Joseph M. Matalon, head of the tax review committee.AS WE approach the 2005/6 budget it is time for us to reflect on the importance of the budgetary process. Last year I wrote on this process but the focus was different from what it should be today.
The focus last year was to look at the budget from a high level, that is the final budget, rather than at the individual Ministry level. The reason for me doing that was that I thought it was more critical to get the "whole" under control, and so greater emphasis was placed there. I think, however, that the past year has shown us that there is some amount of fiscal discipline in the overall budget and this is evidenced by the consistent tracking, reporting and performance over the period.
As we seek to improve on the model it is now best, in my opinion, to turn the focus to the micro budgets that make up the macro. This means that focus must be placed at the levels of the various statutory and other governmental organisations contributing to the consolidated budget. This was reinforced in my mind in the Gleaner report on Thursday February 24th entitled "Unpaid bills taking toll on health care system". In addition to that there was the announcement that Air Jamaica would break even in five years, implying that losses will be made until then.
CONSIDERING OBJECTIVES
In both instances it occurred to me that the budgetary process is fundamental to (1) understanding why the hospitals are in that position, and (2) determining the feasibility of Air Jamaica. In the case of the hospitals that statement could only have been made because of the objectives that were first defined when compiling the budget. In relation to Air Jamaica the objectives that are set for the airline will determine how successful the budgetary process is.
This is the first mistake that persons make when preparing budgets, that is, they do not understand that budgeting has more to do with qualitative decisions rather than quantitative. Because of that basic misunderstanding many budgets are unrealistic and in many instances overrun. The result is that the objective of the organisation is not met because they are not aligned with the budget.
The report that the public hospitals are in a financial bind because many of the bills remain unpaid speaks volumes to the non-alignment of the real objectives of the health system with the budget that was created. It is obvious that at the budgetary process the objective was to raise revenue (cut costs) for the government rather than provide appropriate health care. If the objective was to provide proper health care then the steps would be:
Determine what level of health care is to be provided;
What resources are needed to provide that level of health care and determine the availability of the resources;
. What level of health care can be reasonably provided given the resources available;
What portion of the health care can be realistically covered by the population; and
What measures are going to be used to ensure that the objectives are met (measurement).
If these questions were asked and properly budgeted for then we would not be talking about the financial crisis in the hospitals. This is because we would have understood that most of the persons utilising the services do not have the money and that the objective of public health is to ensure a healthy society, rather than raise / save money. In the context of Air Jamaica it is therefore going to be very important that when the five year plan is being done that the proper questions are considered. It is quite easy for us to forget the real mission and get sidetracked into other areas such as saving Air Jamaica because it is a part of our history. It is therefore at the important budget juncture that we will determine whether or not Air Jamaica is going to be a financial strain on the country over the next five years and beyond.
INFLUENCING BEHAVIOUR
Budgets also are very important in influencing behaviour. We can see this from the national budget. We only have to think of the way in which investment behaviour is affected by the various tax and interest rate announcements by the Finance Minister. We have all seen where in the past the country has held its breath to see what (if any) new taxes the budget announces, which usually determines how persons behave. It is therefore very important then for the budget setters to understand the importance of the budget in determining behaviour. One of the primary reasons for the positive economic activity being experienced is the projection (budget) by the government of its commitment to meet a balanced budget in 2005/6.
TAX COMMITTEE REPORT
Recently the Tax Review committee presented its report, which in the most part seems progressive. This could only have been because the terms of reference (TOR) outlined in the report. The TOR was very involved in ensuring that the tax recommendations had a positive impact on the economic development of the country. The other major objectives were (1) revenue neutralisation; (2) tax distribution burden; (3) balance between direct and indirect tax; and (4) reducing major inefficiencies in the tax system. The result of this was that the committee recommended various tax initiatives that should assist in meeting those objectives. The problem I see, however, is that it appears that protecting short term tax revenues (in order to balance the budget) seems to have overshadowed the objective of assisting economic development. This is illustrated in the recommendation for imposing a capital gains tax, which would certainly affect the investment climate, and attempts at revenue neutralisation. The Minister in his wisdom has stated that a capital gains tax is not on.
Given the TOR, however, this report for the most part met its objectives and has made some good recommendations. It is easy for us to look at the report in the context of immediate social impact, such as the recommended gas tax hike, but this recommendation in addition to the increase in GCT, increase in tax threshold, removal of education tax and HEART, and reduction of property tax are attempts to improve the long term economic environment by making it more attractive for productive rather than consumption activity.
National budget
In the final analysis I think the Tax Reform report is a good example of relating outcome to objectives. This report also speaks well about the approach to setting the national budget, as it shows that proper decisions are being made in determining this year's budget. Based on this I am confident that while the primary objective of the Finance Minister will be to balance the budget in 2005/6, this will be done in the context of sustaining the economic improvements we have been experiencing.
It is this same approach that sectors such as education, health and security must take in order to determine success. If the objective at the time of setting the budget for these sectors is to save money, rather than provide proper service and development, then we will always be speaking about deficiencies in these areas. As we approach the 2005/6 budget year it is going to be very important for the budget setters in the various government organisations to understand that in order to achieve success it is very important that the budget setting process is properly done. They must first set proper objectives (TOR) and then put in place proper measurement methods, in order to improve performance.
E-mail: dra_chung@hotmail.com
