Living on the edge: The Jamaican Government has maxed out its credit card: Recovering fiscal sustainability

Colin Bullock and Christine Clarke, Guest Columnists 

While the International Monetary Fund's (IMF) main purpose has remained provision of balance-of-payments support, it is recognised that balance-of-payments problems are as much a creature of fiscal imbalances as of external shocks. A popular current interpretation of the IMF is that 'It's Mainly Fiscal'.

Oil-price shocks contributed to international recession in the late 1970s and 1980s, undermining economic activity and fiscal revenue potential in developing economies. Economies such as Jamaica's have been challenged to maintain external account and exchange-system viability in the face of severe fiscal constraints. The sustainability of borrowing depends on the resources so acquired being applied to building productive capacity rather than on current consumption.

In some respects, managing a country's finances should reflect the best principles of running an individual household. Consider the oft-cited 'Joneses', who are the envy of their neighbours. If they live on the edge, frequently shopping at expensive boutiques, driving the latest-model luxury vehicles, gambling and being fixtures on the social pages, they will face financial difficulties from the first adverse financial shock. If Mr Jones loses the value of a speculative investment or his company folds, the Joneses will find themselves in closer touch with their bank manager, and Mr Jones, as well as Mrs Jones, may have to seek employment.

The Joneses have certain basic expenditures which they must undertake. They need to buy food, medication and fuel for transportation. The difficulty of adjustment is that the Joneses are unwilling to give up the luxury vehicles, live in a more modest house or retreat from the social pages. They pay little attention to enhancing their personal productivity. They take out a second mortgage, miss some car payments, accumulate debt and, eventually, start avoiding the bank manager.

The multilateral financial institutions and domestic and international financial markets represent Jamaica's version of the Joneses' bank manager. No matter how much compassion and empathy there is about the borrowers straitened circumstance, the provision of financial support (loan or grant) will never be able to support the spending habits of the profligate borrower on any sustainable basis. In the absence of a willingness on the part of the borrower to prioritise spending to increase earning to readjust lifestyle relative to earning capacity, financial support from other parties will not continue indefinitely.

Adjusting lifestyle

A key aspect of the circumstance of our Joneses is living on the edge to accommodate socially impressive expenditure. Without saving, the shock of a major medical emergency means more debt. Jamaica, like the Joneses, has been living on the edge.

Budgets assume optimal conditions where: (1) the economy is growing (2) revenue will perform at or above expectations, and (3) there will neither be natural disaster nor international market shocks (higher oil prices or interest rates). We maintain a large government bureaucracy consistent with good intentions. When faced with adverse shocks, we spend more than is consistent with fiscal targets. We consistently ascribe cause to external circumstance rather than to our own inability to adjust.

Jamaica, like the Joneses, has an apparent difficulty in accepting more modest domicile. Digicel is moving downtown but are government offices following? Or, will they continue to pay multimillion-dollar rentals to private landlords uptown? The Urban Development Corporation has recently been focused on urban renewal of Up Park Camp and the Nuttall lands rather than the sustainable 'regentrification' of 'downtown' Kingston.

Jamaica's difficulty of pulling back from the edge is demonstrated by the substance of the stalled IMF standby agreement (SBA). This includes protracted failure to implement structural reforms in public. Some commitments predated the February 2010 SBA, having been cited in the 2008 Article IV Consultation. Reform of the public-sector establishment and the moderation of wage and pension expenses are intended to create room for more growth-oriented capital expenditure. The failure to implement betrays an anticipation of negative social and political reaction where political leadership has not been open about the reality of the narrowness of our fiscal resource constraint.

Painful Medicine

It is anticipated that any government, after the imminent general election, will have little option but to move on these reforms. Adjustment is inevitable, and will become more painful and more potentially socially dislocating, the longer it is delayed. Successful implementation is, therefore, as dependent on policy commitment, as on a willingness of policymakers to be candid with the populace regarding the necessity for change, what to expect, and how the burden of adjustment is to be shared.

These reforms will not, in and of themselves, solve all our fiscal problems, but they will create a basis for correcting our imbalance between consumption and productive effort. Although there are enterprises and activities which the Government may have to divest, and others in which it may have to adopt a reduced role, this will not be sufficient to pull Jamaica's public
finances from the edge. Fundamental reform will need to take place in our expenditure-development and Budget-implementation processes.
The Budget has to become, as it is legally intended - the beginning and the end of government expenditure and debt accumulation. The sleight of hand of off-Budget expenditure and using off-Budget funds as fronts for accumulation of public debt has to be avoided. The Budget has to be constructed as a simultaneous calibration of revenue and expenditure rather than identifying 'must-spend' first and then scrambling around to identify the necessary revenue, thereby introducing arbitrariness in key policy areas. This sequencing of an expenditure-oriented Budget lends itself to the self-defeating process of hiding (undercounting) expenditure and padding revenue estimates.

There has to be strengthening of the control mechanisms on government spending. Projects should not be initiated outside the Budget, regardless of the availability of cheap or concessionary financing, and regardless of the need. The major current expenditure project, the Jamaica Development Infrastructure Programme (JDIP), was initiated off-Budget but has the effect of increasing public debt. A project ought not to be initiated on the basis of engineering feasibility and the availability of low-cost financing (that has to be repaid anyway).

Assessing JDIP

The motivation of JDIP is said to be the poor condition of our roads, which is the result of a failure of budgets over many years, across several political administrations, to afford money for essential maintenance. Conceptually, the maintenance of existing roads is recurrent expenditure, although if a road is impassable, its rehabilitation could be seen as the creation of a new asset. Two aspects of new construction, Palisadoes road dualisation and the Christiana bypass, have elicited questions of need and priority. The road projects facilitate personal income and consumption in the short run (contractors, engineers, equipment operators, labourers, flag men) with a more distant prospect of facilitating growth.

The recently released auditor general's report on JDIP also raises the importance of probity and integrity in the administration of government projects. Questions have been raised about issues including identification of work that has been certified and paid for, office rehabilitation, and accounting for the value of capital assets transferred to the project. While explanations are anticipated, expenditure that is undertaken on the basis of a guarantee to be honoured by the taxpayers of Jamaica, should never take place without full scrutiny by the parliamentary representatives of the people. In this regard, the incentive system (including sanctions) needs to be reviewed and strengthened.

While projects are initiated off-Budget and, apparently outside a prioritised Public Sector, Investment Programme, there are other fundamental issues demanding the allocation of public funds. Children in public schools have a 31 per cent failure to achieve mastery of literacy at the grade four level, and a likelihood of weaker mastery of numeracy. The resources available to the health sector are scarce and preclude the implementation of the systems that are necessary for improved levels of health. Despite the paucity of resources in these sectors, sanctions and rewards are needed to ensure that the 'little' that is invested is properly spent and that the associated returns are maximised.

The efficiency that we desire cannot be obtained from simply 'streamlining' and reallocating functions between expenditure heads. There has to be an effective prioritisation of expenditure which gives adequate consideration of maintenance and operations, and is consistent with a clear articulation of government objectives and within the resource constraints defined by debt sustainability. This prioritisation has to protect the most vulnerable in society while facilitating economic growth.

Policy must ensure that services are adequately and appropriately funded from all feasible sources, including taxation, grants and user fees. In the final analysis, the burden of adjustment has to be more equitably distributed where income-based assistance is given to the truly needy while a larger fraction of the economic cost of government services is financed by those who can afford to pay.

Email feedback to columns@gleanerjm.com, colinb3@yahoo.co.uk and clarke.christine.@gmail.com.