Friday, April 27, 2007

Balancing numbers and lives

Last week two significant events happened in my space. The revenue budget was presented and I attended the funeral of a young man cut down at the start of his life. This young man of course is just one of hundreds killed each year by either gunmen or the police. He was a very hard worker and very enthused about developing a productive life through his entrepreneurial assets. His crime, like many others, was being in the wrong place at the wrong time.

The day before the funeral the Finance Minister presented the revenue estimates, a part of the overall budget, which has earned the reputation of being a meaningless set of numbers in a big book each year. Meaningless because the budget does not seem to support any development objective and is really ignored when more expenditure or new taxes are needed. In fact the real budget comes at the end of the budget year, which is the supplementary estimate.

The presentation by the Finance minister, I think was good, as he seemed to identify all the issues that affect us, but in terms of anything in the budget to engage discussion about a development path forward, non-existent. His budget presentation was nothing short of a statement that it is recognized that an election is in the air and until it is over with we will be doing nothing. But even more important the budget process does not support any objective to improve the daily living conditions of Jamaicans and in particular prevent the lives of ambitious young Jamaicans from being snuffed out. Mr. Shaw’s presentation did provide some insight as to major policy actions that would be adopted by the JLP, and I am hoping to see further development of these ideas as promised to be revealed in the manifesto.

Numbers Game
While the annual budget is a numbers game, displaying the balancing skills of government, the same cannot be said about the balancing of people’s lives. So while on the one hand we argue about one or two percentage points in GDP growth or inflation, or what the debt/GDP ratio is, the lives of Jamaicans are not improving relative to the rest of the world, which is experiencing phenomenal growth. And improvement does not mean borrowing money to buy a second hand car or answering two cell phones at once. Improving people’s lives means significant improvements in per capita income; proper physical infrastructures, such as secure bridges and roads; readily being able to access health services, not having to appeal to the public for assistance on the nightly news; being able to walk or drive without wondering if you are going to be cut down by gunmen or abused by police. A better GDP or inflation number this year, over last year, means nothing if we cannot relate this to better living conditions.

If the government was thinking ahead instead of just implementing additional taxes on cigarettes, wouldn’t it be in the best interest of Jamaicans, and the health system also, to ban smoking in public places, as developed countries have done. Is it more important to earn immediate revenues or look at the future effects of smoking? This logic is difficult to understand, just as I find it hard to comprehend how an intelligent person sees clearly marked in large letters on a cigarette box “SMOKING KILLS” and still lights up. I think the next tax to be dreamt up is the one on noise pollution. Instead of banning loud playing of music in public places, the government will one day place a tax on people who play music. This is the only reason why I can imagine this public nuisance, and lack of public order, continues unabated.

Clearly though there are really no new ideas in the budget and what was not included is more important for comment. For years now there has been a call for significant tax reform, and this was recommended by the Matalon report over two years ago, which has been condemned to a life of dust and shelves in the good company of many similar reports. As usual though we have been thrown a bone in the form of the expected consolidation of payroll taxes. I applaud this effort although long overdue but as servants we must not be ungrateful and ask for more.

The budget also included another provision for the allocation of funds for small businesses. The comment I would have here is “what’s new?” The minister also suggested to financial institutions that the interest spreads were too wide and needed to be narrowed thereby joining the prestigious club that tries to reduce interest rates through moral suasion. Of course another way to do this is to fix the business environment and stick to fiscal targets, thus moderating government’s need for debt, which will (1) force commercial banks to lend money to businesses; and (2) reduce interest rates through competition.

Elusive growth
Growth is projected at 3% for 2007/08, and while achievable will be difficult. This depends on crime levels (still number one priority after years) and two factors beyond our control, the US economy and hurricane season. While we have provided $5.8 Billion more in the expenditures for disaster management we have not considered any contingencies for hurricanes in the growth or inflation estimates. It is apparent now also that the US economy is weakening, caused by a worse than expected housing market.

The minister seems to have indicated though that the need for debt will not be reduced anytime soon. In fact the budget calls for an incremental $37 Billion in debt next year, which means that we will be much closer to the $1 trillion mark. The debt level is the only record we break more times in a year than Asafa Powell breaks his record. In 2006/07 the fiscal deficit was 5.4% of GDP, a far cry from the 2.5% originally projected, and in 2007/08 is projected to be 4.5%.

For this reason Bear Sterns has considered it necessary to downgrade our bonds from market perform to under perform. The logical flow from this of course is that GOJ bond prices could fall. If prices fall then yields increase. If yields increase then it means to attract new debt interest rates will have to increase. If so then how likely will it be that interest spreads will fall? It may be a little more difficult.

If bond prices fall then financial institutions will be impacted as we now use International Accounting Standards, which calls for financial instruments to be valued at market. We also know that some of these companies have eliminated the Held to Maturity classification, thus the reduced valuations would have to be shown in equity or profits. Trading gains could go down at a time when reduced interest rates are impacting profits. The biggest sector on the stock exchange listing is financial stocks, so go figure.

This scenario of course may not play out as I am sure that business persons in the financial sector are very astute and will ensure they are protected from this but it illustrates the link between the budget process and the entire economy. So when we present a budget that does not speak to the development objectives it puts everything on stand still. As an optimist, however, I am convinced that the budget process will see a clearly defined path for development when the other contributions are made and all my fears will be laid to rest.
So while the Finance minister has laid the blueprint for the policy, by identifying the major policy issues, I expect that these will be developed and at the end of the budget presentations we will have a clearly defined plan for balancing people’s lives, and we will live happily ever after.

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