Keith Duncan | Fiscal risks loom large – growth is the panacea

Jamaica’s macroeconomic stability was achieved through great sacrifice and prudent management of resources by successive administrations through adhering to the fiscal rules which are embedded in law.

The government was required to maximise its revenues and constrain its expenditures such that the difference could be used to accelerate debt repayment. Consequently, we were able to drastically reduce the proportion of tax revenues devoted towards meeting the interest costs on our debt obligations.

Without accounting for amortisation towards the principal, these interest costs consumed 70 per cent of tax revenues as recently as 2005. Since then, however, we have managed to reduce this proportion to 15 per cent of tax revenues, thus significantly opening up fiscal space that can be allocated to other areas of expenditure.

This fiscal space which has been created by this debt reduction strategy has seen increased allocations and increased spending in the areas of education, health, wages and salaries, capital expenditure infrastructure projects, investments in the national security capacity within the JCF, JDF, social programmes and the safety net for the vulnerable.

We should continue to adhere to the fiscal rule ensuring that Jamaica gets to the 60 per cent debt to GDP target in 2028 and sustain it at this level going forward.

PUBLIC SECTOR INCREASES

In the past three years addition fiscal space has been devoted to increasing public sector wages and salaries under the newly restructured compensation system with wages and salaries increasing from $222B in the financial year (FY) 21/22 to a projected spend of $424B in FY 24/25. For the same period as a percentage of GDP, wages and salaries have increased from 9.58 per cent of GDP to 13.15 per cent and have increased as a percentage of tax revenues from 36 per cent to 46 per cent.

This significant increases poses a great risk that this increase will crowd out other critical areas of spending.

These increases to the public sector were well overdue and well deserved as the Public Sector and their Union representation has shown tremendous restraint and sacrifice in the past with agreeing to wage freezes and incremental increases which severely eroded the purchasing power of the public sector. This was especially pronounced in the leadership, management and technical areas of the public sector whose incomes were significantly below their private sector counterparts.

Until the amendment of the Financial Administration and Audit (FAA) Act in April 2023 which removed the fiscal target for wages as a proportion of GDP, Jamaica’s fiscal rules had this target fixed at nine per cent and which was fastidiously adhered to under our EFF and PSBA arrangements with the IMF. Over the course of both agreements from 2012 to 2019, the growth in public sector wages was constrained below the increase in tax revenues and GDP. Since then, however, there has been a reverse of this trend owing to the recalibrated salary scales in the public service. While it was expected that the initial years of implementation of the compensation exercise from 2022 to 2025 would cause a material breach of this target, there is no indication that this trajectory will moderate in the near to medium term. The rise in salaries as a percentage of GDP continues unabated to as much as 14 per cent by FY2027/28, as GDP converges to its usual anaemic growth rate of one to two per cent in the aftermath of the post-pandemic boom, and exacerbated by our continued vulnerability to exogenous shocks, as the effects of Hurricane Beryl and Tropical Storm Raphael have shown.

In order to continue on the path of fiscal sustainability, we should consider the re-introduction of the fiscal target of a fixed percentage of wage-to-GDP, or possibly index growth in wages and salaries to inflation in order to prevent an uncontrollable rise in wages as a proportion of our economic output.

Wages and salaries as a fixed percentage may not necessarily be at the previous indicative target of 9 per cent, although this is the rough median for all countries in the world (9.21 per cent), those in the Latin American and Caribbean region (9.33 per cent) and for countries with a similar income level as Jamaica (9.42 per cent). This also does not mean that we should contemplate freezing wages, or any retrenchment of public sector workers as happened in the past to cut the wage bill.

NEW ROUND

As the GoJ and the public sector enter a new cycle of wage negotiations, with even outstanding matters for the cycle that is now ending in FY 24/25 all stakeholders need to be aware of the extremely limited fiscal space. Stakeholders should be guided by the available fiscal space and the many competing demands to ensure that they arrive at an informed and responsible position that will safeguard our fiscal sustainability and macroeconomic stability.

The GoJ and the public sector must look to increase the productivity of the public sector and to introduce the promised performance management system which would complement this productivity drive in the public sector. Productivity buttressed by a performance management system that will effectively track key performance indicators (KPIs) and other deliverables where added compensation is tied to increased productivity. Structural constraints to growth must also be eliminated including reducing bureaucracy and red tape and facilitating the ease of doing business. This also involves increased digitization and re-engineering of processes, rationalization and shared services to increase efficiency.

GUARD AGAINST ELECTION PROMISES

This restraint in wages must also be complemented by the resistance of the temptation by political parties to make lofty and impractical promises on the campaign trail as we’re in the throes of an election season. On that front, two oft-talked-about issues have resurfaced – the further raising of the income tax threshold and the proposed deceleration of debt repayments to divert towards other areas of expenditure. Each of these has the potential to put the country’s fiscal sustainability at risk. Going into the 2025/26 fiscal year, budgetary space is almost non-existent due to the rigidity of public sector wages and interest costs which are likely to remain elevated due to the slower-than-projected reduction of interest rates by the US Federal Reserve and the Bank of Jamaica.

NO FISCAL SPACE FOR INCREASED INCOME TAX THRESHOLD

The recent increase in the income tax threshold to $1.7m cost $8.95B. Based on 2023 numbers, a further increase to $2.0 million would cost an additional $13.4B; an increase to $2.5 million would cost an additional $25.7B, while an increase in the threshold to $3m would cost another $38B. Based on fiscal forecasts, there is very little to no room for increasing this threshold unless this expenditure is accompanied by additional tax revenue, whether in the form of newly introduced taxes or increases in the existing rates of taxation.

A possible deceleration in debt repayments will also reduce fiscal credibility, upon which our relationship with external creditors heavily depends. Ratings agencies and domestic and international investors will be watching us keenly to ensure we maintain our fiscal responsibility, otherwise we could pay the price for reduced confidence and creditworthiness, as well as, higher interest costs that will negatively impact Jamaicans in all spheres of life.

OUTLINE INCLUSIVE GROWTH STRATEGIES

As election festivities reach fever pitch and the ‘silly season’ intensifies, both political parties should jettison the temptation to overpromise election goodies for which we do not have the capacity to deliver owing to current fiscal constraints. The parties should instead seek to outline to voters how we can build on the foundation of the hard-won macroeconomic stability to drive inclusive growth of the Jamaican economy.

We must focus on increasing our GDP, our per capita income levels, which currently stands at just under US$7000 – the lowest in the Caribbean outside of Haiti. We do not generate enough wealth for our population so we must increase growth levels in order to ensure that per capita GDP increases equitably to enhance the quality of life of our citizens. This will translate to increased tax revenues which will allow for greater investments in our human capital development through further education, as well as growth-enhancing infrastructure, increased compensation for our private and public sector, spending on the protection of the most vulnerable, among other expenditure priorities.

Breaking Jamaica out of decades of ‘anaemic’ low growth must be the focus of our policymakers, the public and private sector.

Keith Duncan is chairman of Fiscal Advisory Committee and CEO of JMMB Group. Send feedback to columns@gleanerjm.com