Keith Collister, Contributor
Taxpayers at the Inland Revenue Department's Constant Spring Road centre in St. Andrew. Tax revenues have underperformed budget expectations this year. - NORMAN GRINDLEY/DEPUTY CHIEF PHOTOGRAPHER
FOR THE month of November 2005, the fiscal deficit was $2,563 million - a far cry from Government's original budget projection for November of a $100 million surplus. Of considerable concern is the fact that the November deficit, at $2,563 million, was over $1,000 million greater than October's underperformance of approximately $1,505 million and was the largest deviation from budget for the entire fiscal year to date. In fact, November was the second month so far this fiscal year that a surplus was projected, but was not actually achieved.
In the light of this, it is important to bear in mind that the budget is projecting a surplus from November onwards every month for the rest of the fiscal year. This is in line with past experience whereby the last quarter of the fiscal year is always in substantial surplus, due largely to the heavy corporate income tax payments received in the month of March.
For the fiscal year to November, the deficit is $24,980 million, or $7,935 million more than the budgeted deficit of $17,046 million. Using a provisional inflation adjustment to estimate last year's GDP at $540 billion, this would equate to a deficit of approximately 4 per cent. As this would not be a significant improvement on last year's deficit of 4.8 per cent of GDP, it would certainly not impress the financial markets, either local or foreign.
Hopefully, this latter projection may be unduly pessimistic because, although I expect the budget surplus for the month of December will turn out to be lower than the projected $1,575 million, I believe that, even with continued underperformance in tax revenue collection, this should still leave the budget in substantial surplus for the March quarter. In short, assuming the underperformance of the budget continues around its current average of $1 billion per month, without an additional tax package (which in my opinion would be counterproductive at this time), I estimate the final outcome will be a budget deficit of around 2 per cent for the full fiscal year. This would be in line with what I understand to be the current projections for Jamaica of leading international analysts, such as Dr. Carl Ross of Bear Stearns. Thus, it seems likely a budget deficit of this magnitude is already factored into our international bond prices.
Expenditure restraint partially offsets revenue shortfall
For the April-November period, central government revenues are now 10.9 per cent below budget, or a total shortfall of $13,495 million. This shortfall is mainly due to the underperformance of tax revenue by $12,505 million compared with budget. The impact of this shortfall in revenue was to some extent offset by savings of $5,560 million on the expenditure side of the budget, comprising savings in recurrent expenditure (programmes and interest costs) of $1991 million and savings in capital expenditure of $3569 million.
Extraordinary fiscal restraint ended in November
This pattern of extraordinary fiscal restraint ended in November, which saw expenses, at $16,938 million, exceed the budget figure of $16,452 million. Whilst, as stated above, this is still a combined $5,560 million below budget expenditure for the fiscal year to date, it nevertheless suggests a reversal of the trend for the April-October period, when expenses were $6,045 million less than budgeted. Accordingly, I believe that it is very unlikely that the Government will be able to achieve significant further cuts in expenditure for the rest of the financial year.
Wages and salaries
Up to October expenditure on Wages and Salaries had been slightly below budget but, in November, this expenditure item exceeded budget by $410 million and was a major reason for the month's expenditure being higher than budget. It is likely that this reflects the catch up payments made to the public sector unions to partially compensate them for a much higher level of inflation than allowed for in the Government's original Memorandum of Understanding with the Unions. This means that, for the rest of the fiscal year, the Government's wage bill will be higher than budgeted.
Programmes
Similarly, November Programme expenditure, at $3,507 million, was substantially above the budget of $2,720 million. This reduced to only $488 million the extent to which expenditure under this heading was below budget for the entire April to November period.
Interest costs
Year to date, interest costs overall are still $1,500 million below budget, over 80 per cent of this being due to lower than projected foreign interest costs. Whilst in November foreign interest costs were still substantially below budget, domestic interest costs were slightly above budget. This suggests that, given the recent extended period of domestic interest rate stability, it is unlikely that domestic interest costs will continue to be lower than projected. Moreover, rising world interest rates are certain to have an adverse effect on our foreign interest costs.
Capital expenditure
At $701 million, Capital Expenditure for November was $189 million below the budget of approximately $890 million. This cut in the November capital budget was small relative to October, when the Capital budget was cut by $950 million to $720 million. Due to the size of December's capital budget of $2,297 million, additional savings may have been possible. However, as the entire budget for the March quarter is less than that for the month of December, this category of expenditure will not in my opinion provide a convenient source for further last minute cuts (as has often been the case in the past) so as to achieve a better budget balance in the final quarter.
Revenue underperformance
For the month of November Government revenues again fell short being some 13 per cent or over $2 billion below budget projections. Whilst International trade taxes were in line with projections, and non tax revenue (the majority of which is the "infamous" customs user fee) was about $250 million above projections, Income and Profit Taxes, at $4,345 million, were lower than projected revenues of $4,704 million. However, it was the fact that taxes on Production and Consumption which, at $4122 million, fell $1129 million below the projected $5251 million, which was the major factor in the overall shortfall in Government Revenue against projections. This shortfall was largely attributable to the underperformance of local GCT, with November revenues of $2,326 million compared with a projected $3,032 million, as well as a more than $550 million shortfall in special consumption tax.
Summary
In summary, the reason for the Budget Deficit for the year to November being $7935 million higher than Government projected is largely due to the underperformance of local GCT and GCT on imports by $4,531 million and $2,629 million respectively. The rest reflects the underperformance of special consumption tax, tax on interest and lower than budgeted receipts from PAYE, the adverse effects of which have been largely offset by savings on the expenditure side of the budget. Clearly, Government has a steep hill to climb if it is to limit the budget deficit to the 2 per cent of GDP which I indicated earlier in this article is what I believe the international financial community has already factored into our bond prices.
