Friday, March 02, 2007

Valuing our spending

The first supplementary estimates for 2006/07 were tabled on Tuesday by them minister of finance. It shows that the government will be spending $14 billion more than the original budget estimates. The recurrent expenditure has been increased by $13 billion (6.2%) to $224 billion, and the capital side increased by $1 billion to $147 billion.

On the recurrent side, the main contributors to the $13-billion increase were (1) Public debt charges (Ministry of Finance)- $4 billion; and (2) Salaries (Ministry of Education - $6 billion and Ministry of Health - $3 billion). On the capital side, we see allocations to the Ministry of Finance to redeem public debt, additional amounts to Sabina Park, Air Jamaica, security and health.

The main areas that have received the increased allocations were wages and salaries (received the lion's share), Cricket World Cup, and debt servicing. Certainly these should not come as a surprise as we would have known from earlier in the fiscal year about the greater-than-projected salary increases, under the MOU2, the fact that net debt borrowing was racing ahead of projections, and the massive expenditure taking place on World Cup Cricket. The question that we need to ask is, are we efficiently allocating our resources to ensure that we get the maximum value-added from each dollar spent.

Lower return per dollar
At the start of the fiscal year, I had indicated that the way we spend each dollar would need to be the main focus. The fact is that we had already projected a fiscal deficit of $21 billion (2% of GDP) and after the supplementary estimates, and the performance of the revenue side, we can expect a deficit of $41 to $45 billion (4% of GDP). At the same time, our actual growth will come out at around 2.6%, when we had projected 3%. We can take from this then that we will be getting a lower return from each dollar spent than we had projected. In other words, if we projected expenditure of $358 billion and GDP growth of 3%, and we are spending $372 billion for GDP growth of 2.6%, then it means that we are spending more to get less.

This is the way we need to look at the expenditures that we undertake, as at the end of the day all that matters is that we are getting a greater return on what we spend. In other words, when governments spend money, it has to have a value-added return in mind, although it is measured in a different way than in the private sector. When the government spends on health, education and security it does so because we want to achieve a highly productive society and a safe environment to live in. This is the basic function of governments. We need to therefore ask ourselves, what is the best use of our scarce resources to maximise the returns to society.

It is within this light that we have to examine the supplementary estimates and the general way that we allocate resources. The first question I would ask is, why we are projecting to spend $14 Billion more than originally budgeted when we are going to grow at a slower rate. Is it that we did not properly estimate the expenditure requirements, and therefore misaligned our spending with the growth estimates? Is it that in order to grow at 3%, we need to spend more money, or is it that we need to allocate our already scarce resources to better uses?

Examples of this relate to the sugar industry and Air Jamaica. The IMF has been recommending that we shut down both the sugar factories and Air Jamaica for over a year now. The reason for this is that they remain a strain on the fiscal accounts. Air Jamaica, for example, has accumulated losses of over US$1 billion (J$7 billion). It is therefore very important to ensure that Air Jamaica becomes profitable in 2009, or at minimum subsidies should be no more than US$30 million, as it does have some economic benefit to the country. The fact also is that air travel is extremely important to a country like Jamaica, which relies on tourism for foreign exchange earnings. If it is bleeding at the rate of US$100 million per annum, however, then we have to look at alternatives. The sugar industry is a clearer situation, however, and we must make a transition from the current structure of the sugar industry or close it, as other Caribbean countries have done.

Priority spending
We have to decide what the priority is for our spending. Our net borrowing has been $25 billion more than projected, for the 10 months ended January 2007. Have we made the best use of that additional borrowing? We still see the need for better equipping of the police force; greater health facilities; and more funding for education. These, I believe, are the primary pillars on which a progressive society should be based. If we do not have a highly literate and healthy population then our productivity levels will be lower than our international competitors. If we are unable to control crime, then we could have the most beautiful aeroplanes in the world, no tourists will come here. It is therefore very important for us to focus on, or at least give greater resources to, the basic social and physical infrastructures if we are to grow at the levels comparable to the world economy, and even our region.

The global economy and Latin American region are growing at rates of upwards of 5%, so when we are celebrating 2.6% (1/2 of what others are growing at) then we really do not understand where we should be. Much of this growth that we are seeing is because of the global expansion and liquidity that we are benefiting from. There are fears currently that the global and US economies may be weakening, and increased talk that it is possible that the US economy could go into recession by the end of 2007 into 2008. If this happens then we will be affected. It therefore continues to be very important that we spend each dollar in a way that it provides us with the greatest benefit.

Now that we have spent $8 billion on cricket, and $4 billion of that on the two stadiums, we need to ensure that a plan is put in place to make back that money. Any plan can only be supported by the reduction of crime, however, and so just as we have allocated monies to cricket world cup, Air Jamaica, and sugar, it is also very important that we allocate appropriate funds to security, education and health.

One thing I have always commended the government on, which continues to be their main achievement, has been the building of the highways. Irrespective of what some persons may want to say, a good road infrastructure is very important for the economic development of any country and for too long we have neglected this. It is very important not just to stop there, however, as the development of the minor roads, leading from the agricultural lands, is also necessary for the efficient transportation of our agricultural produce to market.

This argument is similar to the concept of Mazlow's Hierarchy of needs. At a very basic level, man needs food, water and shelter to survive. When he has achieved that and extra resources remain then he will look at acquiring the nicer things of life until he eventually has everything and looks towards self- actualisation. The way we have always approached it is that we seek to acquire the finest motor vehicle, paying a car loan, while renting the smallest room in a remote part of town, not knowing where the next meal is going to come from.


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