Dennis Chung, Contributor
DAVIES
LAST THURSDAY the Finance Minister tabled the 2005/6 expenditure estimates. There were positive reports that the budget is only four per cent above last year, indicating a real decline in expenditure, and that education and security have been provided with much needed increases.
It is important to note that although security received a ten per cent ($17 billion) boost, this is still below the 12 per cent inflation experienced, implying a real decline. Local government and sports suffered a nine per cent cut, but the capital allocation has increased by $263 million (over 50 per cent) and could mean upgraded fire equipment with less going to sports.
DEBT SERVICING
The reports also show debt servicing decrease from 68 per cent to 66 per cent of the budget. If one were to do the math, however, the same dollar amount will be spent on debt servicing as was done last year. If we assume that the budget was $100 last year then 68 per cent would have been $68. If the budget increases four per cent to $104 and debt servicing is now 66 per cent then this computes to $68.64. This implies that interest rate reductions may not have had the impact that many tout. We must remember that 70 per cent of the debt is at fixed interest rates so that reductions will not have any significant effect on the interest payments. The decrease to 66 per cent of the estimates is caused primarily from the four per cent inflation factor.
What we must examine (which I have not seen) is assumed exchange rates, although based on projections devaluation should be minimal this year. It is also going to be interesting to see what the primary surplus is as this will give an indication of what debt borrowing requirements will be. It is amazing that we find the fact that debt servicing is less in percentage terms a positive, without examining the details, such as the dollar amount of debt, which is always very important. There is no improvement if the way it came about is by increasing expenditures.
REVENUES
The four per cent increase in the face of trailing of tax revenues ($8 billion) so far this year is important. For the year just ended we have seen almost all budgeted expenditures realised but a significant shortfall in revenues, primarily as a result of tax revenue shortfall in the order of $8 billion so far. If we are already behind projected tax revenues and the expenditure estimates have increased this year then where will the additional revenue come from? This is even greater reason to expect that there will be tax reform along the lines of the Matalon recommendations. Let's see what happens next week.
As relates to the expenditure estimates we must take a closer look at the details. I have not had the opportunity to see them but would like to make a few comments. The approach to take would be similar to what any company's management would do if faced with a cash flow crisis. While revenue maximisation measures is very important for the long-term survival of the company, in the short term expenditure cuts and return strategies are critical. The prudent manager would look at what expenditure will bring the greatest return for each dollar. This should be the approach when analysing the expenditure estimates.
I have always said it is not enough to just increase allocations to security and education. There needs to be a plan to get the most out of the expenditures. If the problems are more than just resources then we could be throwing good money after bad. What is needed is not just a presentation that more money has been allocated but to understand what the strategies are for the use of the funds. We should demand that proper control systems be put in place to ensure monies are expended properly.
EDUCATION
There has been a significant increase in education's budget, with a whopping $2.6 billion capital expenditure increase (over 1,000 per cent) and over 1,000 per cent increase in equipment purchases. While on the face of it this seems great, especially for the capital expenditure targeted for land and buildings, this may not be the prudent thing to do. Why do Jamaicans have this affinity for owning land and buildings, when what we really need from them is the utility? I mean, if I could get a house to lease for $1 per year for the next 100 years then why do I need to own it? Sure, there is the argument of capital appreciation but if you never sell the land or building then you will never realise the appreciation value and it will only look good on the books.
This is why when valuations are done for companies cash flow is more important as capital appreciation on the books cannot be spent and is really a non earning asset. Similarly, with the cash crunch that government faces why would we want to purchase land and buildings rather than maybe lease finance with the option to purchase. This could mean that of the $2.8 billion targeted for expenditure we may only have to spend $280 million in lease /purchase financing payments. This would leave some $2.5 billion to be spent on additional debt servicing (which would hasten debt reduction) and services such as fire fighting. This is the sort of creative thinking needed in this crisis I we want to add short to medium term value.
As for whether we will get the best returns on our education dollar I would like to suggest that the present educational structure will not allow that. I have not read the education study but I hope that the additional expenditure roll out will happen jointly with the recommendations (if good) so that we will reap the rewards of spending additional funds. The present GSAT exam, as I have always pointed out, is an injustice to grade six students as it does not really prepare them for higher learning but causes more stress than anything else. I mean, why does a grade six student have to know the names of all the mayors or the parts of the ear. I don't know that and it has not caused any major inhibitions in my life.
SECURITY
In relation to the increased allocation to security, as I mentioned above this is a real decline. Still the amount of money is significant ($17 billion of an available total of $116 billion) and so should be spent wisely. The main problem of crime as I see it, however, is not lack of funds but rather a lack of will and attitude. If you asked me I would say we are not efficiently utilising even the funds we have now. If we put additional funds into security without changing the crime fighting approach and environment then we will be throwing more funds into the black hole.
ENVIRONMENTAL CHANGE
If we are to truly address our crime situation then there are a few dependencies that must come first. These include the environment we ask police to work in, the "snail pace" of the justice system and speedy and just resolution for acts of police brutality. Without these changes then we will only be flushing more money and effort down the drain.
In the end the real test of the expenditure estimates is not how much money is allocated to the ministries or even what percentage debt servicing consumes. What must be done to create an effective budget is a detailed evaluation of what the funds are to be spent on and what returns are expected.
E-mail: dra_chung@hotmail.com
