On Monday, POWER 106 was kind enough to invite me on the radio to talk about the soon to be released supplementary budget. The background to the need for a supplementary budget is the recently negotiated seven per cent increase in public sector wages, which has added $10.4 billion in budgeted expenditure on a gross basis. The government originally instituted a wage freeze on April 1st 2009, scheduled to last three financial years to March 31st, 2012. Well known commentator Ronnie Thwaites quite reasonably asked why this payment was not in the original budget.

The answer would appear to be that, in his opening budget speech, Minister Shaw had signalled the possibility of a settlement, when he observed that “public sector workers have faced difficult times, and that the Government is determined to find a resolution” but that “any solution must be affordable”. He had further advised that “the Government would be consulting with the IMF with a view to reducing the length of the wage freeze and how to treat the arrears.” Presumably, the IMF also recognised that at Jamaica’s high inflation levels, three years was too long for a wage freeze, even if wages are actually increased at increments of 2.5 per cent.

Thwaites also highlighted the very important issue of why public sector wages were raised without any commitments to improvements in productivity. This critical issue of Jamaica’s remarkably poor productivity performance (over many decades) will no doubt be a key part of any future progressive agenda.

Minister Shaw has ruled out imposing new taxes in the supplementary budget due August 31, saying the wage bill would be financed through expenditure cuts of around $7 billion. This matches the increased wage costs, which would only be $7 billion net of increased taxation from personal income tax and statutory deductions.

In the April budget, the Minister announced total capital expenditure for pubic sector entities of $89 billion, with $60 billion in non debt central government expenditure, providing an unusually high level of room for cuts to meet targets as has occurred many times before.

In the first quarter of current fiscal year, the fiscal deficit was $5,878.0 million, or 52 per cent below the budgeted deficit of $12,216.8 million, due to reductions in current — 7.4 per cent — and capital expenditure — 35.6 per cent — below the original budget. Some of this level of under spending is likely to become part of the planned cuts, reducing their severity, if this is acceptable to the IMF.

My article on July 15, entitled “It’s the economy, stupid”, noted the appalling stupidity of the recent debate in Washington over raising the debt limit as something Jamaica had so far been able to avoid. However, it argued that we were very vulnerable to a period of prolonged global economic weakness, which required a more cooperative approach from Jamaica’s political parties. The current international financial turmoil could see negative transmission effects in tourism, remittances and bauxite. However, if the global economy weakens as expected, falling global oil prices, with the possibility of West Texas intermediate falling well below $80 per barrel, should lead to lower inflation and greater consumer purchasing power, as well as partially offsetting any deterioration in the balance of payments from potential declines in tourism and remittances. This may allow scope for even lower interest rates locally as long as we don’t become part of the “risk off” assets that international investors want to sell.

Can we pass the IMF tests?

The fiscal year 2010/2011 primary surplus was $3.5 billion lower than budgeted, so that we are likely to have failed on this measure.

The first quarter primary surplus was, at $ 14,915.1 million, $ 3,032.2 million or 25 per cent above target. However, despite the primary surplus being above what was budgeted, according to leading international bank JP Morgan the primary surplus for April-June 2011 quarter underperformed by 20 per cent the US$216 million (1.6 per cent of projected 2011 GDP) surplus target originally negotiated with the IMF, although the current IMF targets could be adjusted. Nevertheless, JP Morgan still expects the overall fiscal deficit target to be met, with the deficit falling to 5.5 per cent of GDP in calendar year 2011 from 7.1 per cent in calendar year 2010.

Tax revenues for the fiscal year to June have underperformed by approximately $3.3 billion, however a new arrears/compliance programme is expected to raise additional revenue of approximately the same amount. Tax revenues are likely to underperform somewhat over the full fiscal year, although this is likely to be offset, as has occurred many times before, by cuts in capital expenditure.

It is likely that we will pass the tests overall, with waivers granted in a few of the weaker areas on the basis of effort. From a medium term perspective however, the green paper on Public Sector Pension Reform, expected to be tabled in September, and the white paper on tax reform, expected to be tabled in October, will be the key to the success of our longer term multilateral programme targets.

Remembering Tony Abrahams

Jamaica has lost one of its stars with the passing of Tony Abrahams. As a member of the breakfast club, I had the privilege of being exposed to his sparkling wit, strong sense of humour, and keen intelligence both on and off air. One of the many things Tony was passionate about was that Jamaicans should control their own destiny. He fought hard through the breakfast club and other mediums to galvanize Jamaica’s people to take control of their future, and not just accept the tyranny of crime and corruption. He will be missed.