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EDITORIAL - Decent first step by Phillips, but ...

Published:Sunday | May 13, 2012 | 12:00 AM

So far, Dr Peter Phillips seems to be getting it right. His first expenditure Budget, tabled in Parliament last week, was appropriately modest.

According to the Budget, the Government proposes to spend $612.4 billion for the fiscal year, which began in April. That's a nominal increase of the provisional expenditure in 2011-2012.

But with inflation of seven per cent in 2011 and price index expected to continue on the same trajectory this year, spending will, essentially, be flat.

It is significant, though, that all the increase in the Budget will be gobbled up by a big 34.5 per cent jump in the allocation for debt servicing, which will account for 54.6 per cent of overall expenditure, against 46.4 per cent last year.

So while Dr Phillips and his technocrats appear to have, in macro terms, structured a tight Budget, the finance minister will not only have to show that his numbers are credible, but that he has both the will and the political capital to make them stick.

In that regard, we look forward to next week's line-by-line perusal of the Budget by parliamentarians, and then, critically, Dr Phillips' presentation of how he will finance the package.

Two things are immediately obvious from the Budget numbers, assuming that they are credible and the Government has the discipline to make them stick.

closer to meeting deficit target

First, by keeping the proposed spending tighter than most people expected, Dr Phillips has given himself greater wiggle room to meet a deficit target of around 4.5 per cent of GDP - the bottom-line figure the International Monetary Fund is expected to insist on in exchange for the fund's policy imprimatur - without having to contemplate a tax package of the magnitude that many analysts had been anticipating. Indeed, even with only a modest growth in the economy, but a robust and creative revenue-collection programme, he may be able to squeeze by with minor adjustments to some existing taxes and fees.

Second, there is need for further and better particulars on the debt-servicing figures, and especially what they say about Dr Phillips' debt-management strategy.

It is widely acknowledged that at the heart of Jamaica's economic crisis is its debt of nearly J$1.7 trillion, of which 131 per cent of GDP is as bad as that of most of the crisis-riddled economies of the Eurozone. The product of Jamaica's past borrowings, unfortunately, has not been robust economic growth, from which there would have been returns to service the debt. So, the sad reality is that we now pay for the flawed policies of the past with resources that might otherwise go to growth-inducing investment.

It was, in part, to ease this burden and to provide space for reform that domestic holders of Jamaica's debt agreed two years ago to the restructuring of more than J$700 billion of the country's debt. This contributed to a downward movement of interest rates.

Against this backdrop, the projected sharp upswing in debt-servicing costs, especially a near $16 billion, or 13 per cent, in interest payments, is deserving of explanation. We hope it is not reflective of the administration's expectation of long, troublesome negotiations with the IMF which will force acceptance of penalty pricing on debt in the bond market.

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