Budget 2015-16 is two-sided optimism
Two Thursdays ago, Dr Peter Phillips, our minister of finance, submitted his Budget estimates to Parliament. Naturally, the formal numbers that were tabled were covered in attractive wrapping from Washington, with lots of International Monetary Fund (IMF) labels on them.
Although the prime minister tersely reminded the nation, as she stepped out of Parliament, that the Throne Speech was not a Budget Debate, somehow, the Government found ways to put words in the governor general's mouth which lauded what the Government considered to be some of its achievements - such as the passing of seven quarterly IMF tests. We expect more tests to be passed, but meeting the budget numbers will be a much higher hurdle to scale.
Minister Phillips' budget coin is burnished - some would contend, tarnished - on both sides, with large dollops of luminescent grease called optimism. My view is based on the most recent empirical data published by the Government and is not because I'm without optimism. Last year, the Government started off with an expenditure budget of $540 billion, which was shaved to just over $539 billion later in the year. We all now know that the Government couldn't - and didn't - spend all that money - and when it did spend, it delayed payments to suppliers and contractors in a most egregious and financially painful manner.
For fiscal year 2014-15, the Government had a capital budget of $34.6 billion. In the three quarters to December last year, only $18.3 billion was spent, which resulted in a 47% underspending against the Budget. One fairly expects that the Government will not be able to make good on that 47% shortfall in spending because, like many Jamaicans, it simply does not have the money. The numbers also suggest that the Government will be under uncomfortable fiscal pressure to meet the all-important primary surplus target of $121.3 billion set by the IMF. At the end of December, the amount on the ledger was only $66.5 billion. Government officials will tell us that tax collections are generally very high in the last quarter of the fiscal calendar, March to December.
In fiscal 2015-16, the Government plans to collect about $412 billion in taxes. That is a whopping 27.7% above the budgeted amount of $384.3 billion, which was the target for the current fiscal year. The challenge takes on a much sharper edge when we recognise that as late as the ninth month of the fiscal year, December 2014, tax collection was $125.7 billion, or about 33% below the full-year budgeted figure. While government officials report that tax collections tend to be high in the last quarter of the fiscal year, the $125.7 billion is a tall order.
Dr Phillips' task is made harder in that the recently released PIOJ estimates indicate that the economy contracted by 0.3% in the fourth quarter of 2014 compared to the fourth quarter of 2013, and the economy contracted by 1.4% in the third quarter of 2014.
The contraction of 1.4% in the September 2014 quarter and the 0.3% drop in economic growth in the subsequent quarter to December means that the economy may not cooperate with the minister's budget plans. Truthfully, if we return to a mere 1.6% growth per quarter, the finance ministry will find it extremely difficult to make its tax-collection targets.
The IMF has made it clear that it is pushing the Government to step up tax raids to improve compliance. The ministry contends that our ratio of raids compared to other countries is rather low. I am sure some of that is necessary, but the kind of increase in collections that is included in the new Budget suggests that probably both the IMF and the ministry are out of touch with what people can afford.
Compliance as enunciated in public speeches relates, importantly, to willingness to pay; ability to pay is the real issue many Jamaicans and local businesses face on a very regular basis.
Increased numbers of tax audits will engender a heightened sense of fear in persons and may even improve their willingness to pay. Regrettably, for many persons, businesses and Dr Phillips and his colleagues at Finance, tax audits do not in any way improve entities' and individuals' ability to pay. The pervasive and growing inability of so many Jamaicans to pay their ever-increasing amounts of taxes means that the perennial tax-collection shortfalls will continue into 2015-16.
Unfortunately, unless we are favoured with some very unusually large sums of grant money, that revenue shortfall will be matched by the similar annual underspending by Dr Phillips' Government.
- Aubyn Hill is CEO of Corporate Strategies Ltd and chairman of the JLP's Economic Advisory Committee. Email feedback to firstname.lastname@example.org or tweet @HillAubyn.