EDITORIAL - Tackling Jamaica’s Ponzi scheme of debt

Dr Peter Phillips, Jamaica’s finance minister, has at least one thing right about his new job: “The tasks and challenges” he faces are enormous.

We would add to that the little time he has to demonstrate real achievements if he is to pull the country out of its economic funk and have a real chance of sustained economic growth and job creation.
This requires the rebuilding of investor and consumer confidence, which in turn means mapping a clear path towards fixing the massive Ponzi scheme known as the national debt, the real magnitude of which remains understated. This, fundamentally, is what the negotiations that Dr Phillips will initiate this week with the International Monetary Fund is about.

At the end of last October, the recorded debt was more than J$1,619,000,000,000, or better on the eyes, J$1.619 trillion. So in the first 10 months of the year, the debt grew by more than $82.4 billion, or 5.3 per cent, which translates to $271.3 million a day. Between the start of 2008 and October 2011, it grew by $619.6 billion, or 62 per cent.

The official debt is equivalent to around 130 per cent of the value of all the goods and services produced in Jamaica, or gross domestic product. That’s not the full picture. Phoney government bookkeeping, for instance, hides arrears to suppliers as well as outstanding refunds to pension schemes, and others, for withheld taxes on interest income.

Our Government has, for decades, been able to sustain its debt by borrowing more and squeezing more taxes out of the same people, then, Ponzi-style, using the new money to pay old debtors.

But there was a downside. Excessive government borrowing crowded the private sector out of the market and encouraged a risk-averse approach to investment. Additionally, the cost of servicing the debt, which has accounted for as much as 60 per cent of the Government’s budget, leaves little to meet other expenses. The upshot: more borrowing.

We have known for a long time that this approach to public finances was unsustainable. The collapse of the global financial markets, however, made it clear that the game was up.

What Dr Phillips has inherited, therefore, is the job of devising a way of weaning Jamaica off its addiction to debt.

The strategy must include tax reform to bring more people into the net, while encouraging investment. The public sector has to be reformed to create an efficient, rather than lazy and bloated, bureaucracy that enables, not hinders, the private sector. Public-sector reform must mean, too, all government employees contributing to their pensions.

These, as Dr Phillips, observed, are hard challenges. But he can ease the degree of difficulty by, first, being frank and open with the people, plainly outlining the scope of Government and what is affordable. Second, all new borrowings, whether for hard projects or social infrastructure, must be robustly assessed and the return on the investment, preferably one that covers the cost of servicing the debt, clearly determined.