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Editorial: Don’t let go of fiscal discipline

Published:Monday | November 16, 2015 | 12:00 AM

We expect there will be much crowing of vindication among the deficit deniers and advocates of unaffordable Keynesian-type spending and fiscal indiscipline. They misapprehend.

There is value in discipline, which is what is reflected in last week's marginal downward adjustment of Jamaica's fiscal target under its agreement with the International Monetary Fund (IMF), which ought not to be interpreted by the Government as a signal to let loose the spending spigot in a pre-election binge. That would only lead to the collapse of Jamaica's agreement with the IMF and the squandering of hard-won gains in reforming the island's economy.

At best, therefore, the slicing of a quarter of a percentage point, to 7.25 per cent of gross domestic product (GDP), from the primary surplus target for this fiscal year provides a bit of a cushion against what Finance Minister Dr Peter Phillips estimated to be public-sector wage settlements of J$8 billion above projections.

In other words, with 0.25 per cent translating to approximately J$4 billion of a J$1.5-trillion economy, it means a little less can be directed to debt payment and a little more spent by Government to drive consumption, which should translate to increased economic activity and, perhaps, faster growth. On this score, the Government will have even more flexibility next year when the primary balance will be further lowered to seven per cent of GDP.

Critics will say it was their argument all along to call for an even deeper retrenchment of the targets. They will have missed, or forgotten, the facts.

Four years ago, Jamaica had a public debt that was heading towards 150 per cent of GDP. The Government, rather than balancing its Budget, ran a deficit of nearly six per cent of GDP. Global financial markets were skittish to lend to the island and, if they did, in the absence of the imprimatur of the multilateral institutions, insisted on interest rates that were unsustainable. Fiscal containment, in the circumstance, was inevitable if Jamaica was to place its debt, relative to the size of its economy, on a downward path.

 

PRIMARY SURPLUS TARGET

 

The 7.5 per cent primary surplus target was not the product of a magician's hat. It was arrived at by analysis. Its achievement thus far, plus other reforms in the economy, required discipline and was helped significantly by the buy-back, at a more than 50 per cent discount, of the US$3-billion PetroCaribe debt to Venezuela. The Government's debt is now 125 per cent of GDP and appears on track for 98 per cent by 2020.

It is the basis of what the Fund described as the entrenchment of macroeconomic stability and this improvement in the 'debt dynamics' that it is possible for there to be "loosening of fiscal policy and realignment of monetary policy" to better support efforts to grow the economy'. This, however, does not mean a forfeiture of discipline.

We agree there is a role for Government in stimulating demand and output. The fundamental driver of economic activity, however, must be the private sector. In the past, its capacity to invest and to create jobs and economic growth was compromised by the Government, whose appetite for borrowing bid up the price of debt, making it too expensive for entrepreneurs to borrow. We know where that got us.