Tue | Jul 7, 2020

Mark Golding | Flaws in the suspension of fiscal rules

Published:Sunday | June 28, 2020 | 12:11 AM
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Nigel Clarke, minister of Finance and the Public Service.
File Nigel Clarke, minister of Finance and the Public Service.

There is much in Dr Nigel Clarke’s article published in the Sunday Gleaner on June 7, 2020, with which I agree. Most important, the Opposition recognises that Jamaica is going through a severe economic contraction as a result of the crisis caused by the COVID-19 pandemic, necessitating the suspension of the fiscal rules in Paragraphs (a) and (b) of Section 48C(1) of the Financial Administration and Audit Act (the FAA Act). This will enable the Government to fund additional social and health-related expenditures to respond to the crisis despite the revenues for this fiscal year now being projected to fall below the budgeted target by J$81 billion.

The two fiscal rules in relation to which the FAA Act provides for the possibility of suspension were the reduction of the public debt to 60 per cent of GDP by March 2026 and the maintenance of an annual fiscal balance as a percentage of GDP that will allow Jamaica to achieve that debt-reduction target. These fiscal rules, enacted as law in 2014 and adhered to by successive administrations, have provided the reference point for Jamaica’s celebrated fiscal turnaround. This somewhat technical matter is, therefore, of great national importance.

The FAA Act specifies the procedure that must be followed before the minister with responsibility for finance can make an Order suspending those two fiscal rules. However, it is noteworthy that the minister has not only implemented the procedure for suspending the fiscal rules for the current fiscal year. More importantly, the Government also passed a bill amending the FAA Act to defer the target date for reducing the public debt to 60 per cent of GDP (from March 2026 to March 2028) and to expand the grounds on which the fiscal rules can be suspended. The bill was rushed through the House, being tabled, debated, and passed on a single day, Wednesday, May 27, 2020.

Prior to this amendment, the law had provided four separate grounds, the occurrence of which can anchor a suspension of the fiscal rules. Two of those grounds are based on the invocation of a constitutional procedure, namely, the occurrence of a period of public disaster or a period of public disaster under Section 20 of the Jamaican Constitution. Each of those grounds requires a declaration to have been made by the governor general, which will remain in effect for only 14 days unless it is subsequently approved by a two-thirds majority of both Houses of Parliament, a process only possible with bipartisan support.

The third ground is the occurrence of a financial-sector crisis, which must be certified as such by the governor of the Bank of Jamaica before that ground can anchor a suspension of the fiscal rules.

The fourth ground is a severe economic contraction, which is a defined term in the FAA Act. The relevant element of that definition is “a one-time quarterly reduction in gross domestic product equal to or greater than two per cent relative to the corresponding quarter of the preceding financial year”.

Given the unprecedented severity of the economic downturn facing Jamaica and, indeed, the entire world, and more specifically, the Planning Institute of Jamaica’s projection of a 12 to 14 per cent contraction in GDP in the April to June quarter of 2020, one would reasonably have assumed that this is the ground on which the suspension of the fiscal rules would have been anchored. Indeed, the PIOJ, in its report to the minister and the auditor general, which is a mandatory part of the suspension procedure, cited the severe economic contraction as a ground for suspending the fiscal rules.

RECEIVED LEGAL ADVICE

However, this is not the ground on which the Government relied to suspend the fiscal rules. The minister indicated to the House that the Government had received legal advice that based on the definition of a severe economic contraction in the FAA Act, a projected contraction does not suffice, and what is required is a contraction, which has already occurred.

One approach to the conundrum presented by this legal interpretation would have been to amend the FAA Act’s definition of a severe economic contraction so that a projection by the Planning Institute of Jamaica (PIOJ) of an economic contraction of the required magnitude could anchor a suspension of the fiscal rules. However, the minister indicated that he is of the view that this approach is undesirable as he thinks that it would enable possible manipulation of this ground of suspension.

Such manipulation would, presumably, entail the PIOJ succumbing to pressure from the political directorate to falsify its economic projections, a risk that has not transpired in Jamaica’s history and which I regard as more theoretical than real given the quality and traditions of that long-standing public institution.

The Government instead adopted the approach of pushing through its bill to insert two additional grounds of suspension of the fiscal rules, namely, (i) the making of an order under Section 26 of the Disaster Risk Management Act, declaring the whole or any part of Jamaica to be a disaster area or a threatened area; or (ii) an order under Section 16 of the Public Health Act.

The Opposition parted company with the Government on its approach to this matter. Neither an order under Section 26 of the Disaster Risk Management Act (which is made by the rime minister) nor an order under Section 16 of the Public Health Act (which is made by the minister with responsibility for health) is subject to the approval of either of the Houses of Parliament. Instead, they are mechanisms that lie entirely within the purview of the Executive and are not subject to parliamentary oversight. They, therefore, introduce a real possibility of manipulation for political ends as both grounds lie under the exclusive control of the political directorate.

These two additional grounds are, therefore, as regards transparency and oversight, substantively inferior to the existing grounds of an occurrence of a period of public disaster or a period of public emergency under Section 20 of the Constitution. Either of the existing grounds, because of the constitutional requirement of approval by a two-thirds majority of both Houses, must enjoy bipartisan support in order to last beyond 14 days. That fundamental protection from abuse does not exist in relation to the two new grounds legislated by the Government.

The Opposition, therefore, considers that this legislative amendment has introduced an undesirable pathway for the executive usurpation of the fiscal rules. While we accept, and have publicly proposed, that the current crisis ought to provide ample grounds for suspending the fiscal rules, the change in the law that was railroaded through Parliament by the Government lacks adequate checks and balances on an issue that is fundamental to the economic well-being of Jamaica and is, therefore, susceptible to abuse. As such, we regard it as unsound legislation.

OBJECTIONS IN THE BROADER CONTEXT

I should also mention that our objections to the bill arose in the broader context that the Government has, controversially, chosen not to invoke the procedure of declaring a period of public disaster in order to provide a constitutionally solid framework for the panoply of legal measures imposed in response to the COVID-19 crisis. Instead, the prime minister has imposed them under the Disaster Risk Management Act. Those measures are made by him alone and do not require parliamentary approval. The Government’s bill to allow orders made under the Disaster Risk Management Act or the Public Health Act to anchor the suspension of the fiscal rules further entrenches what the Opposition regards as a misguided and potentially dangerous approach.

When in the future a government seeks to use a public-health crisis as the anchor for suspending the fiscal rules, the sole remaining protection from abuse will be the requirement for the auditor general to have validated that the estimated fiscal impact is equal to or greater than 1½ per cent of GDP. That is an important element of protection, but on its own, will be less robust than the additional requirement of parliamentary oversight under Section 20 of the Constitution.

The fact that the minister’s order suspending the fiscal rules is subject to approval by both Houses of Parliament does not meet these concerns. The Government of the day will always enjoy the required simple majority to obtain that approval.

In his article in the Sunday Gleaner, the minister made no mention of the fundamental departure between the Government and the Opposition on what should be required before a public-health crisis can anchor the suspension of the fiscal rules. He merely threw in parenthetically that “(the Government and Opposition disagreed on the urgency of this amendment”).

It is true that confronted with far-reaching legislation of such importance, the Opposition objected strongly to being deprived of the minimum period permitted by the Standing Orders between the tabling and passing of legislation, but the gravamen of the discord was not about urgency. We made it clear that our objection to the railroading of this bill was because the approach adopted by the Government is problematic for the reasons we articulated in the debate on the bill on Wednesday, May 27, 2020, and which I have reiterated in this article.

As I said in the House that day, extraordinary circumstances may necessitate extraordinary measures, but extraordinary measures fashioned with undue haste may result in extraordinary mistakes. Time alone will tell whether the Government’s approach to this matter will come back to haunt Jamaica.

- Mark Golding is the shadow minister of finance and planning. Send feedback to columns@gleanerjm.com.