DAVIES
THE BUDGET Debate opened on April 27, 2006, with the Finance Minister Dr. Omar Davies, starting the ball rolling. As is the case with Dr. Davies, he follows a certain format (and we should be used to it, given that it is his thirteenth consecutive Budget presentation).
That is, he first presents highlights of the previous year and or, fiscal year macro-economic indicators; then looks at the medium term; and then looks at some policy effects on selected sectors; and then discloses how the Budget will be financed.
What was also most interesting was that Dr. Davies in his opening challenged the Opposition to come up with an alternative Budget. Given that the Opposition spokesman on finance, Audley Shaw, has responded to the challenge, let us hope that we will have a lively and informative debate over the two weeks.
HEADINGS
Dr. Davies' presentation can be encapsulated under certain headings: first, mixed results but moving in the right direction - if we are to follow his own words as to the GDP growth rate, the balance of payments (BOP), the net international reserves (NIR), the debt figures, interest rates, fiscal deficit rate; unemployment rate, and the poverty rate. Second, the way forward - for his medium term projections; third - providing the support - for how he proposes to finance this year's J$358 billion Budget, with a projected increase in tax compliance, and domestic borrowing.
Highlights of these areas, for those who missed it, were a real GDP growth of 1.4 per cent in 20005; annual calendar inflation of 12.9 per cent and fiscal year inflation of 11.4 per cent and falling rates in recent months; a ballooning BOP current account (fuelled by a rising oil bill); a healthy NIR of US$2.1 billion; slight declines in debt ratio; and interest rates (with a 20-year and 30-year bond successfully marketed); a slight fall in the unemployment rate; and a decline in the poverty rate (across all parishes).
For critique will be his missed targets, especially the failed balanced budget attempt last fiscal year and the less than favourable revenue out-turn; and the vague reference to what should be the permissible loss by the state (as to how we go about developing new ventures especially state owned ones). This latter issue cannot be glossed over as he avoided looking at Air Jamaica, only briefly mentioned Sandals Whitehouse, and did not touch on the Greenfield Stadium project. These are costly state ventures and the sums expended could have been earmarked for other purposes or avoided to reduce the debt burden. The visionary view may be nice but if it cannot provide the bolts and steel we may end up with more white elephants. It's an issue that Dr. Davies will have to return to, as costs mount.
What is good about Dr. Davies however is that he is blunt (some would say combative) in outlining the economic difficulties that the country will have to face. The domestic challenges of low productivity, high crime rates and criminal behaviour; the need to raise educational quality among a broader group, reduced concessional external support (grants and special trade facilities); and our susceptibility to natural disasters.
EXCHANGE RATE
He has also challenged the Opposition to take a position on an exchange rate regime, as to whether they would support their ex-Opposition leader's call for a fixed exchange rate, given current developments (post-Argentina).
He again posited that we have to provide the right macro-economic stability to undertake the massive social developments that we wish, and that we also need sustained investment to tackle these challenges.
His revenue projections will also come in for challenges since the over-optimistic projections of last year shot the balanced Budget concept to bits (along with the low formal growth rate). I also did not expect a fairly high 2.5 per cent of GDP fiscal deficit target, but I suppose it gives the Finance Minister a chance to bring in a lower out-turn, if he can control wage demands (a second MoU being critical at this time). The JPS divestment sale is also interesting as some persons argue that the Government should shed profitable state-owned assets but at the same time they want the Government to keep loss making state-owned ones. It's an interesting debate but if the Government decides to sell JPS shares this time, let us hope for a more transparent approach than what was done last time, when 80 per cent of it was sold to Mirant.
I am still not comfortable with such a high level of internal borrowing (J$111.9 billion) but at least we are reducing external borrowing, thanks to the large 30 year bond floated earlier in February. It remains a Budget that is still too mired in debt and far too dependent on loans to be sustainable over the medium or long term. As Dr. Davies himself would say - we are on our own in a more competitive world, and only we can decide how we want to proceed.
