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Fiscal rule needs independent oversight — CaPRI

Friday, January 31, 2014    

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In the face of corruption and institutional inadequacies within the public sector, a fiscal rule won't work in Jamaica without oversight by an independent body, according to Caribbean Policy Research Institute (CaPRI).

What's more, the policy think tank reckons that the success of the country's latest agreement with the International Monetary Fund (IMF) depends on the Government's ability to design and manage an effective fiscal framework.

In its latest study, CaPRI proposed nine mechanisms that would support the strengthening of Jamaica's fiscal rule -- which are institutional frameworks designed to support the Government's financial or budgetary prudence and credibility by codifying a standard procedure for dealing with all matters that are subjected to the rules.

"An independent technocratic committee, selected through a transparent meritocratic process, should be appointed to oversee the creation, execution and monitoring of the budget, specifically the targeted aggregates," said the report. "This committee must make recommendations to the relevant body to determine infractions, culpability, and apply any resulting penalties.

"Importantly, the independent committee must be equipped with the appropriate mechanisms to forecast deviations and to communicate to the public in a timely manner."

Another key element of the think tank's recommendations was the need to incorporate the rule in legislation, and make it binding for the entire public sector.

"It is important that the rule spans the general government as research by CaPRI (in 2008) indicates that central government absorbed public entity liabilities of over $180.2 billion between 1996 and 2003," said the report entitled Designing a Fiscal Rule for Jamaica. "FINSAC's debt alone in 2001 accounted for 22.7 per cent of GDP."

Up to last March, 76 countries have either or both national and supranational (regional) rules, according to the study, while 73 per cent of countries with budget balance rules and six per cent with debt reduction rules have sought statutory binding of these reules.

Sanctions against deviations would have to be put in place to ensure that the cost to the offender of breaking the rule is higher than the benefit, according to the think tank, which also recommends that the legislation incorporating the rule must state the necessary procedure to be taken to correct deviations and place the country back on a path of achieving its economic targets.

"Automatic correction mechanisms specify the necessary adjustments required to place the country back on its pre-defined fiscal path when there are deviations," said the report. "These corrections can take the form of adjustments to expenditure or taxes. For effectiveness, these corrections must be explicitly detailed in legislation.

"Switzerland and Germany also have budget balance rules that act as "debt brakes", where deviations from the rule (positive or negative) are stored in a notional account. When the account balance exceeds its ceiling a timed process of correction is activated."

The IMF labels Jamaica's escape clause as well defined, but there can be meaningful improvements.

The main concern is that the finance minister is allowed to interpret the escape clause without explicit voting requirements for the interpretation and triggering of the clause specified.

CaPRI recommends that these exceptional circumstances must be interpreted by an independent monitoring body and require a supermajority vote in parliament upon the recommendation of the independent monitoring committee, especially given that Jamaica has a two-thirds parliamentary majority.

Other recommendations made by the policy think tank include: the strengthening of information and technical capacity of the public sector; the inclusion of medium-term, multi-year forecast in budgets, which measures the impact of the present budgetary decisions on future budgets; and the calculation of targeted budgetary aggregates by taking into account the cyclical nature of the economy.

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