Apr 2004 Financial News

Review of Jamaica's Budget

Apr 19, 2004

FINANCE MINISTER Davies has outlined his revenue plans to fund the $328 billion Budget estimates now under debate in the House of Representatives. Hardly surprising, given Government's heavy debt-service costs, borrowing is a principal source of funding ­ second only to the expected tax intake ­ with the government slated to borrow $153 billion, and non-tax revenue and grants completing the budget's financing plan.

Of particular significance this time around is the absence of a hefty tax package as occurred last year. In fact the Finance Ministry is actually removing taxes on solar water heaters produced in the CARICOM region as well as the recently imposed GCT on health insurance premiums. Additionally, this new budget has two supply side schemes aimed to boost output; namely, a new loan scheme for exporters and one for young entrepreneurs in the communications technology sector. These new schemes in a context of a budget with no taxes, despite the earlier promise of increases in property taxes by the Finance Minister, suggest that a deliberate attempt was made to design a budget consistent with the conciliatory tone underlying the historic MoU signed with the trade unions.

But despite the relative palliative nature of the budget with its no-new-taxes stance there are a number of issues that still need clarity if the budget is to be seen as credible and consistent. For one thing there is the matter of the timing of the upcoming negotiations with IMF regarding a monitoring agreement. This agreement is significant, if the government is to find favour with overseas investors and not have to offer very high premiums (high interest rates).

Further, if these deliberations are protracted government might have to stay longer in the domestic market causing rates to hover at their present levels rather than trend down. In his post-budget presentation Dr. Davies argued that analysts are placing too much store on IMF approval when the market is more impressed with the government track record. In this regard he pointed to the administration's success in reaching last fiscal year's deficit target.

Of course while one can understand The Finance Minister's positive spin regarding the ministry's track record, we believe that investors will be attracted to debt instruments when both an IMF-sanctioned agreement and government's consistent performance are in place.

There is also the concern that the inflation figure could come out much higher than the targeted 9% level. This is especially worrying given recent and expected increases in utility rates as well as the problem of rising oil prices in the world market.

In addition there is the broader concern that with only 30% of the budget available to fund recurrent and capital expenditure, the social sector could be terribly squeezed. With typical bravado, the Minister has said that the commitment to meet fiscal targets will not retard the social agenda. The problems with the Fire Service as well as reports that some police stations may have to be closed, show that this will be a definite problem area, despite the Minister's assertion that fees charged by some government departments will be increased.

In summary, there is no gain, saying that this year's budget is tidier, clearer, and more consistent than last year's. It indicates what can be achieved when there is a genuine attempt at collaboration with the social partners that goes beyond mere rhetoric.

Source: Jamaica Gleaner
http://www.jamaica-gleaner.com/gleaner/20040419/cleisure/cleisure1.html