Entrench the fiscal rule

By Dr Nigel Clarke

At the bottom of the business cycle, of which we missed the top, Jamaica finds itself with staggering unemployment, weak consumer demand, and a sagging economy, which conspire to engulf us. Meanwhile, the Government, hamstrung by suffocating levels of debt, has limited fiscal options for a convincing and effective rescue.

While high levels of debt exist, the economy remains in jeopardy. Sanctioned by the International Monetary Fund (IMF), the Government, having been forced to extend the projection horizon, forecasts that public-sector debt will be equivalent to annual output in 2020, seven fiscal years away, counting the present, and three years beyond the end of the IMF programme.

Achieving this crucial, but by no means secure, target requires extreme, punishing and unrelenting fiscal consolidation. This must be maintained over the seven-year horizon, across one, possibly two election cycles and for half of the period without the watchful eyes of the IMF.

After all of the disciplined restraint and collective sacrifice forecasted to last at least one-third of a generation, we will remain highly vulnerable in 2020, with a public-sector debt-to-GDP ratio of 100 per cent, and even this assumes growth at the top end of our recent experience for most of the seven-year horizon.

The elephant in the room is that this is an extraordinarily risky, fragile and improbable path that defies our collective experience. Point forecasts and estimates are silent on the probability distribution of outcomes and on the variability of supporting assumptions. Even with the best of intentions, many developments could derail the process.

The possibility, therefore, of meandering through thickets of pain, only to end up in the same bush where we are now confined, is real. Maintaining debt-reduction focus and execution across election cycles and into a post-IMF future is at odds with the historical experience of the last 25 years.

As such, despite the elevated prospect of near-term target attainment, there is a dangerous yet widespread view, here and overseas, that clouds of inevitable implosion hover. While that view exists, economic agents remain tentative, looking for ways of escape, or avoiding Jamaica altogether.

ADDRESS GULF OF CONFIDENCE

This gulf of confidence that exists in the long-term viability of Jamaica's public finances must be addressed decisively. The Government, propelled by the IMF, has signalled its intention to adopt a fiscal rule, enshrined in law, that commits this and future governments to a path of fiscal prudence and towards stable and sensible debt levels.

The rule would include a cocktail of corrective and automatic fiscal adjustments that would be triggered by deviations from the path, with appropriate escape clauses to allow for temporary responses to exogenous shocks.

However, it would be exceptionally naïve and a grand waste of time if this rule were constructed in a manner that admitted the possibility of change, or even abandonment, with the support of a simple majority of Parliament. The existential threat posed by the precariousness of Jamaica's public finances, and the generational time frame required for rehabilitation, demand that the fiscal rule be irreversible. One way of achieving this would be for amendment thereof to only be permissible with the affirmative vote of a two-thirds majority of both Houses of Parliament.

Sound public finances are at the core of a strong and growing economy, while weak fiscal accounts imperil the soundest investments. Capital will, therefore, not commit itself for the long term where there is doubt. With the passage of an entrenched and well-thought-out fiscal rule, Jamaica would certify that it is on a continuous path of de-risking the economy and consolidating fiscal gains from this, prior, and future periods.

This would buoy assessment of our prospects and significantly improve the long-term outlook on Jamaica. The disposition of capital would change and the defensive freeze of local businesses would thaw. Rather than wait until 2020, and beyond, for risk to subside, an immutable rule brings forward the benefits of full programme and post-IMF execution to today.

There is no better way to enhance confidence that we can do what we have never done than by making its undoing unthinkable.

Dr Nigel Clarke is deputy chairman and CFO of the Musson Group and serves as an opposition senator. Email feedback to columns@gleanerjm.com.