THE GOVERNMENT has a budget to manage just as any other entity or individual. There are expenses that arise that must be financed.
Expenditure may be recurrent such as wages and salaries, programmes instituted to increase social welfare and interest payments on debt incurred. Other expenditure include capital programmes such as infrastructural development and repayment of loans.
The main source of income is revenue from taxes. The fiscal deficit arises when expenditure exceeds income. The nation's fiscal deficit became of greater concern since the post-election presentation of supplementary budget estimates of $13.5 billion which showed an increase to $33 billion from $9.9 billion.
This effectively means that the authorities will have difficulty in achieving the fiscal deficit target of 4.4 per cent of Gross Domestic Product (GDP) as outlined in the IMF Staff Monitored Programme (SMP).
The fiscal deficit to GDP ratio is expected to be 8.4 per cent at the end of the 2002/2003 fiscal year. Consequently, the Government has implemented additional tax measures and licensing fees to generate $1.4 billion to help finance the additional expenditure.
Borrowing is the other mechanism being used to address the shortfall.
Jamaica's external debt at 54.9 per cent of GDP in 2001 is manageable. However, the domestic debt has risen considerably, primarily as a result of the following:
Assumption of FINSAC liabilities.
Takeover of loans and other public debt obligations.
Issues of domestic debt securities to cover Bank of Jamaica losses.
Financing the fiscal deficit over the last several years.
The Provisional figures from the Ministry of Finance indicated that the total domestic debt decreased by 3.2 per cent over the previous month to $351.1 billion in December 2002.
$33.4 BILLION DEFICIT
The fiscal out-turn to December generated a deficit of $33.4 billion, predicated on lower than budgeted revenues and grants ($79.2 billion) coupled with greater than budgeted expenditure ($112.6 billion).
However, total revenues of $115.9 billion is expected to be generated to realise the 2002/03 fiscal deficit target. The government has employed various strategies to manage debt. These include:
Issuing more long-term debt in both local and foreign markets.
Minimising currency exposure by limiting issues of US$-denominated and US$-indexed securities in the domestic market in order to maintain a prudent domestic debt structure.
Approaching the international capital markets for financing to the extent of the amount due for repayment in the given fiscal year.
These loans would be accessed at the most cost effective rates. Standard and Poor's has adjusted their outlook on Jamaica's long-term debt outlook from stable to negative citing the larger than budgeted fiscal deficit.
However, Moody's, another international ratings agency, has reaffirmed their rating of stable, but has also cited the fiscal deficit as a major concern.
These ratings influence the cost of borrowing abroad and therefore impacts the cost of borrowing locally.
In order to rein in the growing deficit, and in an effort to achieve fiscal balance by 2005/2006, the Government may need to:
Fast-track revenue enhancing measures which include steps to encourage greater tax compliance and reduce exemptions (both statutory and discretionary).
Contain and/or cut expenditure.
Widen the tax net to include the large informal economy.
Divest additional assets.
The aforementioned measures are, however, short and medium-term strategies. It is important to note that a critical component to ongoing trade negotiations such as the Free Trade Area of the Americas (FTAA), is the reduction of tariff barriers which will no doubt lead to a reduction in revenue earned from customs duties.
Therefore, fostering a buoyant private sector and ultimately achieving economic growth is the most sustainable way to attain fiscal balance.
This column is contributed by the Private Sector Organisation of Jamaica.
