Beyond the Supplementary Estimates 2011-12

Colin Bullock and Christine Clarke, Guest Columnists

The Gleaner headline of August 31 proclaimed 'Shaw's shocker', and the article, with other elements of the press, expressed concern that the Supplementary Estimates added $2.1 billion to the Budget, reflecting a net increase of $4.4 billion in recurrent expenditure and a net reduction of $2.3 billion in capital expenditure.

The overall increase is contrasted to expectations that the Budget would have been cut by $5 billion to $7 billion. The way in which the revised estimates have been interpreted as budgetary expansion is misleading.

The expenditure total increasing by $2.1 billion includes recurrent expenditure (wages, interest and 'housekeeping expenses'), Capital A (financed entirely from Government of Jamaica), Capital B (Government of Jamaica contribution to projects dominantly financed by external agencies) and amortisation (the repayment of loans rather than purchase of goods and services). If the Supplementary Estimates sought only to correct for approximately $8 billion in unbudgeted wages and salaries, it would show an increase in wages and salaries of $8 billion and a reduction of $8 billion in non-wage expenditure. Without other intervening factors, the total expenditure as defined above would show no change from the original Budget; not an overall $8 billion reduction from the original Budget.

Instead of the total spend being identical to the original Budget, the Supplementary Estimates reflect an increase of $2.1 billion. This is more than fully accounted for by an increase in amortisation of $2.6 billion. By subtracting amortisation from both the original and supplementary budget, it appears that expenditure on non-amortisation goods and services is expected to fall by $0.7 billion. If a further adjustment is made for an (approximated) $8-billion increase in wage expenditure, expenditure outside wages and amortisation would be expected to contract by between $8 and $9 billion.

It is this alternative focus on the composition of the changes that reveals that there is indeed pain in the Supplementary Estimates. Another media house reports the $2.1-billion increase in the overall total as the net impact of additions of $16.5 billion and cuts of $14.1 billion, but these numbers are exaggerated by reallocations between 'heads' of expenditure. For example, the public service function is subtracted from what used to be the Ministry of Finance and the Public Service and added to the Office of the Cabinet.

Wage increases factored

As reported, most 'heads' are allocated more for recurrent expenditure, reflecting the accommodation of the wage increases. The Gleaner of August 31 indicated, however, that this subsumes a reduction of non-wage recurrent expenditure for 'housekeeping' items like travel expenses, telephony, stationery and office supplies, training, fixtures and fittings, and computer hardware. These are critical elements of daily public-sector operations and arbitrary cuts may either increase inefficiency in public-service delivery or budgetary overruns.

Along with these non-wage recurrent expenses, there are also reduced allocations for important capital programmes across several 'heads'. Much has been made of reductions of $910 million for the Ministry of Energy and Mining ('postponement of refinery upgrade' and rural electrification), $800 million for Ministry of Education ('postponement' of school construction), $500 million for Ministry of Housing ('postponement' of housing development project), $350 million for Ministry of Transport and Works ('postponement' of road infrastructure project and Vernamfield development) and the Office of the Prime Minister (including a reduction in allocation for the Jamaica Social Investment Fund).

Literature suggests that the predicted Keynesian decline in economic activity as a result of reduced government expenditure is not a fait accompli when the cuts are made to government transfers and wages. The thinking is that private consumption is stimulated in response to an anticipated decline of the future tax burdens suggested by a sustained decline in the public debt-to-GDP ratio.

However, the current Supplementary Estimates reflect an increase in wages and a decrease in capital expenditure. Any increased demand from wage increases may significantly leak into imports, while the reduction in capital programmes may both reduce aggregate demand and economic productivity. In a context of already weak growth and employment performance, this weakening of productivity is likely to be the more significant and long-lasting impact of the redistribution of expenditure. It is instructive that structural adjustment in the mid-1980s, in focusing on the 'low-hanging fruit' in health and education, may have weakened Jamaica's long-run capacity for economic growth.

In the absence of fundamental transformation of the structure and functions of the public sector, the cut in housekeeping expenses may be arbitrary, speculative and counterproductive. Care has to be taken that the efficiency of delivery of services is not affected. A reduction in telephony and travelling expenses should focus on waste and avoid the diminution of essential travelling functions. The reduction in expenditure on computer hardware undermines efforts to enhance the efficiency of already severely under-resourced public-sector information systems. If these cuts are not carefully considered and managed, there is potential for further budgetary underperformance as unavoidable expenditure (e.g., on utilities) continues where budgetary allocations have been arbitrarily cut.

It is the difficulty and pain of these severely resource-constrained policy choices that inform why a country should make every effort to avoid having to face them. In this regard, Jamaica has demonstrated a remarkable incapacity to learn from its own history of loose fiscal management, followed by sharp and socially deleterious fiscal adjustment. Jamaica did not have to arrive at the point where an IMF borrowing arrangement appeared inevitable, but having arrived there, it should have done better in implementing its terms and conditions.

The 2008 MOU is the genesis of the current wage settlement and need for Supplementary Estimates. In light of the then (2008) emergence of the global economic and financial crisis, the agreement should have, at that time, been recognised as unaffordable. It's legally supported implementation now destabilises the economic programme and may affect financial markets. The substantial road-rehabilitation programme launched outside of Budget and macroeconomic parameters betrays a weakness of commitment to budgetary integrity and the adjustment process.

The Supplementary Estimates, even if viable, are only part of the solution set of resolving Jamaica's apparent stand-off with the IMF, and getting the macroeconomic programme back on track. The restoration of the macroeconomic programme is also equally dependent on the as-yet-unspecified revised revenue projections. Tax revenue has been running behind programme and grants have been affected by the deviations in the macroeconomic programme. Tax reform is in transit from Green Paper to White Paper, and it is not clear that there is significant potential for revenue enhancement without deep reform of tax waivers and incentives. A revised revenue forecast is still required.

Essential expenditure cut

It is unfortunate that many of the structural initiatives anticipated in the macroeconomic programme have been so long in gestation. Tax reform is work in progress. At the same time, the delay in addressing tax incentive reform means that policy is cutting essential social and economic expenditure, while a generous and apparently unproductive tax-giveaway system remains intact.

The concern about the potential impact of cutting housekeeping and capital-programme expenses suggests strongly that meaningful public-sector restructuring should already have been in place. The Public Sector Transformation Unit was never asked to consider the structure and functions of government and, accordingly, restructuring appears to be largely the reallocation of functions between 'heads'. Given the severe resource constraint of our public indebtedness, it appears to be counterintuitive that we should be able to efficiently do all of the same things, but with less money.

Other aspects of planned structural reform need to be accelerated in implementation. These include the Treasury management system and the fiscal-responsibility legislation. The latter ought to be reviewed to discourage the initiation of projects outside the Budget (a cause of fiscal deviation) and to make the process for validation of fiscal-programme deviation more credible. (In the draft, it is the minister of finance who certifies when deviation is warranted). Above all, the legislation would establish the requirement for full disclosure of economic policy intentions, methodology, outcomes and projections. Jamaica will be unable to successfully manage its challenging adjustment agenda without deeper and better informed consensus and partnerships.

Proactive, strategic public-sector reform and rationalisation; reduced dependence on taxes that distort economic decisions; reduced reliance on tax incentives and waivers; and facilitation of improved levels of productivity are likely to be indispensable to Jamaica in truly paving a path to sustained economic growth. At the same time, the allocation of scarce public-sector resources has to seek to generate revenue-enhancing economic growth.

Unless the development partners are more generous in the financing of, and the required pace of, the adjustment process (which now appears unlikely), or we engage in a second round of debt restructuring (inimical for the domestic financial system and disavowed by both the authorities and Jamaican market analysts), sharp adjustment is unavoidable. We must demonstrate greater fidelity to the adjustment process and a more growth-oriented allocation of scarce resources.

A full and frank articulation of the status of our programme interaction with the multilateral financial institutions, the current state of the economy, a programme for economic recovery in a context of deep budgetary cuts and a revised short- to medium-term economic outlook is yet to be presented to the Jamaican people.

Colin Bullock and Christine Clarke are lecturers in the Department of Economics, UWI, Mona. Email feedback to columns@gleanerjm.com, colbul3@gmail.com and clarke.christine.a@gmail.com.