Keith Collister, ContributorIT IS extremely important that interest rates continue to fall if the minister is to reach the balanced budget target this fiscal year.
One only has to look at last year's budget to see how much of the budget is consumed by interest, and therefore how crucial is the need for lower interest rates.
Out of a total projected expenditure of $196 billion in the
original budget, excluding debt repayment, $96.3 billion represented interest costs.
The second supplementary estimates recently projected revised total expenditure of $200.8 billion, but this would have been even higher without a projected $2.7 billion in savings in interest rate payments due to lower than projected interest rates.
BALANCING THE BUDGET
Fortunately, barring a huge shock, I believe the current trend of falling interest rates will continue, and that this is the key reason that the minister of finance will have a good chance of balancing the budget in 2005/6.
The 2005/6 budget projects a fall in interest costs from $96.3 billion last year to $87.6 billion, entirely due to a fall in projected domestic interest costs from $73.7 billion last year to $64.4 billion this year.
The minister will want interest rate costs in the upcoming budget to continue the recent trend of being below what is budgeted due to faster than expected interest rate cuts, thereby keeping the current virtuous circle intact.
Of course, the main reason for the Government to continue to target a balanced budget is not the demands of our international creditors, but that this is the only way for domestic interest rates to continue to fall.
BORROWING REQUIREMENTS
Without a reduction in the growth of the Government's huge borrowing requirements, it will be very challenging for domestic interest rates to fall much further.
In fact, the actual announcement of a balanced budget target for the upcoming fiscal year by increasing Jamaica's fiscal credibility will actually assist in meeting the target through encouraging a continued fall in interest rates.
A further fall in interest rates will also have the not inconsiderable advantage of allowing loan rates to fall to levels at which smaller businesses can profitably borrow without feeling they are working for the bank.
This virtuous circle should also allow the minister to avoid a 'tax package' this year, which would be very positive for private sector confidence.
In fact, it is extremely important for Jamaica's long-term future that he achieve this target as a balanced budget is already built into the expectations of our external creditors.
The failure to meet this target could lead to pressure on our international bond prices and derail the current virtuous circle of falling interest rates, a stable dollar, lower fiscal deficits and a slower overall growth in debt.
For this reason, the minister of finance is expected to announce a central government budget that is balanced despite recent domestic calls to relax the deficit target further.
While a preliminary glance suggests the budget appears to largely be one of continued austerity, as required by our international creditors, it appears that the pressing needs for additional social spending in areas such as crime or education have to some extent been addressed this time around.
TAX REFORM
On the issue of tax reform, due to the need for revenue neutrality, I do not think a significant portion of the tax reform measures can be implemented immediately in this budget, and in any case the society will need to create more of a consensus before implementing most of the suggested measures.
However, there already exists a consensus on raising the threshold to provide some immediate relief for hard-pressed PAYE earners, which would improve horizontal equity and could be paid for through changes to the general consumption tax designed to catch those not paying their fair share.
In addition, there should also be a sufficient consensus to give small businesses a break and level the playing field between them and publicly listed companies by eliminating tax on dividends from private companies.
TAXATION CHANGES
Most Jamaican unlisted businesses are small, and in a country like the United States would be treated like partnerships, paying tax at the lower personal rate.
This would not cost a significant amount, unlike some other suggested taxation changes.
In fact, a reduction in corporate tax rates for this group would lead to gains not losses, as the tax currently paid by this group is fairly low.
This quest for lower interest rates will hopefully soon be supported by the bringing to closure of the first round of Jamaica's attempt to create a social partnership.
This effort has so far been viewed favourably by international investors and rating agencies, and has in my opinion assisted in the relatively positive view of Jamaica's external debt.
