Morrison

Jamaica's chronic indebtedness will again overshadow all other factors as public attention turns to the crucial issues of how the national Budget for 2009-2010 is to be financed and public expenditure allocated. This time, the effects of the gargantuan debt payments will be that more suffocating and the tough global economic environment and the impact it is having locally will limit the policy options

Our budget crunch appears to reach new peaks of severity at five-year intervals. Back in 1999-2000, the spike in debt payments arising from FINSAC pushed the fiscal deficit to unsustainable levels but a gas-tax increase to raise more revenues was met with social disorder. Five years later, the gap in the 2004-2005 Budget was only bridged when public-sector workers agreed to a wage freeze. Each time, the wider society, government, Opposition and the business classes seemed to prefer to avoid the tough choices. Against the background of a declining economy, the financing gap in this year's Budget makes tough choices unavoidable and may require not just a wage freeze, but significant tax increases as well.

Beyond the financing gap, these choices are critical to halting further slippage in key macroeconomic indicators, such as inflation, interest rates, exchange rate and foreign reserves, which have been the focus of public concern. In short, if success is to be achieved in shoring up confidence about our economic prospects, then we must make headway in sorting out the long-standing fiscal problems. A reduced budget deficit means less borrowing by Government. Other things being equal, that should lead to lower interest rates on government debt, thereby reducing debt payments and setting off a virtuous circle.

Failed attempts

In a mature political system, rational choices and good policies ought to be viewed as good politics, but in the short-term cycle of electoral politics, this is often not the case. Jamaica's crass political culture and shortage of social capital have been major barriers to rational choices and good policies. I have witnessed how failed attempts at concluding a social-partnership agreement limited the country's ability to work its way out of economic difficulties in 1996-7 and 2004-2005, the effects of which are still with us.

A national crisis such as we are facing ought to lead to some accommodation, at least temporarily. How the issues are addressed by both the Government and Opposition in the current budget exercise will tell whether a consensual approach to dealing with the crisis is likely. Lack of consensus and cooperation will deepen the crisis, imposing even more painful adjustments on an already weakened economy and the most vulnerable groups in the society.

On the details of the Budget, there can be no doubt that debt restructuring is necessary. At current levels of debt payments, the Budget can only be balanced by cuts to discretionary spending of such severity that they would worsen the downturn in the economy and disrupt vital public services. Especially in a recession, government spending is essential to help keep economic activity going as households and businesses are forced to cut back their purchases. Combined with tight controls on wasteful spending and focused attention on clear priorities, lower debt repayments would contribute to more timely achievement of a balanced budget.

The matter of debt restructuring is, however, one that requires delicate handling, national collaboration and innovation. Jamaica's case does not fit within any existing mechanisms, which will make the task much more challenging. Distinctions about debt owned by Jamaicans versus that by foreigners and how this could affect the process seem somewhat simplistic. This is a complex exercise, as was demonstrated in 2004 when some private-sector players under the umbrella of the Partnership for Progress initiative attempted to develop a scheme. But it must be explored fully if we are 'get off the down escalator'.

Economic growth

While debt restructuring would not be an immediate fix, cutting the losses of public-sector companies is an important area where expenditure controls would make a difference soon. Air Jamaica and the Sugar Company of Jamaica (SCJ) are prime targets that should have been dealt with long ago. Vested private-sector interests have held back the downsizing of Air Jamaica but these voices have gone quiet after their outbursts when the London route was discontinued. We heard then that visitor arrivals from the United Kingdom would have collapsed, but no such thing has happened.

Cutting the public-sector wage bill is no easy task. Teachers, nurses, the security forces and other essential workers make up the vast majority of the establishment. Staff rationalisation is possible in some areas, but if truth be told, there are important other areas which are understaffed. Over time, reform of pension arrangements for civil servants will be necessary in order to lessen the burden on the Budget. And there is significant room for savings in overhead costs.

On the revenue side, the emphasis being placed on raising compliance levels is commendable, but the main driver for boosting inflows is a strong bout of economic growth. Reform of the tax code is also long overdue and would help to increase the efficiency of the system, but in a society of wide income disparities a shift towards consumption taxes could increase the burden of taxes on lower-income groups who consume a higher percentage of their disposable income.

The main priority must, therefore, be to get this economy on to a growth path, a subject about which there are many prescriptions that require separate treatment.

Dennis Morrison is an economist. Feedback may be sent to columns@gleanerjm.com.