Nigel Clarke | Fiscal responsibility matters when stakes are high

I THINK that it is safe for readers to assume that, at heart, The Gleaner supports fiscal responsibility, in general, and Jamaica’s fiscal rules, in particular, adherence of which its editorial page has championed across political administrations.

If that is so, sections of last Sunday’s Gleaner editorial gave us reason to question the due diligence it employs before arriving at its positions on matters of a technical nature.

Weighing in on the public sector wage restructuring is fair game. However, on Sunday, March 12, when the voting membership of teachers and doctors were gathered to make critical decisions, the promotion of impractical and irresponsible fiscal choices by the editorial, and the resulting trivialisation of Jamaica’s rigid fiscal realities stained The Gleaner’s otherwise strong record of upholding fiscal truth in Jamaica.

If fiscal targets do not matter, then of course, the Government of Jamaica (GOJ) can take on any expenditure, at any time, and, the GOJ can even ignore the revenue implications of its decisions.

The GOJ has $30 billion of budgeted ‘back-pay’ resources in this fiscal year for teachers, doctors and police. Since November, I have been explaining that if this large volume of expenditure goes unpaid this fiscal year, it would, most probably, need to be paid over a number of years beginning in 2024/25.

Revenue received this fiscal year, if not spent during the year, cannot be utilised for any “above the line” expenditures (expenditures that go into determining the fiscal balance) in a succeeding period given that under our fiscal rules, Jamaica is required to run a modest positive fiscal balance at this time. If the $30 billion is unspent it could only be utilised in the next fiscal year for “below the line” expenditures such as the repayment of debt.

This is so as the 2023/24 budget has no provision for $30 billion of payments relating to the first year of restructured compensation. (However, it makes provisions of $32 billion for the second year of payments).

COULDN’T 2023/24 EXPENDITURE BE REARRANGED?

Budgetary expenditure for 2023/24 is programmed at just over $1,000 billion. Of this amount, three line items of expenditure, (i) wages and salaries, (ii) debt service and (iii) pension payments consume approximately $700 billion or 70 per cent of the budget.

Add the next nine largest categories of recurrent expenditure:

• The PATH Programme (school nutrition, school transportation and all PATH grants),

• Drugs and supplies for hospitals,

• Subventions to our universities,

• Subvention to the university hospital,

• Allocation for the judiciary,

• Subvention to the JUTC,

• Recurrent maintenance of roads and bridges,

• Street lights, books and materials for schools.

We are just below $800 billion or approximately 80 per cent of the budget. Add the non-wage operating expenses of the police, correctional services, MOCA, regional health authorities and laboratories and we surpass $850 billion.

The capital expenditure budget envelope, which is used to improve standards of living, is to be considered less than optimal at 2.2 per cent of GDP or $75 billion. This brings our total to $925 billion.

The approximate $75 billion that remains has to cover all other remaining expenditure across ministries, departments and agencies (MDAs). It is therefore virtually impossible to force-fit a block of $30 billion of unplanned expenditure into such a structure without precipitating a crisis.

MISLEADING SOLUTION OF A SUPPLEMENTARY BUDGET

The editorial made the suggestion that the $30 billion could be accommodated by invocation of the supposedly magical process of a supplementary budget:

“... or the administration might consider tabling a supplementary budget if and when they do. Supplementary budgets are a norm for governments, which have to react to developments during the financial year …”

I consider this misleading and deeply troubling.

If fiscal targets matter, then supplementary budgets that accommodate additional unbudgeted expenditure can only be consistent with fiscal rules if additional revenues finance them.

We have had seven supplementary budgets over the past two fiscal years. Most of these revised expenditure significantly upwards. This may account for the illusion of the magical properties of the supplementary budget process in recent times. However, the dramatic over-performance of GOJ revenues over this period was the only reason these large supplementary additions to expenditure were feasible.

Now that the economy has surpassed pre-COVID-19 levels of economic output, and with inflation declining, the scope for significant revenue over-performance that could accommodate $30 billion, as a single line item of unbudgeted expenditure, is extremely limited. Contrary to the editorial’s suggestion, the chances of a supplementary budget process ‘magically’ creating space for $30 billion, in a fiscally responsible manner, are slim to nil.

The editorial also suggested:

“While funds are fungible, monies can be segregated and escrowed, as the Government did with the amounts that it was prepared to pay the Venezuelan government for its 49 per cent share of the Petrojam oil refinery that Caracas refused to accept. A similar approach might be contemplated with respect to the bargain units that haven’t accepted the administration’s offer.”

I will mention two of several challenges with this suggestion.

Warrants for payments can only be drawn against specific budgeted activities. In this case, the budgeted activity that relates to the $30 billion provision is compensation allocated across all MDAs. The Petrojam/Venezuela example involved a single beneficiary. With teachers, doctors and police, we have approximately 40,000 individual beneficiaries!

Further, the law requires that the employer withholds statutory payments relating to compensation and pay these over to the tax authority. If funds are placed into an escrow account, how would the employer handle the withholding of statutory payments? And, at what point would the statutory payments become legally due and payable, since the actual employee would not be in receipt of the funds at the point of expenditure by the Government?

Anticipated receipts of statutory payments from additional compensation have naturally been factored into revenue. If the programmed compensation were to be paid out into escrow without the simultaneous inflow of related statutory payments, the fiscal balance target would be missed. The suggestion is therefore unworkable as the achievement of fiscal targets is actually very important.

Championing fiscal responsibility matters most when the numbers are big and the stakes are high. The editorial has usually been well informed, and on point, at these junctures. Not this time, unfortunately.

Nigel Clarke is minister of finance and the public service. Send feedback to columns@gleanerjm.com