Debating the IMF Budget

Ian Boyne, Contributor

The biggest relief for the average Jamaican who waited for news out of Peter Phillips' Budget presentation was that there were no new taxes. With that out of the way, there was little interest in whatever else he had to say. I think this will be one of the dullest and most yawn-producing Budget Debates.

The big decisions and 'prior actions' have already been taken and debated. Everything is now stale. Man a Yard Audley Shaw will, of course, come with his polemics and histrionics on Tuesday, and he is a hard worker when it comes to his Budget presentations. He will do his research and search diligently for gaps in Phillips' presentation.

For me, though, the issues are simple and straightforward: Would the International Monetary Fund (IMF) give a better deal to the Jamaica Labor Party? What wiggle room exists for a substantially different set of measures than the one Phillips has accepted?

Audley can come with a lot of sound and fury about protecting the poor and what has been "laid on the backs of the people" and how "anti-growth" this Budget is. I might even agree. The question is, in this real world where our most critical decisions are decided outside our borders, how many options do we really have?

Phillips himself made an important admission in his Budget speech of last Thursday: "It may be that, left to ourselves, there are areas of the Fund programme that we would have cast differently, but we had no such options." That's plain enough. And I don't think Audley Shaw would have had any options either. He is Man a Yard here, not in Washington.

There is no way that the IMF was going to countenance any expansionary programme, no matter the arguments put to them. They would still have insisted on their harsh 7.5 per cent primary surplus target. They would have insisted on forcing public-sector workers to forego wage increases. They would have insisted on an austerity package which would lead to cutbacks and the raising of taxes. These things are inevitable under an IMF programme.

We can fantasise as much as we want and play to the gallery. Rhetoric about 'wicked, uncaring, oppressive Government' makes for nice news clips and newspaper copy. But it's absolutely useless for serious analysis.

If critics of the Government maintain that the delay in signing an agreement with the Fund caused the dollar to slide, as well as other deleterious economic effects, that has to be measured against signing a bad and unfulfillable deal early. This has absolutely nothing to do with backing the present Government. It's simple logic. No deal was better than a bad deal. Take one proposal that has come out which was resisted by our negotiating team: The suggestion for a haircut on our debt by the IMF. This was worth fighting over. The consequences of that haircut would have been catastrophic.

Phillips was right also to dismiss as "illusions" the views of a few pushing for some non-IMF path. This turning away from the IMF, as undesirable as some of the elements of its programme are, would result in "worsening poverty, especially among the most vulnerable and disadvantaged sections of the population". Also, "sharper cuts to the Budget, resulting in significant reductions in the availability of public goods and services such as health care and education, which again would affect the poorest Jamaicans".

Also, as financial analyst Jermaine Burrell pointed out to me in a recent interview, a repudiation of even our international debt would see Jamaican companies losing billions and having to lay off thousands, with some perhaps closing. Much of our international debt is owned by Jamaicans, not foreigners. This is not commonly known. Any unilateral repudiation of debt would not just hurt the 'big man' and 'the big finical institutions', but non-financial Jamaican companies, the pensions of poor and working-class Jamaicans and the overall profitability of our business and commercial sector. It would be an unmitigated disaster.

Mortgaged ourselves

So we are faced with Hobson's choice. Let us face the stark reality. We have surrendered the right to manage our own affairs. We have mortgaged ourselves. The South Centre has just published a highly informative and empirically rich 60-page paper titled The Age of Austerity: A Review of Public Expenditures and Adjustment Measures in 181 Countries, written by Isabel Ortiz and Matthew Cummins, a Columbia University professor and World Bank economist.

Under the tutelage of IMF and general neoliberal economic framework, "an alarming number of countries appear to be undergoing excessive fiscal contraction, which has major risks". The IMF pushed counter-cyclical, expansionary measures at the onset of the global crisis in 2008-2009. Some 144 countries ramped up public expenditures, with the average expansion amounting to 4.0 per cent of GDP. Nearly 50 countries announced fiscal stimulus packages totalling US$2.4 trillion, a quarter of which was for social protection.

We face certain dilemmas, and we might as well acknowledge them frontally. First, we know of the limitation of austerity measures. We know that while they are designed to set the foundation for growth, certainly in the short-term it depresses growth.

As the South Centre paper says, "Numerous studies have highlighted the fallacious basis of austerity programmes. In the short term, austerity depresses incomes and jobs and hinders domestic demand and, ultimately, recovery efforts. Austerity also has negative impacts on employment, economic activity and development over the long term. Even recent research at the IMF acknowledges that fiscal consolidation has adverse effects on both short- and long-term unemployment, private demand and GDP growth, with wage earners hurt disproportionately more than profit and rent earners."

The paper cites IMF chief economist Olivier Blanchard's recent admission that the IMF underestimated the multiplier effects of the economic contraction in the design of austerity policies. But notes the paper: "These IMF research papers do not appear to be reflected in IMF operations." So when Jamaica - whichever party is in power - sends its negotiating team to negotiate, it's not the scholars and academics the team is negotiating with, but policy dogmatists and bureaucrats intent on your carrying out the dictates of the economic Magisterium.

Phillips said last week, in his presentation, that "the ultimate objective of the entire reform agenda is to reverse the long-term trend of low growth and declining productivity, which has come to characterise the Jamaican economy". He then said, "The challenge for us as a Government, with the support of the Jamaican people, is to go beyond the strict confines of the extended fund facility to create an economic and social environment which encourages and facilitates investment and induces long-term innovation and productivity gains."

Faith-based commitment

Peter Bunting bawled out for divine intervention last weekend, and without using that same phrase, Peter Phillips is similarly expressing his faith-based commitment. For though he presented his usual list of mega projects which constitute his growth agenda, how those will infuse dynamism into the larger economy under our fiscal austerity requires a lot of faith.

But I agree with Phillips' point that talk about "where the Government's growth strategy is" may be misconstrued. People will say, "I hear the Government talking about a debt strategy, but where is the growth strategy? That is what they must concentrate on."

Phillips is right: "I think it is important, at the outset, to dispel the notion that economic growth is separate and apart from the economic reform programme itself. Indeed, the economic programme is necessary for us to achieve sustained growth. It is not possible for us to achieve sustained growth if most of our resources go simply to pay debt. And, in turn, you cannot achieve high rates of growth if Government consistently spends more than it earns and thus finances itself by commandeering inordinate resources from the private sector."

So while I inveigh against the IMF theology of economic development, I freely concede that even without an IMF agreement, it would be necessary for us to reduce our debt and take the hard decisions to facilitate that and adopt some fiscal consolidation measures.

We are in a crisis, and in a crisis we don't take desirable and pleasant actions. So we can't just blame IMF imposition for all our problems. Some things we would have been forced to do anyway just because they make economic sense and are prudent. It's the pace of adjustment and some levels of inflexibility that I fault the IMF for.

Phillips waxed eloquent last Thursday in his sermon: "So the essential point to be made, Mr Speaker, is that in order to reach that 'promised land' of sustained economic growth, we have to enter through the gates of fiscal consolidation." Amen, fiscal austerity apostle, Peter!

He laid out his regressive tax reform programme which would "remove most exemptions and most items eligible for zero rating," which is part of the IMF gospel. The South Centre paper makes a well-argued case against this IMF dogma. This drive towards means-tested social-protection targeting, while seductive on the surface, has a number of disadvantages highlighted by the paper:

"It is costly; means testing absorbs an average 15 per cent of total programme costs; it is administratively complex and requires significant civil service capacity which is often lacking; it can lead to large undercoverage; the scope of the target often falls short of adequately covering vulnerable populations and instead tends to focus on the extreme poor, leaving many vulnerable persons excluded by design from receiving benefits."

These are precisely some of the concerns I have raised in reacting to Damien King and the Private Sector Working Group's crusade for abolishing GCT exemptions for basic goods. I am afraid we are going to adapt these measures without sufficient empirical work and cross-country research.

Says the paper in criticising the shortcomings of means-tested social-protection programmes: "In many countries, targeting has dismantled public-service provisions for middle classes and created two-tier services ... ."

Interestingly, though, both the Government and the JLP - certainly Mr Shaw - is in favour of this neoliberal, regressive approach to taxation.

It's an IMF budget which is being debated. How Mr Shaw will play his hand on Tuesday with the deck of cards given to us by the IMF will determine whether he is a serious player or a three-card man.

Ian Boyne is a veteran journalist. Email feedback to columns@gleanerjm.com and ianboyne1@yahoo.com.