Sat | Oct 20, 2018

Strengthening Ja's fiscal performance

Published:Wednesday | December 3, 2014 | 12:00 AM
Dr André Haughton

Where are we now?

A KEY element of the International Monetary Fund (IMF) agreement is that Jamaica manipulates fiscal policy (government spending and tax receipts) to maintain a primary balance of 7.5 per cent of gross domestic product (GDP).

This year, Government's revenue targets for the first three quarters are $7.4 billion less than projected. This shortfall is problematic since within the IMF agreement, there is a clause that Jamaica can cut spending to meet this primary surplus if revenues fall off target.

With a reduction in revenues receipts, Jamaica will be forced to cut spending to achieve such a huge primary surplus. This will reduce the amount of spending on capital and infrastructure necessary to improve the platform to facilitate a better business environment in the island. Jamaica's primary surplus is one of the highest in the world for highly indebted developing countries, and it is becoming more and more difficult to maintain given less-than-expected global economic growth projections. Drought conditions in the summer contributed to less-than-expected farming output in the island, which has had a negative impact on aggregate economic output and lower-than-expected tax-revenue receipts. Furthermore, the tax rates in Jamaica are too high. Currently, Jamaicans pay more than 50 per cent of their income in total taxes and, based on the 'Laffer Curve', government tax revenue will reach a maximum point and begin to fall if the tax rate is too high. In this case, the Government must reduce the tax rate to increase tax revenue if that is their objective.

How are the other economic indicators?

Growth in GDP has remained the average one per cent with slight increase to 1.5 per cent expected in 2015 while poverty levels are increasing. The level of credit offered to the public sector has been consistently more than five times the level of credit offered to the private sector. As a result, private investment spending in the island is relatively low. Drought conditions contributed to inflation, although inflation estimates are projected to be below 10 per cent this year. The debt-to-GDP ratio has been falling gradually, but Jamaica's external debt servicing as a percentage of GDP has been increasing. The multilateral share of external debt has increased from 21.1 per cent in 2006 to more than 36 per cent currently. The exchange rate has depreciated by 6.4 per cent thus far in 2014, moving from J$106.15 to US$1 at the beginning of January to an average of J$113 to US$1 currently. The current account deficit moved from 19 per cent of GDP in 2010 to just over 12 per cent in 2014 and is projected to be approximately eight per cent by 2015. This has been achieved by a fall in imports greater than the fall in exports, not an increase in exports as a result of a depreciating currency. Within the IMF agreement should be the flexibility to change quantitative targets if they become incongruent with other critical objectives.

What targets have already been met?

Jamaica agreed with the IMF and has designed and implemented the fiscal rule in the 2014-2015 fiscal year. From now onwards, the annual Budget will be guided by this fiscal rule as well as a more long-term budget plan over a number of years - the aim of which is to strengthen the nature of a country's fiscal performance. These will help to establish a more transparent system upon which tax waivers are granted, and abolish ministerial power to grant or validate any tax relief.

The fiscal rule has put a limit on how much the country is allowed to borrow, as well as what the country can borrow to do now and in the future. This will help to ensure a sustainable fiscal balance. Under these circumstances, Jamaica should maintain a steady pace of debt reduction.

Jamaica tabled a charities bill and the Omnibus Incentive Act in the House of Representatives guided by the Inter-American Development Bank in consultation with the IMF. A review of public-sector employment and remuneration that serves to advise policy reform was finalised. The Government also tabled in parliament a comprehensive public-sector investment programme.

What targets are yet to be met?

Other targets, including ensuring that the public-service e-census database is up to date and covers all ministries, departments and agencies, and the implementation of a new system to track approval of construction permits across all parishes, have not yet been met. Plans to enact an electricity act have not yet been implemented also. They have not yet developed an action plan for public-sector transformation to cover shared corporate services; and have not yet reallocated, merged, abolished or divested/privatised some departments and agencies.

Dr André Haughton is a lecturer in the Department of Economics on the Mona campus of the University of the West Indies. Follow him on Twitter @DrAndreHaughton; or email: You can check out his blog: Economics for Busy People or Facebook: