Sunday, April 04, 2010

The budget’s role in development

As far as I can remember, every year the government goes to parliament and outlines the expenditure and revenue estimates for the upcoming year. And you can be sure that as night follows day that some new taxes or fees are to be added to the overall economy. Even if something is given to the citizens, be assured that it is going to be taken back elsewhere.

The questions we must ask is why do governments come to the Jamaican people year after year for more but we still see no real development in the country. There are some that will argue that Jamaicans drive better cars, live in better houses, and carry two or three cell phones so the citizen must be better off. While we enjoy natural developments, as a result of the technological advances, the fact is that (as I pointed out in my book) in1975 we were ranked in the top 39 percent of countries surveyed in the Human Development Index (HDI), while in 2005 we moved to the 57 percentile. So relatively speaking Jamaica has declined in HDI ranking.

Governments are parasitic
For years Government has been parasitic, just like the mosquito which sucks blood from the body without replacing it, waiting instead for it to be nourished by other sources before it starts its blood sucking again. The problem is that at some point in time that constant sucking of blood without any adequate replacement will make the person ill and eventually lead to their death.

Add to that the fact that the person is very sick already and what you do is hasten the process of death. So compare that to an economy that is in recession and you will understand why new taxes will only serve to shrink the economy further. Can you imagine if the US in 2008 chose to increase taxes in order to reduce the fiscal deficit? The global economy would have crashed and cause devastation.

So we can understand the effect on the fiscal accounts from the tax package introduced in December 2009.The February fiscal numbers show this. Cursory looks at the fiscal numbers do not reveal the true picture, as the fiscal deficit and tax revenue is distorted by the JADEX. And so one would be misled to utilize those numbers for any assumptions without making the adjustments to smooth out that extraordinary item as accountants would do.

If one were to adjust out the extraordinary items caused by the JADEX, the normalized fiscal deficit would in fact be approximately $121.3 Billion and not $135.6Billion, or 12% of GDP rather than 13%. No doubt the IMF took this into consideration. On the other hand as it relates to the tax revenues, they actually underperformed in January by 19.47% ($4.3 Billion) if normalized. This is because one would have to remove the tax effect of the JADEX in order to arrive at what the normalized tax would be, which I estimate at $17.8 Billion compared to a budget of $22.2 Billion.

The tax revenues is what I am more concerned with than the fiscal deficit target, as it measures how healthy an economy is. And remember that this is in the context of the December tax package. Moreover this does not include the GCT on electricity bills and increased property taxes, which I think will have a further contractionary effect on disposable incomes, which is the blood supply of economies.

The problem with our budgets therefore is that there has been no real alignment between our budget process and the desired economic developmental objectives. So even while we set targets for economic growth, inflation etc., the fact is that our budgets have not been configured around our macroeconomic objectives. So we will inevitably end up missing our targets on that basis.

Budget philosophy
While this budget has made some improvements in that philosophy, I do not think that it has gone far enough to compensate for the negative consequences of the budget. The Minister of Finance has correctly recognized:

(1) the need for restructuring the debt cash flows – this is something I have touted for a while to much ridicule from most persons, even some who know embrace it as the best thing since sliced bread. As a matter of fact the much anticipated downgrades I was told would happen if we discussed it too much, all happened before it was discussed and after it was done and discussed we got upgraded. The Finance Minister has taken a very bold step in doing this and I think is consistent with his overall philosophy on the necessary adjustments that need to be done. While I welcome the restructure, my own view is that the pace of the restructure carries significant risks and means that other revolutionary changes must happen to minimize the JADEX risk, with some amount of social fallout. I also believe that the government is going to have to seek other loans like the China road loan to mitigate this risk;
(2) the need to rationalize and bring efficiency to the bureaucracy of government - among these efficiencies is one that I think is one of the most significant developments in recent times because of its positive effect on business costs and private sector efficiency. That is the efiling rolled out by the Tax Administration. I would certainly recommend this project for special recognition at an event like Business Leader or Jamaica Chamber of Commerce awards because of the efficiency it brings to businesses; and
(3) the need to reduce discretionary expenditure to only what is necessary and adds value.

So the overall philosophy of the Finance Minister is I think moving in the right direction. The problem is that the actions of the Finance Minister need to be supported by the other policy arms and actions of the bureaucracy. So that while the Finance Minister is pressing ahead there are other aspects that are weighting down his initiatives. Not least among them is crime, which I have been at pains to point out will only frustrate any financial effort made to turn the fiscal around, as even if the Shaw and his team get interest rates down to zero percent, no one will make any real productive long term investments in a socially decadent environment. The other factor is that we must settle the dispute between the government and teachers/nurses so as to avoid all the resulting unproductive time.

This problem of support can also be implied from the budget numbers, where there are significant real cuts in the budget for the public defender, OCG, auditor general, and courts. My opinion is not based on any detailed knowledge of the programmes but what we need is to get a clear indication of what will the resources allocated to these agencies do to improve the objectives and further serve as a stop to the excesses they seek to prevent. So the budget exercise must not just be a focus on how much is spent this year versus last or how much we can reduce the fiscal deficit by but must focus primarily on what are the deliverables expected in relation to the overall economic targets and whose accountability will it be for certain specific targets to be met.

Unless we understand this inextricable link between the budget and the behavioural aspects of the society we will continue to focus on how much we spend in relation to last year, in a very narrow financial way as I have heard some commentators do, which will only result in us going through the same ritual next year without any real benefit.

As I indicated though, I think the overall philosophy of the budget is changing for the better but we must improve its alignment with the overall economic objectives by taking a much more detailed view of the deliverables in relation to expenditure. That requires a certain shift, which I will not comment on here.

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