CHUNG
THE RECENT elevation in violent crime levels served as a distraction to the very important consideration of what is happening with the fiscal numbers. This still remains a very critical year for Jamaica, as we must ensure that our projection of a balanced budget is maintained, if we are to gain from the
expected economic benefits. Already we are seeing the systematic reduction of interest rates, in both the local market and international debt issues.
As the economy progresses it is going to be very important for us to continue the reduction of interest rates and maintain fiscal discipline to ensure we remain on track for a balanced budget. This means that continued monitoring of actual versus budget numbers must be maintained to keep expenditures in check, in relation to the revenue numbers.
A few weeks ago government released the provisional numbers for the first month of the fiscal year, April 2005. One month is not enough data to properly assess performance in my opinion, primarily because the government uses cash accounting to report its numbers.
ACCRUAL ACCOUNTING
This means that any expenses incurred but not paid will not make it into the budget. Under accrual accounting (used in the private sector) any unpaid expenses would form a part of the accounts as they would have been incurred, although not paid.
This gives a more realistic picture of the operations and will not lead to any major surprises in future accounts, as all known expenses incurred would have been reported.
APRIL PROVISIONAL NUMBERS
In the case of the government numbers we could find that expenditures incurred in April but not paid until May would not be reported until the end of May. This still remains a fundamental weakness with the fiscal reporting, as it does not provide a realistic figure in the earlier months of the year.
The implication is that correction of any over-expenditure may be caught too late. Another factor to be considered is the off-budget expenditures, which could have a future impact on the budget. These are the main weaknesses I see in the budgetary process that must be considered.
Bearing that in mind, the April numbers do show that the government is on target and the key factor is to ensure that this type of performance is maintained throughout the year. There are two main concerns that come to mind with these very preliminary numbers, however.
The government budgeted $61.4 billion for wages and salaries for the 2005/6 fiscal year. In April 2005 the numbers show an amount in line with what was budgeted for this category, which is $5.3 billion. Wages and salaries are usually constant, unless there are extraordinary payments such as retroactive pay.
If we assume a constant payment over the fiscal year, then the $5.3 billion equates to $63.6 billion over the period, which is $2.2 billion more than projected; and
The less than expected performance of the 'Production and consumption' category of revenue by $180.1 million, led by an underperformance in GCT of $314.9 million, may have implications for the month's growth projections. The fact is that GCT is a consumption tax, and is an indication of economic activity, as the higher economic activity is then the more GCT will be collected.
Is this an indication of less than expected economic activity that could mean lower than projected growth? What effect will this slow down in economic activity have on future profits tax? These are some main considerations I would look at in order to determine what the future holds.
Those would be my only two concerns after taking a cursory look at the budget numbers, as it is still early days and any number can still play. The Finance Ministry must continue to be diligent in ensuring that the numbers are carefully tracked so that we can meet our targets this year. I am particularly heartened by the numbers, which show that loan receipts are $3.9 billion less than projected, while at the same time loan amortisations are $3.2 bllion less than projected. This means that loan amortisations were at a faster rate than receipts in the month.
INFLATION
My main concern for the fiscal targets does not arise from the government accounts. The reported inflation numbers for April and May 2005 are of concern. The projected inflation for the 2005/6 fiscal year is 9 per cent. The inflationary numbers reported for the months April and May are 1.9 and 2.2 per cent respectively. This totals 4.1 per cent for these first two months of the fiscal year, and means that the inflation target is under some pressure. If there are two more similar months then we would have basically achieved the inflation target within a four-month period.
During May, the all groups category recorded higher indices than in April. The main contributors were in the categories of starchy foods, 3.3 per cent, and vegetables and fruits, 11.8 per cent. My own feeling is that the GCT changes (increase to 16.5 per cent and the move from zero-rated to exempt) must have had a significant input in this effect. Some amount of detailed analysis needs to be done in this area, and if in fact this is so then the effect must be considered in a revised inflation target. I have always felt that it is not possible to maintain a 9 per cent inflation target with the changes in GCT.
In addition to the above, we have heard about the expected increases in electricity and transportation fares. This will only compound the inflationary effects we are already experiencing. It is important that we control inflation, as the last thing we want is for businesses to start expecting higher inflation numbers and project it in their prices.
If we cannot control prices through introducing a greater supply of, or cheaper goods, then we will have to control it from the demand side, which may mean decreasing money supply. This could have a slow down effect on economic activity and growth and could affect our efforts to further reduce interest rates. This is important as it is the reduction of interest rates that will continue to drive economic activity the most.
I am still confident that the economic objectives will be met, but we need to ensure that inflation is controlled. There are still many other positives but we must ensure that inflationary pressures do not increase, as this could also affect confidence in the economy and ultimately much-needed investments.
Email: dra_chung@hotmail.com
