Keith Collister, Contributor
Dr. Carl Ross, senior managing director and head of Emerging Markets Fixed Income Research at Bear, Stearns and Co. - RUDOLPH BROWN/CHIEF PHOTOGRAPHER
THE BUDGET deficit for the month of October of $3,836 million was over $1,500 million higher than the original projection of $2,333 million.
This was due to the significant underperformance of Government revenues by over $3.2 billion (or over 20 per cent below budget projections), mainly reflecting weak tax revenues. Income and profit taxes brought in $3,545 million compared with a budgeted $5,091 million, while GCT revenues continued their recent underperformance at $2,216 million versus a projected $2,790 million. International trade taxes were also below budget by over $700 million.
TAX REVENUES BELOW TARGETTED GROWTH
Tax revenues are up only 5.2 per cent for the April to October period compared with the comparable period the year before, and are way below the targeted growth of 19 per cent. This is a particularly poor performance when one remembers nominal GDP growth has been higher than projected due to much higher than anticipated inflation. The budget shortfall is entirely driven by poor revenue performance, with central government revenues over 10 per cent below budget for the April-October period, or a shortfall of $11,316 million. This is a reversal from April/May when revenue was above budget.
ACROSS-THE-BOARD WEAKNESS
According to a report by leading U.S. investment bank Bear Stearns, the weakness in tax revenues is "across the board", with income taxes about 10 per cent below plan' production and consumption taxes about 18 per cent below plan, and import taxes over five per cent below plan.
Expenditure Restraint partially offsets Revenue shortfall
In contrast, overall expenditures are up only 2.5 per cent year to date (compared with a budgeted 8 per cent), although this good performance was still not enough to offset the disappointing revenue numbers. For the entire April-October period, expenses are $6,045 million less than budgeted, with most of those savings coming from Programmes and Capital Expenditures.
This expenditure restraint has been driven mainly by falling interest costs, which are down nine per cent, and a flat wage bill compared with the same period of FY2004/05 (a severe wage cut in real terms). October Expenditure of $16,573 million was about 9.5 per cent below the budget of $18,320 million. Capital Expenditures were cut again by $950 million, or 57 per cent, to $720 million so additional savings from this area are unlikely.
Primary Surplus below last years
According to Dr. Carl Ross, senior managing director at Bear, Stearns and Co, the year to date primary surplus (which excludes interest costs) is actually lower than the same period of FY2004/05, both in nominal terms and as a percentage of GDP. "Last year through October, the primary surplus was 5.3 per cent of the full-fiscal-year GDP, whereas this year it is at four per cent-4.5 per cent of estimated GDP."
Balanced Budget Target under threat
The lack of improvement in the fiscal numbers for October means that the Government is now significantly behind its balanced budget target for FY2005/06, and that the likelihood of Jamaica meeting its balanced budget fiscal target this year is declining. For the entire April to October period, the fiscal deficit is $22,416 million, or a significant $5,270.4 million more than budgeted. Whilst the overall deficit is falling, it is nowhere near the level consistent with making the balanced budget target.
Dr. Ross comments "If the fiscal accounts follow a similar path to recent years for the remainder of the fiscal year, the overall central government deficit is on track to be 3.5 per cent - four per cent of GDP, down from 4.8 per cent of GDP in FY04/05, but well away from the 0 per cent target..If the government improves revenue collection in the second half of the Fiscal Year (which we think is possible due to delay in full implementation of tax measures) and continues its demonstrated spending restraint, the deficit could come in around the two per cent of GDP range."
The latter level of deficit should be enough to satisfy the international markets, particularly if the Jamaica dollar exchange rate remains stable, thereby allowing our debt ratios to improve. Dr. Ross believes however that the fiscal challenges remain severe, and that they "may intensify into 2006, requiring ongoing fiscal restraint in a year in which there could be a general election (following on the retirement of the Prime Minister)."
Challenging backdrop for next years budget
The Ministry of Finance is currently in the process of preparing the budget for the next financial year. On the basis that we would balance the budget this year, a surplus had originally been projected for next year allowing the Jamaica Government to pay down some of its huge debt. This now looks extremely challenging, particularly in the context of the likely wage demands from the public sector and in the absence of sharply falling domestic interest rates.
In his report, Bear Stearn's analyst Dr. Carl Ross asks "One has to wonder whether high tax rates have had the effect of choking off the economy and perhaps leading to more evasion than expected. " If Dr. Ross is correct in his surmise, faster economic growth would appear to be essential in reversing this underperformance of tax revenues.
