Friday, May 25, 2012

The case for fiscal stimulus

LAST week I read with interest the comments to my article, and thought that it would be good to respond to these comments and explain the role of fiscal stimulus, and why it is important for Jamaica. The comments included that I always have a negative view on the economy, irrespective of which government is in power. Commentators also suggested that austerity is needed rather than fiscal stimulus, given that places like Europe have always had stimulus.

With regard to the first comment mentioned, I would only say that I am grateful that the recognition is there that I comment negatively regardless of which government is in power, as it shows impartiality. Secondly on this comment, is there any evidence that our economic development has been improving. If not, then it would seem that my comments are warranted. If however we have been seeing welcome economic development then I would be wrong. I will let the reader make that judgement.

International Monetary Fund (IMF) Managing Director Christine Lagarde recently warned that UK policymakers do more to boost economy. (Photo: AP)

On the second comment, I wouldn't really refer to the waste in fiscal spending during the periods before the recession as the same as the need for stimulus today. The fact is that the reason you need "fiscal" stimulus during a recession, or stagnant economy, is that the private sector will not invest where aggregate demand is low. It is therefore necessary for Government, through fiscal and monetary policy, to provide stimulus to the economy, in order to improve aggregate demand. Without that, then aggregate demand will remain low, and the private sector, because of its profit motive, will not make any new investments. The result is economic stagnation, and increased unemployment, which causes further reduction in aggregate demand.

Only this week there were three reports that showed that the fiscal tightening, in Europe and Jamaica, has caused further declines in the economy.

The first is a report by the Organisation for Economic Corporation and Development warning the Eurozone of a possible severe recession if growth strategies are not adopted, especially since Greece announced that they may be exiting the economic bloc.

The second is where the International Monetary Fund (IMF) has been urging the UK to focus on growth by providing stimulus to the economy, either by direct fiscal spending or reducing interest rates. The IMF's fear is that if Europe does not halt its current decline then the global economy could be negatively affected, and again lead to another global recession.

The third is an affirmation from the IMF that approximately 44 per cent of Jamaicans are living below the poverty line. That is on less than US$2.50 per day. This does not look to me like the IMF projections, and fiscal tightness, we were depending on has worked.

Those who argue against fiscal stimulus say that we cannot continue to live beyond our means, and that the most important thing to consider is the high levels of debt, and that we need to run the country like a business.

The problem with these arguments is that they are simplistic, as they do not consider the social impact of the actions. What we need to remember about a country is that it cannot be run like a business, where if it is not profitable you can shut it down and start a new business. When a business closes then all they will need to do is pay the redundancy costs due and start anew. On the other hand one cannot shut down a country and cannot get rid of human resource (social) problems by merely paying redundancy costs. While the consequence of a business closure may be industrial action, if a country reduces its economic activity severely then you could have industrial unrest.

At the same time, during a recession, the private sector will always seek to cut back on expenditure and activity because of a reduction in disposable incomes. One can always argue that eventually businesses will always start to invest again and economies do recycle and become prosperous again. The problem with that argument is that this cycle can take a very long time, during which period there can be a lot of suffering and social decay.

When this happens in a country we are not talking about lost profits, as a business would consider, but rather we are talking about lost lives. It is the responsibility of Government to ensure that the lives of its citizens are maintained at a certain standard of living, and any Government that fails to do so has really failed in its primary objective of improving the rights and living standards of its citizens.

It is for these reasons that fiscal stimulus is important in times of recession, as when the private sector retreats then the only other source of stimulating aggregate demand and providing the jobs to do so is government. Hence the importance of a programme like Jamaica Emergency Employment Programme.

I would be the first to admit that Jamaica has a serious debt problem, but even more important than the absolute level of the debt is the debt-GDP ratio. Now this ratio changes not only by the numerator (debt) but also the denominator (GDP). In addition, the only way that the debt will be paid off is if the GDP increases — that is if there is growth.

Applying austerity measures will cause the GDP to either decline or remain stagnant, resulting in no growth at best. The debt-GDP will increase anyway because debt naturally increases because of interest costs. In addition, declining or stagnant GDP leads to a loss of the productive base of a country, which makes it more difficult to get growth in the future.

It follows therefore that the path of least resistance, to reduce the debt-GDP, is to increase GDP (grow the economy). In times of recession this can only be done by first practicing short to medium-term fiscal stimulus. A failure to do so will most certainly result in higher poverty levels and Europe-like symptoms.

Friday, May 18, 2012

Growth will not come from the budget

THE Government has presented the 2012/13 estimates of expenditure, and it is reflective of the serious fiscal crisis that faces the country. About a month ago I wrote that "...the fiscal crisis we face today is maybe the toughest one we have ever had to face". And the fact that 54 per cent of the $612 billion budget is allocated to debt servicing is evidence of this. This also means that the amount of money left for expenditure in the local economy is just $276 billion.

Anyone who understood what was facing us is certainly not surprised by this very tight budget, especially as we all know that it is essential for us to satisfy the IMF and the perception of the creditors from whom we will have to, in very short order, approach for loans.

Even with this tight budget, though, the Government did the right thing by reallocating some of the funds to deal with the JEEP programme, which is well needed to provide income for those with the highest propensity to spend. However, the budget presented will not be enough to promote the much needed economic stimulus. The problem of course is that our refusal to have accepted that the economy needed stimulus over the past two years has resulted in an economy that has contracted over that period.

I think even the previous naysayers must now agree that Maynard Keynes was right when he indicated how necessary fiscal stimulus is in times of economic recession. As an example, Europe could continue to face difficulties well beyond when the US has fully recovered because of the mistake they made by relying solely on austerity measures.

As a result of our policies, and the resultant need to tighten the fiscal budget, the fiscal accounts are losing its relevance in terms of being able to help generate growth in the economy. This is why the economy is just projected to grow between zero and one per cent this fiscal year.

My own view though, is that even with the current fiscal situation, the economy can still grow within the two to three per cent range if we are serious. For this to happen though it is going to require a change in the way that we think about sustainable development. One of the first changes in thinking is that we need to understand that the preoccupation with the fiscal accounts, to the detriment of the economy and external account, must change.

In fact, the first thing we need to recognise is that any significant tax package will more than likely cause a further contraction in the economy. This may be the way that those who craft the budget are looking, but it has not worked before, and therefore more than likely will not work again. If we ignore logic for fiscal expediency, then we could find ourselves at this juncture again next year.

If, however, logic does not prevail and there are going to be new taxes, then logic again dictates that it would be better to reduce the tax at the levels where there is the highest propensity to spend in the local economy and place the tax burden where there is a higher propensity to save, or spend externally. What would be practically translated into is reducing the PAYE rate, while increasing the consumption tax on imported items that are locally produced, as an example. Even this sort of approach is not sustainable, however, as it could result in capital moving offshore.

The corner that we have painted ourselves into, however, is one where we had no option but to present this type of budget. The result of our failed fiscal policies over the decades, and the absence of policies that enables the market towards productivity.

While we recognise that the budget will not assist with any growth in the economy this year, there are three initiatives that could help to significantly stimulate the economy. These are:

* The move by Minister Paulwell to bring greater competitiveness to the energy sector, while at the same time bringing greater awareness to the benefits of going with renewable energy primarily at residences. This is something that I have been pushing for over two years and I am happy to see that the current minister is taking this seriously, as because of the past reluctance to properly embrace this, it has cost the country significant amounts of foreign exchange;

* The three mega-projects being introduced by Dr Davies, if they can get past the bureaucracy that has stifled so much of our progress, will definitely provide a significant stimulus to the economy; and

* The push by the Transport Ministry to bring some order to the transportation system has the potential of providing significant savings to the energy bill and increasing productive hours. This can easily happen if we do what is necessary to properly structure and realise the benefits from the transport system.

So while the projection is for the economy to grow between zero and one per cent, I think that this view of how the economy will perform is really restricted by the capacity of those looking at the economy to think outside of what exists today. If we do a little thinking, and acting, outside of the box, it is my view that we can see two to three per cent growth. But we must first have the will to do what is necessary to achieve this.

Private-Public Hospital (PPH)

Only this week I was at a private hospital that I'd had a bad experience with late last year. Again I had another bad experience, which made me wonder if it wouldn't have been better for the patient to have gone to the University Hospital, or even KPH.

It seems as if this hospital is taking the Public-Private Partnership (PPP) thing to another level and is now touting the concept of PPH, as the wait to see a doctor topped two hours at this newly crowned PPH. The only difference is that the cost of the PPH is more than the pure public hospital, even though the wait time is the same or worse.