Bullock
The first supplementary estimates for the fiscal year 2009-2010 were tabled on August 22. They reflect an increase in expenditure of some $6 billion. This has elicited reactions of surprise from many quarters. While the basis of the increase may be placed in some perspective, the apparent embrace of an increased fiscal deficit and higher than programmed borrowing and debt raises several pertinent questions.
There has been a significant increase in budgeted interest expenditure. This is due only in part to increased interest rates flowing from monetary policy. A significant part of the increased interest expense has to do with the failure of revenue, a higher than budgeted deficit and increased short term financing. This dramatises the circularity between higher than programmed deficits, more borrowing and higher interest costs.
Coming in the context of negative debt ratings and increasingly protracted negotiations with the International Monetary Fund (IMF), the increased deficit and borrowing are indeed surprising. In the context of what is now confirmed as significantly underestimated interest expense and over-optimistic revenue forecasts in the original budget, the increased expenditure and budget deficit are not so surprising after all. Note that while budgeted interest expenditure increased by $16 billion, non-interest recurrent expenditure is cut by $4.5 billion; Capital A (wholly financed by government) by $4.5 billion, and Capital B (Government cofinancing of externally funded projects) by $1.4 billion.
Given the apparently non-negotiable nature of the size, structure and functional expectations of government, it was hardly likely that other elements of expenditure could have been cut by more than the $16 billion. Adherence to the current structure and list of functions assumed by government would also have limited the capacity of public administration to deliver the cuts that were expected of it.
supplementary estimates
Even while there is an understanding of the difficulty of cuts within the existing governmental architecture, several questions arise about the nature of the cuts that have been tabled. One has to be careful that in the urgency for "better numbers", there is not "underbudgeting" for essential social functions where it is inevitable that money will have to be spent anyway. To the extent that this happens, we are only setting ourselves up for further budget overruns, further supplementary estimates and a further widening deficit. The alternative is an unprogrammed dilution of the quality of delivery of public service.
There are concerns about the relativity of the distribution of the budget cuts and our capacity to grow out of debt, increase food self-sufficiency and earn or save foreign exchange. Perhaps the fundamental structural expression of our fiscal and debt crisis is that we have been borrowing money at home and abroad, largely to finance recurrent expenditure. In this regard, so far, the supplementary estimates are not reassuring. Recurrent expenditure is to increase by $12 billion, capital expenditure is to fall by $6 billion and we are subsequently informed that the $6 billion is to be financed by increased external borrowing. This profile does not stimulate growth and does not facilitate any correction of the debt problem.
Of special concern is the treatment of 'agriculture' and 'transport and works'. 'Agriculture' has had cuts in its recurrent budget but especially in its Capital A programmes. "Transport and Works" has had sharp cuts in both Capital A and Capital B. This raises questions about our food self-sufficiency programme and the impact of investment expenditure and infrastructural development on economic growth. Regarding Transport and Works it is clear that the Road Maintenance Fund was never seen as a substitute for the Budget.
Following immediately in the wake of expressions of surprise regarding the increase in the expenditure budget were questions about revenue, deficit and financing. How is revenue performing? Will there be new revenue measures? What are the implications for the deficit? How will it be financed? Are there any implications for monetary policy and interest rates?
increased external borrowing
These questions have been partially answered, but in a way that raises further questions. We understand that the $6 billion increase in expenditure is to be financed by increased external borrowing from multilateral financial institutions. We believe that this increased external borrowing is contingent on the seal of approval of a borrowing agreement with the IMF. The supplementary estimates were announced at a time when a team of technocrats had just re-engaged the IMF in technical discussions and we have since learnt that the projection for agreement has been put back from October to November.
In this context, we want to believe that the increased expenditure, not accompanied by revenue enhancement measures (outside of compliance/enforcement) has at least the tacit agreement of the IMF. While this belief enlarges our optimism about the "new IMF", there are other questions about how the IMF and Jamaica see Jamaica's future unfolding. A larger deficit and increased debt, even if agreed by the IMF, still increases the weight of future debt servicing, further threatening the size and effectiveness of Capital expenditure. A larger deficit cannot be sustainable unless it is financed by grants and/or by extremely concessional financing.
"Forgive us our debts" is the path explicitly not chosen. The alternative is to adjust and grow our way out of debt. There, therefore,, needs to be a clear perspective on what the future holds regarding our capacity for fiscal adjustment, deficit reduction and a more growth oriented allocation of increasingly scarce public finances. Unless the world is willing and able to give Jamaica concessional resources into an indefinite future, adjustment is inevitable. We believe that a structured and growth-oriented process is to be preferred to the chaos of market closure, foreign reserve exhaustion and inflation.
Colin Bullock is lecturer in the Department of Economics, UWI, Mona. Feedback may be sent to Colbul3@gmail.com or columns@gleanerjm.com