds up to no economic growth. Which means more social decay. Which means more youth frustration. In other words: more crime.
Budget deficit and inflationary policy issues seem to many to be arcane and technical and full of jargon. In practice, they are at the core of our economic and social challenges. The budget deficit is the accounting measure which most accurately captures the failures of out there in our real economy. It tells us how little is all our tourism and alumina and sugar and banana really worth in comparison to the goodies which we want to consume but do not produce! Pay close attention to the budget deficit because it is the best measure of our general economic failure and the hard choices we have to make.
Government is hedging
For example, no offence meant to Chris Tufton who obviously means well, but his ideas on food security in Jamaica have a fanciful 1970s quality to them. As the PNP discovered on the food farm projects of the 1970s and Mr Seaga discovered at Spring Plains, the technological transformation of Jamaican agriculture is no simple matter. The human resource and other infra-structure required to accomplish this is simply not present in the Jamaican countryside as yet.
This Budget looks remarkably like one of those Omar Davies presented in the 1990s. The new MOU settlement is just below 18 per cent. The public-sector wage bill remains bloated beyond all justification. The real increase to the security budget is two per cent, which will go largely to repairs of stations and vehicles. At the same time, the Government seems determined to honour its election promises in the area of health, at least. The real increase in the health budget is about 11 per cent. Education is a different matter as it does not look to me as if there is a significant real increase. It is also intending to provide increased short-term relief to the poorest sections of the population. But all such measures run counter to the compelling economic necessity to reduce our budget deficit and to cut Inflation. The Government is hedging.
The problem here is not the goal of helping the poorest groups in society. That is vitally necessary. The problem is attempting to do this in an inflationary manner. If your economy is not growing and you wish to increase expenditure in a non-inflationary way, then you have to redistribute existing resources from one group in the society to another. At this point, financing the Budget becomes a very serious political and social issue of the highest importance. Otherwise, you borrow or print money.
In true Jamaican fashion, we seem to be opting to evade the issues yet again. We have chosen the latter alternatives. If you are going to apply new subsidies, then these must be financed in a non-inflationary manner. In other words, impose some new taxes.
The prime candidates here are our comically low property taxes and financial services. But for obvious political reasons, the Government (and probably the Opposition) are unlikely to propose such a course. We prefer to incur more debt financing and to increase inflation with all their dire consequences than to bite the political and social bullet of increased taxation. It will be critical, therefore, to see what the minister of finance and the Opposition spokesman on finance come with when the financing side of the Budget takes centrestage.
Low-resource measures
Cutting our budget deficit means that we should forget about significant new resources for security, education and the youth. Such resources simply do not exist. The security strategy for this year must focus on low-resource measures - primarily the transformation of the force.
This approach to our finances is a harsh one, but global economic realities are getting harsher by the day and are unforgiving. Recession is a reality in the United States. The devaluation of the US dollar continues apace. Oil prices are now firmly over $100 per barrel. Global rice prices went up 30 per cent this week, and shipping costs continue to soar. The announcement by the Government that energy policy will be at the centre of their activities is therefore, greatly to be welcomed. We simply cannot continue with an oil bill heading towards US$1.5 billion.
But the Government must understand that a problem of such magnitude cannot be solved bureaucratically. Managerialism won't work here. Tough, consistent leadership by example from the top will be essential, otherwise these policies will have zero credibility. The sight of politicians zooming up in gas-guzzling SUVs to champion energy conservation is too ludicrous for words. Likewise for efforts from the Mercedes and BMW set to exhort people to take the bus. Some drastic steps will be required from our leadership for energy conservation to be taken seriously by the Jamaican people.
The Opposition's response
All of this raises the question of what the Budget responses of the Opposition are likely to be. I hope they realise that the time for gloating over the failures of the JLP's pre-election promises has passed. It has already been clearly established that all that was electioneering rubbish.
It is now time to move on to a more constructive stance. Of course the Opposition must present a detailed critique of the Government's Budget numbers, especially pertaining to the revenue- and deficit-reduction targets. The real expenditure and financing costs seem greatly understated to me. The pressures for increased inflation from such a budget could be severe. But the Opposition has a duty to go further. It must show that it has a deep grasp of the problems of the country and a broad vision of how to advance.
The Opposition must try to be constructive and put forward credible suggestions to improve our dire economic situation. In the same vein, the Government will not get away with any more chatter about whether they inherited a so-called 'unbudgeted' commitment of $16 billion from the PNP. They must take full responsibility for this 2007-2008 Budget and not imagine that they can palm off blame on the previous regime. This is no time for demagogic point-scoring. Too much is at stake for the usual silly games of desk-pounding to be played by either side.
) to say as the 'budget speeches' go along.
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