Edward Seaga
AS TIME draws nearer for the commencement of the Budget Debate, questions begin to arise on many
aspects, some of which will need clarification.
It has become routine over the past few years that budget presentations always have at least one huge imponderable to be dealt with generally posing an especially difficult problem for the minister of finance. Two years ago, for instance, the focus was on the massive gap in the budget caused by the more than $7 billion of unbudgeted expenditure admittedly made to assist the PNP to win the general election in 2002, as authorised by the minister of finance in his now famous, "run wid it", directive. Last year, it was preoccupation with a memorandum of understanding between the Government, trade unions and the Private Sector Organisation of Jamaica.
This year, the concern is not singular. What seemed as if it would be a trouble-free year for the budget, is now looming large with queries on how some shocking disclosures are to be treated.
AIR JAMAICA
Air Jamaica takes top billing. Without having full and final accounts, it appears from the recent reacquisition of the airline that massive debts have come to light which, incidentally, must have been in the system all along without the representatives of the Government on the Air Jamaica board being aware. At least, this is what the country is being asked to accept, as unlikely as it is.
The Air Jamaica story, so far, deals only with the negatives. What about the positives which can be lost in an overall scaling down? Should they not be known for a proper assessment by the public of what should be scrapped and what should be retained? What about major loss factors like the long delayed Category 2 FAA rating while Government fumbled? The 9/11 cataclysm, Hurricane Ivan and dramatic increase in the price of oil? A ministry paper in Parliament, at least, is needed to deal with the Air Jamaica problem more fully.
Whatever the state of ignorance or information, Air Jamaica now presents a triple whammy for the Ministry of Finance:
The amount required to put the airline back on track has not been determined, or is not yet ready to be revealed;
Losses are now US$20 million per month, suddenly up from US$15 million. The accumulated losses is near US$900 million;
Debt is around US$900 million also, and rising.
Apparently these amounts were not previously known, or fully known to the Ministry of Finance. To include them now in the Budget of 2005/06, will be more than challenging. There is bound to be dislocation of what was planned before for Budget presentation.
The extent of the dislocation
will depend on the treatment of the losses, the debt and the amount for the re-construction of the airline on whatever is to be the final scale of operation.
Debt which is under guarantee will be added to the gross national debt, including external debt, creating a sizeable increase in what is an already one of the highest debt to GDP ratios in the world.
Debt service payments will have to be transferred to the central government accounts since the airline, with continuing losses, has no way to provide for its own debt service at this time. Because Air Jamaica will now be on the books as a government-owned operation, it will be classified with other overnment entities like the Bank Of Jamaica and Port Authority as a Selected Entity, which means, that it will not be treated in the central government accounts. This could enable a certain amount of creativity to be used in bringing debt service to book by sheltering it in the Selected Entities account where it will impact on the overall deficit, not the central government deficit. In this way, damage will be outside the purview of Bear Stern, Standard & Poor's and the International Monetary Fund, (IMF) the three agencies which monitor the central government fiscal deficit to determine if, when and how much, the government can borrow. The IMF, however, is likely to dig deep and require that the Air Jamaica debt service be taken into account by central government until the airline can once again, hopefully, deal with its own debt.
Projection on budget revenue and expenditure are, therefore, bound to be affected, whether here, or hereafter.
LETTERS OF UNDERSTANDING
The use of letters of understanding (LoU) and comfort letters are not new but in the past were used sparingly as a timely expedient to be treated in the short term.
Disclosure in the Public Accounts Committee (PAC) last week that $19 billion of these instruments exist, has sent shock waves through the financial system. The extent of the damage will not be known until the minister reveals the details to enable an assessment of the risk level of the debt which the LOU instruments were issued to cover. The high-risk debt could end up as defaults, in which case, it becomes central government debt to be serviced. This will affect the fiscal deficit. For sure, the substantial amount of $4.5 million used for road repairs and maintenance will fall in this category soon. Additionally, many weak state-owned companies are on the list which could add to the defaults.
EDUCATION TRANSFORMATION
The prime minister has received the report on a transformed education system. The report is thorough but to my own analysis, deficient in dealing with some critical areas, such as an effective plan to deal with the most insidious problem of all, illiteracy. But the report is bold in other areas in tackling some of the big problems.
It was proposed originally in the report that a total of $522 billion be spent on the transformation plan over the next 10 years. This is an average of $52 billion per annum as compared to present $30 billion expenditure, recurrent and capital. This would require an additional $22 billion on the average annually, a total of $220 billion over 10 years, a staggering amount to find, unless much of it is going to be taken from existing votes elsewhere to the detriment of other areas. I recommended in a previous publication that a more realistic scenario be drawn since $160 billion of the $220 billion of extra funding is recurrent expenditure which cannot be financed from loans and could not be found from additional taxes either. I await with interest the result of the effort initiated by the prime minister to find this financing.
When these three areas of financing are taken together, notwithstanding the unknowns which exist, it is obvious that an exceptional number of new commitments will have to be entered into by the Ministry of Finance to cover losses, pay debt and finance the critically needed area of educational reforms. This financing can only come through facing some harsh realities by:
* Cutting expenditure drastically;
* Raising new revenue unbearably;
* Securing considerable grant money.
These are all imponderables.
The final mix of funding will have to await more information on the intention or expectations of Government.
One thing, which is certain, is that there will be a jolting impact on the economy. Adding any sizeable new additional burden of financing to a budget, which is already 93 per cent fixed in its commitments for salaries and debt service, leaves no wiggle room in the remnant of seven per cent of budget expenditure, which is already committed to service all other needs. This is even moreso likely to be the case since the 2005/06 budget which has just been tabled shows only a five per cent increase over last year. Room to manoeuvre is, therefore, likely to be even less.
As a consequence, the future can no longer be what it was expected to be. It can be a whole new ball game!
* Edward Seaga is a former prime minister. He is now a Distinguished Fellow at the University of the West Indies.
