FINANCE and Planning Minister Dr Omar Davies says the government cannot reduce its level of borrowing without cutting its capital and/or recurrent budgets.

“This notion of ending borrowing, or the choice between borrowing and not borrowing is (like) erecting your windmill and charging it. There is no such possibility, unless you are talking about cutting your capital budget or slashing your recurrent,” Dr Davies told the Standing Finance Committee (SFC) of the House of Representatives last Tuesday.

He was responding to questions from the Opposition spokesman on finance and the public service, Audley Shaw, during Tuesday’s meeting of the committee reviewing the 2007/2008 estimates.

Shaw noted that for the two previous fiscal years, the etimates had amortisation on internal debts at $108.6 billion (2005/06) and $105 billion (2006/07), while the new estimates projected that the amortisation on internal debt would be be down to $68.7 billion.

“This is an extremely sharp drop,” Shaw said. He pointed out that it has to be seen against the background of a debt target for the previous fiscal year which had been exceeded.

“And, the fact that we are moving steadily along to the trillion-dollar mark,” Shaw added.

He asked the minister to explain how he was able to project such a relatively lower figure?

Dr Davies said that there were two main factors:

(1) in 2003, there was the issue of “short-term paper” which matured in 2005/2006;

(2) the debt strategy, which he has presented annually, is to lead to a stretching out of the amortisation to allow for more time for repayment. As investor confidence increases and they are willing to purchase longer-term instruments, it gives greater leeway.

“It is a combination of those two factors,” Davies explained.

Shaw: So the debt is rising, but we are taking longer to pay it off?

Davies: Well, that is a simplistic summary. But, the fact is that the debt strategy which has been articulated is being implemented.

Shaw: But, is it not also a fact that where the debt is rising, taking longer to pay it off, it is also costing us more in interest payments as a result?

Davies: Not really. In the sense that, if you have a 30-year mortgage or so, then you would argue that interest paid on the initial principal is greater than if you have a 10-year mortgage…We are moving to the stage where persons are offering us money for 30 years, so that is part of our stratagy to stretch out amortisation.

Shaw asked the minister whether, in his debt management strategy, any cost-benefit analysis had been done on the consequences of building up debt by extending the profile over 10-30 years.

Shaw: Are you not concerned about mortgaging the future of the country in the way that you have been doing?

Davies: As opposed to cutting all budgets. The financing which is available serves three purposes- (1) recurrent;(2) capital; and (3) to repay debt. So since we have to repay debt, in posing your question in that particular way, it must be with regard to chopping either the capital budget or the recurrent budget, a percentage of which relates to wages and salaries.

The question is what area of expenditure would you cut in order to reduce your borrowing?

Shaw: Have you considered as to how you can substitute growth-oriented policies that earn, rather than constantly borrowing, borrowing and more borrowing?

Davies: Well, there are certain obligations of government which have to be honoured, like schools, like hospitals, like debt servicing. So the question which you paint is that, even if we take on board your suggesiton, there are certain obligations which must be discharged and to discharge them, either you discharge them by paying for them through revenue, or a combination of revenue and borrowing.

As regards the increase in growth and investments, the fact is that there is additional new investments. One challenge is to create greater domestic investment to capitalise on some of the potential benefits arising from foreign direct investments.

The private sector comes to me and say if you do, these are the growth implications and these are the revenue implications…That’s a gamble. In the meanwhile, I know what are our obligations and Jamaica has a proud record of honouring all its obligations in debt.