Strategic planning is important

The government recently released the fiscal numbers for the eight months ended November 2006. The overall fiscal deficit shows better than projections, as it was J$28.0 billion versus a projected J$29.6 billion. In order to fully appreciate the outturn, however, we have to go behind the numbers to see what it is telling us. In fact a closer analysis shows that we are in fact behind on our development targets, even though the absolute number appears to be better than projected.

The fact is that the deficit currently stands at over 3.0% of GDP versus a projected 2.5% of GDP. There are still four months to go but based on the growth rate it seems unlikely that this target will be achieved. As I have been saying since the start of the fiscal year, given the cement crisis and the infrastructural support, the economy does not show the capacity to grow at 3% to 4%. We did not have any natural disasters this year so in true Jamaican style we created our own, the cement crisis.

Tax revenues
My projection is that for the fiscal year the deficit will come in at over 3% of GDP simply because GDP growth will not be at the 3% to 4% projected. Because of this tax revenues will also come in below target, which already was very difficult to meet, as a 20% increase in tax revenues was always going to prove challenging. My own projection remains that we will achieve tax revenue growth of approximately 10% to 15% at most. My reasons are (i) the MOU will restrict growth in income; (ii) single digit inflation will keep prices relatively stable, meaning little growth in company profits, if any; (iii) the reduction in interest rates has affected company profits negatively; (iv) the first three months was positively affected by tax arrears collection; and (v) the planned increase in the income tax threshold would have negatively affected payroll taxes.

Many would argue that tax revenues are just J$2.7 billion (2%) behind budget with eight months gone. However, the last four months represents 39% of total tax revenues, and relies heavily on increased payroll, profits and interest taxes. Companies have shown less than expected profits; the savings rate has declined, and companies have laid off staff in order to deal with lower profitability. In addition lower profits means less Christmas bonuses. This translates to less tax collections, and may be a reason behind the government’s late decision to postpone the increased tax threshold until other allowances are removed to neutralize the effect.

This postponement can only negatively affect business and consumer confidence. We must bear in mind that the only real difference between today and a few months ago, when economic prospects did not seem so upbeat, is increased confidence. It is confidence that will lead persons to invest and spend monies. If we continue to make decisions that adversely affect the confidence in government pronouncements then it will only serve to restrict our growth. After all when taxes are to be increased the legislation is always hurried through, and in many cases not put into law until months or years after. It seems as if only when there is to be a credit given to the public that the administrative preparation has to be perfect. The cost of this decision could be more than the potential loss in revenues.

The fact that we always seem to struggle to meet our tax revenue and growth targets is symptomatic of the way we plan and approach budgets. As an example, each year we prepare budgets as if natural disasters are an exception rather than the norm. So when the hurricanes and the floods happen the government always seems surprised at the extent of the damage even though this occurs almost every year.

Strategic planning process
This is not a problem only to be found in the government budget, as private companies face this issue also. Budgets are seen as the beginning and end of the planning process when in fact they really should just be used to support the strategic planning process. Unless we understand this then each year we will be surprised that we miss the budget targets, and will also place the blame at the wrong feet. Whenever budget targets are not met we tend to focus on the Finance Minister as failing when it is because the operational objectives were not met why the budget was not achieved.

Looking at the annual budgetary process it seems as if there is little or no strategic planning. And if it is actually happening it seems to be overshadowed by the actual budget. The budget should be the outcome of the strategic planning process, thereby supporting the objectives set for the year. These strategies should be driven by the operational ministries, such as Education, Security, Health etc.

The strategic planning process should be as follows:
The Cabinet (Executive) should sit each year (maybe 6 months before the budget is presented) and set broad objectives for the coming fiscal year, e.g., to reduce unemployment by 1% or improve per capita income by $500. The important point here is that high level objectives should be set and measurements must be carefully selected so that they can guide growth objectives;
Each operational ministry should translate the high level objectives to achievable tasks, based on their operational capacity, and set timelines for each. Measurable targets should be set and at this stage each Ministry should prepare their own blueprint as to how the targets will be achieved;
The various ministries / departments should next put realistic costs to each operational strategy. Each task should have documented (i) the assumptions for meeting the target; and (ii) the impact it will have on meeting the high level objective for the ministry / department;
The executive team should meet to go over the plans of all Ministries. The strategic plans of the Ministries should include all departments and statutory organizations that falls within its accountability;
The Finance Ministry should consolidate the budgets and prioritize expenditure based on the value added to overall objective and resource availability. At this point the budget will be finalized and presented to the nation along with the strategic objectives.

It is important to understand that the budget is merely a support for the strategic plan, so that if the operational objectives are not met then the budget may not be met. Once we start focusing on the budget then we lose sight of the strategic objectives, which is really what will drive growth.

Unless we can approach our annual budget in this way then we may end up meeting our fiscal targets but not making any real progress. Because of this we get preoccupied with the absolute fiscal target when we should be concerned with whether or not our strategic objectives have been met. So at the end of 2006/07 fiscal year we may meet our absolute fiscal target, but productivity, per capita income and the quality of education may have all declined. Maybe we need to change the name to the fiscal strategic plan and in that way hold ministries responsible for achieving the targets they set at the start of the year.