April :1.3, 20:1.0 BUDGET DEBATE 2010 PRESENTATION BY OMAR DA - - PDF document

BUDGET DEBATE 2010 PRESENTATION BY

OMAR DA VIES, MP OPPOSITION SPOKESPERSON ON FINANCE AND PLANNING

April

:1.3, 20:1.0

BUDGET DEBATE 2010 PRESENTATION BY

OMAR DAVIES, MP OPPOSITION SPOKESPERSON ON FINANCE AND PLANNING

April :13, 20:10 A: INTRODUCTION

:1.

I begin this presentation with the usual acknowledgement of the contribution made by various officials, from the different institytions, which have provided us with documentation and data.

2.

To be frank we have a specific complaint, to which we will reluctantly return, but we should never underestimate the extent to which our officials put in the time and effort to facilitate our work here in Parliament. 3. I wish to extend special acknowledgment to Financial Secretary, Dr Wesley Hughes and Governor of the Bank of Jamaica, Mr Brian Wynter. Each is relatively new to his respective position, although they are both well-known as public officers - Dr Hughes at JBI, the BOJ and Planning Institute, Mr Wynter at the Bank of Jamaica and as the first Head of the Financial Services Commission. We welcome them and thank them and the members of their team for their efforts. 4. This Budget debate comes at a critical juncture in our country's history for a host of reasons. For one, we are half way through this Administration's term, this represents the third budget being presented by the

• Minister. By now we should have been able to discern a pattern to the policies and programmes being

pursued by this Administration and reflected in the budget. 5. To be frank, this Budget Debate is somewhat anticlimactic, as it revolves around commitments made in the Standby Agreement with the IMF. As such this budget marks our formal reengagement with the International Monetary ~und for the first time in over:15 years. 6. Within that context, although we have long passed the stage of blaming our ills on the IMF, there can be no question that the Standby Agreement represents a far more important set of guidelines for actions on the financial, macro-economic and social fronts than the budget documents themselves.

7.

We are also in the first budget following the execution of the Jamaica Debt Exchange (JDX). The Opposition had stated that it supported the exchange, from the perspective of reducing the debt servicing burden of the country. !-lowever, there are several outstanding matters to be addressed. We will be raising some of the implications of the JDX which seemed not to have been taken into consideration when it was conceived and implemented. 8. Finally this is a critical budget debate as it comes at the end of what one could describe as a "tumultuous" fiscal year. It is a year'in which there were several tax packages. In fact, even at the Standing Finance Committee, on the last day of the fiscal year, the Minister revealed another tax increase - this time with regard to property taxes. 9. It is our hope, and indeed the hope of the whole country, that fiscal year 20:10/U will be a less "chaotic'l one. The country needs to settle down and to operate on a more clearly-defined path. The basis for this less "chaotic" path should be laid by the Administration in the Budget Debate. Last year, the exact opposite

• ccurred and already there are worrying signs about this year.

:10.

My presentation will follow a pattern which I have utilized for many years although there will be some

• changes. I will, insofar as data are available, examine the past year looking at issues such as the level of

economic activity, the fiscal deficit as well as the growth in the country1s indebtedness.

11.

Next I will look at the information provided on the public bodies. This is the first year that we have had an

• pportunity to view both the operations of Central Government and the public bodies in a comprehensive

manner and so I will spefld some time looking at some ofthe more critical ones.

12.

I will then look at the Expenditure Budget and there we have had some difficulties - in terms of being able to make meaningful c?mparisons because of the dated nature of the information contained in the

• document. Then we will look at the financing of the budget. Finally we will consider some of the major

macro-economic and social challenges which need to be addressed if we are to move the country out of the present state. 13. As is usual, there will be-three presentations from the Opposition: I speak today and I'll be followed by my colleague, the MP from East Kingston & Port Royal tomorrow. He will address issues ofthe real economy, including energy. The La will speak on Thursday and speak on the social sectors, governance and related issues.

14.

Before I close my introductory remarks, I should say something about the demise of an institution, which during its over four decades of existence, has filled the hearts of all Jamaicans at home and abroad with pride.

15.

I speak of Air Jamaica. I would be less than honest if I did not acknowledge the factors which caused the Administration to take a definitive decision concerning the airline. We, whilst being Government, faced the same challenges and sought to privatize - or so we thought.

16.

This is not the time and place to speak of concerns about how the process is being handled. What I simply wish to do, is to place formally on record, on behalf ofthe Opposition, the appreciation for the service given by both present and former employees of the national airline.

,

17. There can be no question that there were times when we were less than pleased with the airline for whatever reason - perhaps, because it was ours, we demanded too much of

• it. At the same time, there can

be no question that at its best, it provided a world class service, better than most and equal to any.

18.

As a country we must wonder why it was impossible for a group of local entrepreneurs to respond to the Government's invitation to bid for control ofthe institution. In our more sober moments this is an issue on which we should reflect.

I

19. Suffice to say that the Opposition wishes to formally place on record sincere appreciation to the thousands

• femployees at all levels, who gave us a sense of

pride in our National Airline. B: YEAR IN REVIEW 20. Our attempts to review the year have faced some challenges particularly in terms of the timely availability

• f data. the worst exa,mple of this was seeking to compare the expenditure outturn for 09/10 with the

Estimates tabled for 10/11. Nonetheless, utilizing the data sets which are available, we will seek to look at a set of the major macro-economic indicators including growth, revenues, the fiscal deficit, the growth in debt and within that context, the JDX. 21. As regards economic growth, the Minister has indicated there was a decline of 2.7% in calendar year 2009. The MOF documents projects that for fiscal year 09/10 there will be a negative growth of 3%. This follows

Prepared by Dr. Omar Davies - Opposition Spokesperson on Finance and Planning Page 2

negative growth of approximately 1% in 2008. For the record, this followed years of positive growth of 2.7% and 1.5% in 2006 and 2007, respectively. 22. Those of us, who have listened to the pronouncements of the Minister of Finance and the Public Service whilst he was Opposition Spokesperson, will recall that the comparison of Jamaica's performance against

• ther countries in the' Caribbean and elsewhere in terms of economic growth was a staple in his

presentations. 23. Whilst that was a predictable activity as Opposition Spokesman, I am surprised that he would return to it this year. In his speech he has pointed out that we have barely grown at an average of 1% per annum for the past 15 years. Naturally, we lament that. 24. My only difficulty is that,during the two full years where he has been in charge we are hurrying in the wrong direction with an average negative growth of close to 1.8% per annum. 25. We now should look at the issue of the fiscal deficit, because regardless of how you cut it, regardless of how we boast about the success of the JDX, the fact is that as long as there is a significant fiscal deficit, it means that you will have to borrow to support expenditure, either domestically or locally. And whilst low interest is always preferred to higher interest, borrowing still means increased indebtedness. 26. The picture of an ever-Lncreasing deficit exemplifies the chaos of fiscal management in fiscal year Og/10. And let me just quote from the Government's own documentation. The Memorandum on the Budget for

2010/11, to indicate the extent ofthis chaos.

27.

Just under a year ago when the Minister spoke, he outlined a budget which he confidently asserted would yield a fiscal deficit of 5.5% of GDP, down from the 7.3% of GDP in fiscal year 2008/og. 28. Following the chaos of the presentation on the new taxes, it should have been clear to everyone that no aspect of the fiscal programme could hold. We urged the Minister and indeed the whole Government to quickly bring to Parliament a Supplementary Estimate. They resisted for a while but this was eventually done in September, together with a second tax package. 2g. In that Supplementary Budget the fiscal deficit target was revised from 5.5% to 8.7% of GOP. We then went through two tax packages in December as prior actions to the Government's completing negotiations with the IMF for the Standby Agreement. 30. The deficit target of 8.7% of GDP, put to the country in September 200g, was revised in the IMF Agreement to one ofg.6% ofGDP. We are now told that the outturn for fiscal year was 10.g%ofGDP.

31.

Brief review: we started with a target of 5.5% of GDP in Aprilj we moved the figure to 8.7% of GOP in September; this was changed to g.6% of GDP in the IMF programme presented in February and on the 31st

• f

March, we are now told that the deficit is 10.g%. 32. As I will show throughout my presentation, even this figure of 10.g% of GDP, which represents twice the target confidently announced less than a year ago, must be questioned.

33.

There are two major points which it is useful to make at this juncture. The first that this outturn of 10.g% of GDP is artificial. It is artificial because not included in this deficit target are the significant amounts owed by Government to just about everyone: to the workers, to other creditors, to suppliers, to contractors and for refunds of tax on interest deducted at source. What is this total figure, nobody really knows.

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34. It is of interest thatl as part of the IMF Agreementl the Government is obliged not to increase the level of

• arrears. It is in the country's interest not fail this (or any other) Test but we are unable to participate in

monitoring if we do not know what is the total stock ofarrears. We need to know this. 35. The second question which relates to the deficit is that last year's performance demonstrated that the Government did not hage a firm handle on revenue projections. This is indeed ironic in that the projection in terms of overall economic decline was not far from the mark. Thereforel although the economy contractedl it did not deteriorate more than anticipated.

DEBT 37·

On the other hand, the deficit outturn was twice that of the original projection. The Minister needs to explain to the country why did this come about. More important, it is imperative that the Minister and his technicians tell us why we should have any greater confidence in the deficit target for fiscal year 10/11. The running of significant deficits logically leads to growing debt. The Minister, in his previous lifel spent a great deal of time identifying failures of the previous administration in terms of the growth in the overall debt. It is instructive for us to look at the situation over the last two and a half years in terms of the growth of debt under this Administration (I am quoting from the publications put out by the Ministry). In the middle

• f

fiscal year 07/081 September to be precise, the total stock of debt stood at J$950B. By March 2008, that is the end of fiscal year 07/081 this figure was One Trillion Dollars - One Thousand Billion Dollars.

I

39· A year laterl it had increased by 20% to One Thousand Two Hundred Billion Dollars. We are now told that as at March 31st which has just passed, the figure is One Thousand Four Hundred and Thirty Four Billion

• Dollars. Put another way between September 2007 and to datel the national debt has grown from $950B to

$1/434B, an increase of 55%.

40 . To place everything on the table, during FY 09/09, the Ministry of Finance assumed debts for the SCJ of J$1.9B and US$58.6M. , 41 . In terms of a commonly used ratiol debt to GDP: at the end of the financial year 09/10 the debt to GDP ratio was 129.4% of GDP compared to 115.7% a year before and close to 108% of GDP in 2007. 42 . That is an interesting talel and even as we welcome the significant impact which the debt exchange will have on debt servicing requirements, we need to analyze very carefully what had happened in those two and a half years to have caused the stock of debt to have grown by 55%. Regardless of what we are able to manipulate in terms of the interest rate, this growth in the stock of debt has serious implications for fiscal space in the future. 43· We now need to look at the revenue outturn during the last fiscal year. The inability to predictl with any degree of accuracy, th'e returns from new tax measures represents one of the major failings of the Administration in fiscal year 09/10, 44· We would all prefer to forget the presentation of the first tax package just over a year ago. Nonetheless, that package was estimated to yield $18.1B. ObViously the results were disappointing as in the First Supplementary Budget presented in September 2009; a second tax package was presented with the expectation of yielding revenues of $1.7B over the remaining six months ofthe fiscal year.

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45. You will recall that a thi~d tax package was presented in two instalments - the first by the Minister and the

• ther by the Prime Minister on the 23rd of December. This package was estimated to yield $21B annually,

with $3.7B expected to be collected in the last quarter of 09/10 - that is January to March, 2010. 46. It was projected that the three tax packages would yield an additional $23.5B for the fiscal year 09/10. 47. I have requested of the Ministry data as to the actual performance of these revenue measures against projections but the offi):ial response I received to my query on this matter is that it is hard to say, or "we really don't know". 48. What we do know is that the out-turn for tax revenues was some $26B less than the amount projected when the estimates were presented a year ago. 49. This shortfall occurred in spite of the two additional tax packages announced in September and December. 50. The main point of stressing the divergence between projections and actual outturn, is that once again we are faced with the chaUenge of credibility of the budget. This is something which we need to explore further in looking at the prospects of adequate resources being available to finance the proposed expenditure programme.

51.

Our concern about the credibility of the revenue budget for the new fiscal year has increased by some new revelations about the extraordinary steps which have been taken in recent times to reduce the deficit. These steps include garnering an unprogrammed amount of $5B from various public bodies as well as having the BOJ pay over to the MOF a sum of $2.75B as "profits". 52. We will have much more to say on what can only be termed these 'panic' actions.

C:

PUBLIC BODIES 53. The Opposition welcomes the decision to present documentation on the main public bodies. The summary data indicate that these bodies will have a budget approximately 70% of that ofthe Central Government. 54. This being the first time the total treatment of the State financial activities is being attempted, we were in a sense "feeling our waylf, in dealing with the matter at Standing Finance Committee. 55. How it is approached in the future will is of great significance in terms of seeking to bring about "improved governance practices in public bodies" as is said in the documentation. 56. However, more important, given that Parliament is being asked to "approvell these budgets, we must seek to formally define the 'role of us, Parliamentarians, in assessing the entities during Standing Finance Committee.

57. Issue of importance, given the volume of

documentation, the number of entities and the time constraints. 58. It is clear that this is a "work in progress" and there are some preliminary steps which need to be taken. will advance but two, not in a sense to create contention but indicate observations from this first attempt. 59. The first observation re(ates to the technicians, particularly the relevant officers in the Ministry of Finance, who have done a commendable job in putting together the documentation. However, the documentation,

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presented to Parliament, needs to be more than an amalgamation of the various reports/proposals sent from the public bodies. ' 60. In certain instances, what we have is a "wish lise' which cannot stand up to close scrutiny. 61. The second relates to the role of the political directorate - Ministers and Ministers of State must become totally familiar with what is being proposed by the public bodies under the aegis of their Ministries and what is actually being carried out. 62. For all future assessments at Standing Finance Committee, the Ministers must expect to be grilled on the activities of the public bodies under their jurisdiction, to as great an extent as they are interrogated about Central Government Departments within their Ministries. The simple justification is that in some instances, the budget ofthe "off-spring" is larger than that ofthe parent. 63. I now pose certain questions about four ofthe public bodies which are included in the documentation. 64. The first is the Road Maintenance Fund. It may seem strange that I would begin with this institution. It is clear that I do not have 'any "luck" in getting answers to questions about the Road Maintenance Fund. My questions posed at the end of October still remain unanswered. 65. I should indicate, Mr Speaker that the refusal to provide answers is not only a "diss" to me, but more important to you, to Parliament and to the country. 66. I lament having to criticize you publicly but it is the view of knowledgeable Parliamentarians that the Standing Orders provide you with greater authority to demand answers from the relevant Ministers, than you have used. (Cite Section 17A)

67.

I should indicate to the House that, having failed for five months to have my legitimate questions answered, I have formally asked the Auditor General to conduct a Special Audit of the Road Maintenance Fund. 68. However, I now am formally asking questions as to what are the rules governing the manner in which the resources, which have been allocated to that fund, are spent.

I

69. The Minister of Finance, in imposing the additional taxes on gasoline a year ago, explicitly gave, as a partial justification, the increased allocation to the Road Maintenance Fund. The Administration does not seem to recognize the obligation to state to the public precisely what are the levels of inflow into the Fund and how are these resources being handled. We are once again publicly demanding a response. The credibility of both Ministers - Finance and Transport and Works is at stake. 70. A second question which must be answered relates to the proposed loan from China and the projects to be financed by it. This remains a mystery to the Opposition. On page 40 of the document on "Public Bodies", reference is made to "the establishment of a national road rehabilitation programme of work". It goes on to state that "the programme will be principally financed by the National Export/Import Bank of China and the Government ofJamaica to a value of US$400M". 71. To date, no further details have been provided as to how will this five-year programme work. What is the role ofthe Road Maintenance Fund and what is the role ofthe EX-1M Bank of China? 72. Further question: is this US$400M programme (approximately J$36B) explicitly included in the IMF Standby Arrangement? If so, where specifically is it referred to? If not, how could a programme of such magnitude

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be considered without agreement by the IMF, particularly as such a loan has balance of payments implications? 73. There are many other questions which the Opposition has in terms of the governance of the Road Maintenance Fund but these are initial ones to which we demand answers. 74. The second public body'in which we have considerable interest, and about which we have many questions, is the JUTe. 75. Let me indicate at the start that, as the Administration which committed significant funds to modernize the public transportation system in the Kingston Metropolitan Region and to lift it from the "dark ages", we have an interest, in not only the survival, but the improvement ofthe JUTe. 76. Need to tighten up mOl1itoring of the routes. Flagrant flouting of assigned routes by mini-buses. Where is the Transport Authority? 77. We believe that the working people, the poor and the children of the Kingston Metropolitan Region deserve

to travel in dignity and in comfort. Therefore, it is for that reason that we have some concerns about some

• f

the projections whicl1 have been made in terms of the operations of the JUTC in the new fiscal year and going forward. 78. I draw attention to three projections/assumptions which stretch credibility. 79.

Is it credible that fare revenues will double during the fiscal year, from $]..9B to $3.8B?

80.

Is it feasible that passenger numbers will increase by 27% from 49 million to 62 million?

8l..

Is it feasible that operating losses which were over $l..5B in fiscal year 08/09 will decrease to $24l.M in this

new fiscal year? 82. We have pointed out, time and time again, that it serves no useful purpose to put forward numbers and projections which lack credibility, only for them to be abandoned during the fiscal year. Such actions undermine confidence in official statements. But more important, when the projected revenues do not materialize, a crisis is at hand. 84. We take a particular interest in the JUTC for the reasons which I have outlined before. However, in a practical sense, having' increased fares by such a significant percentage, it should be obvious to the Administration, and to the country, that there can be no further increase during this fiscal year. 85. However, the question remains: what are the commitments which have been made to the IMF, either formally or informally, ~n future fare increases? The projections which have been presented are simply not credible and we warn that another increase in the fares will not be accepted. 86. I turn to the Tourism Enhancement Fund (TEF). The projections from the Fund make interesting reading. 87. The reality is that the budget of the TEF is as big as that of the parent Ministry. In fact, if we take out the allocation for the Tourist Board, the TEF is actually a bigger operation than the Ministry. What ifthe former Administration had not introduced the TEF?

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88. This is making a mockery of the notion of the Ministry when a public body, within the ministry, is actually propping up the ministry by financing many of the activities which should be properly the responsibility of the central body. 89. The issue of governance arises in that we cannot have a situation where the Board of a public body actually has more power in terms ofthe operations ofthe sector than the Minister and Cabinet. 90. What is the future relationship between the body and the central ministry? What is the relationship between the Permanent Secretary of the ministry and the Chairman of the TEF? What happens if the TEF Board does not approve a new request from the ministry, or is it that the Minister can instruct the TEF Board to fund specific projects.

, 91.

What ifthe TEF Board, on a justified principle rejects a "request'l from the Minister? 92. This situation is not tenable and we need a clear indication as to the governance structure of an entity such

as the TEF vis-a-vis the parent ministry. 93.

I now turn to perhaps the most critical of the public bodies from our perspective - the National Insurance Fund (NIF). I invite every single member of this House, and indeed I invite the general public to read very carefully the narrative ~n the publication on the future of the NIF. I say to the Minister and indeed to the whole Administration thatthis is an entity which the Opposition will be monitoring very closely. 94. As everyone should know, the annual contributions from workers and employers to the NIF are unable to cover the pension payments as well as the payments for the NI Gold Health Card. 95. The difference is made up by interest income as well as returns from other investments. This interest income was badly hit by the NIFs participation in the JDX and the forecast is that the investment income for fiscal year 2010/20U will be reduced by $2.6B (31%) compared to that earned in 09/10. 96. Now here we come to an interesting development. Partly in order to cover this decrease in earnings, which the actuaries and managers of the Fund could not have antiCipated, it is now projected that net contributions will be increased by $2.3B because there is a plan to lift the ceiling on contributions to the NIS.

97.

Let me say at the outset that this increase is not something to which the Opposition has an objection, in

• principle. In fact, the LO and I have partiCipated in some preliminary meetings, chaired by the PM on this
• matter. However, it cannot be that such an increase is built into the projections of the Fund without

Parliament having had a say. 98. The reality is that the lifting of the ceiling has taken on extreme urgency because of the losses in interest income resulting from participation in the JDX. 99· A fundamental question which must be posed - did the members of the NIF Board have the authority to agree to participate in t~e JDX, thus diminishing the assets of the Fund? 100. There are several other questions which need to be posed. The first is the way in which any such increase will be structured, but IT!ore important we now need to take a serious look at the governance ofthe Fund. 101. Let me state again, for emphasis. This money does not belong to the Government. The NIF represents funds held in trust to provide pensions to contributors to the NIS, with contributions coming from workers and their employers.

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102.

Hence, any decision taken about this Fund and its investments cannot be taken from the perspective that this is a Government fund.

103.

I repeat that there are ~erious legal questions as to whether the Managers of the Fund were acting in the interest of contributors when they decided to participate in the .IDX in that such an action has had, and will have for several years, a major negative impact on the Fund's financial status.

104.

In summary, what we are saying about the NIF is that any future changes must have the full involvement of Parliament; must have the full involvement of the workers and their representatives.

105.

The NIF cannot be seen as another State entity where decisions can be made by a Minister or by Cabinet without involvement of. the stakeholders, those who have contributed to the Fund. These contributors have a right to expect that in their old age they will have benefits from their contribution to the Fund, which has been managed in the most judicious manner.

106.

A final point which must be made relates to the link between the NHF and the NIF. In the discussions in which the Opposition has been involved, we have made it clear that we expect that the changes to contribution would include not just the NIF but also the NHF. More than ever, that supplement to the NHF is needed. I

107.

The question we need to pose is what assumptions have been made about an enhancement of the NHF even as we speak of increasing the level of contributions to the NIF.

108.

There are several other public bodies the financial operations of which will now be brought under closer Parliamentary scrutiny. This is a positive step, but as I have indicated, it demands far greater rigour both from the technical personnel as well as from the political directorate in monitoring the operations ofthese bodies.

0:

THE EXPENDITURE BUDGET

109.

We are all acquainted wjth the global numbers in terms of what the Administration expects to spend during the fiscal year 2010/2011.

110.

Without seeking to belabour the point, the ability of us Parliamentarians and indeed the ability of the country to carry out a careful analysis of these expenditure plans have been hampered by the fact that the comparative data for fis'cal year 09/10 have been by and large missing. In fact in most instances the latest data which we have are as at September 2009.

111.

I had no intention of returning to the matter but the Minister's insistence on ducking responsibility for the dated data has forced me to address the matter. The argument that this also happened under my watch is "lame".

112.

It is lame because I specifically asked him about it during the Standing Finance Committee Meetings on the

2 nd Supplementary Estimates; he consulted with his officials and solemnly told the Committee that up-to-

date information would be in the Estimates for FY 10/11.

113·

It is lame because even if this occurred in the past, never before were the numbers published so dated and

• irrelevant. Consider all the changes which had taken place in expenditure between September and March.

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114. This is not simply a desire for accurate data for academic reasons. The truth is that we have no idea as to what really happened last year. In several instances members of the political directorate who appeared at Standing Finance Committee were themselves not briefed as to how much was actually expended for their ministries, or for specific programmes/projects.

ll5.

Hence, Ministers were unable to indicate clearly whether there was under-expenditure because their ministries were not administratively ready or there was under-expenditure because the funds had not been made available by the Ministry of Finance.

ll6.

We are totally perplexed as to how a new budget could have been developed unless somewhere within the system, someone or a group of persons had access to these data to make the relevant comparisons. 117. To be frank, the explanations proffered are not reassuring. It is indeed a lame excuse to suggest that it would have been too costly to include the most up-to-date information in the Estimates. Too costly compared to what? Isnlt it costly for us to be engaged in an exercise of analyzing numbers which have no relevance to reality?

ll8.

Whilst the absence of the comparative data for fiscal Og/10 was, and remains, a major defiCiency, there are

• ther questions which are of

concern to the Opposition in terms of the Expenditure Budget. It is impossible for us to discern any overriding policy framework within which the allocations have been made.

ll9.

Yes, we know that resqurces are limited. Yes we know that the challenges are great but it is precisely because of that knowledge why it is imperative that priorities be identified and the country be told the rationale for these priorities being selected. 120. There are two other issues which are of concern to us in terms of the Estimates of Expenditure as presented, and what this whole debate is about. The first relates to the level of arrears owed. The Government owes workers; the government owes contractors; the Government owes creditors for supplies etc, and the Government owes institutions, in terms of tax refunds particularly tax on interest. 121. The only two areas for which we have more or less precise estimates are (1) the amount owed to workers - $13.4B and the amount owed for refunds for the tax on interest ­ $16.4B. 122. For us to have a clear understanding as to the credibility of the Estimates of Expenditure, the country needs

to be told two things. What is the total level of arrears and what is the programme for redUCing, if not eliminating, these arrears over the fiscal year and the medium term. 123. I pose these questions, ~ot simply because this would lead to good order, but moreso because the question

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arrears is explicitly addressed in the Standby Agreement with the IMF. 124. I also turn to the matter of the BOJ advances. The manner in which these advances were made brings great dissatisfaction to the Opposition. We need to know specifically whether there is a programme to eliminate these advances during the fiscal year or is the Ministry of Finance expecting the BOJ to transfer/sell debts to the private sector. 125. The Minister has, indicated that the BOJ has in fact started this process. However, many questions remain. 126. How does this disposal of the Ministry of Finance paper by the BOJ complement its normal monetary

• perations? Will the s~le
• f this paper by the BOJ, in order to recoup the advances to the Ministry of

Finance, impact on the Ministry of Finance's own ability to raise funds in the market?

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,

'1.27.

These are critical questions which need to be addressed and to date, there has been no clear explanation about this matter, from either the Bank of Jamaica or the Ministry of Finance.

'1.28.

In terms of the Expenaiture Budget, given the reality of limited revenue resources we need to know whether specific plans have been made to assist the Ministry of Health to clear the arrears owed to its suppliers which will facilitate new credit being extended.

'1.29.

We need to know also. whether the Minister's solemn and explicit commitment to transfer a specific percentage of the tax on gasoline for use in road upkeep and maintenance still stands.

'1.30.

These are some of the b.asic questions which need to be answered in terms of the Expenditure Budget.

E: FINANCING THE BUDGET

'1.31.

The Minister spent only a brief moment in discussing the manner in which the budget would be financed. 132. The bulk of the financing will come from tax revenues projected at $287B out of the total for taxes and grants of $326B with a p'rojected deficit of 6.5% of

• GDP. There will be need for borrowing of

$J.76B. 133.

Let us look closely at the projected deficit for fiscal year 10/U of 6.5% of GDP. We have already indicated that in 2009/10 we were presented with four different figures for the fiscal deficit. First, a projection of 5.5% of GDP in April; a projection of 8.7% of GDP in September; one of 9.6% of GOP on February 4 and now we are told that the outturn was just under u%

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GDP.

'1.34.

What this indicates is that there is a credibility problem. The Minister needs to indicate to us why the country should believe that he will be able to meet the target this year of 6.5% when three targets in 09/'1.0 were missed. 135. At the heart of this is the issue of the projected tax revenues. When the Minister announced his deficit target of 5.5% of GDP in April last year, this was within the context of a tax package of $J.8.J.B. All of us remember the chaos which surrounded that presentation and from the start, it was apparent that this projected revenue intake would not be met. A second tax package was presented as part of the Supplementary Budget and this was for $1.7B and a third package in December of $2J..5B.

'1.36.

We are only learning that it was expected that the projected revenue yield from the three packages would have been $23.5B for the fiscal year but it is not clear how much of that $23.5B was collected. What is clear is that the original revenue target of $29J..6B was missed by $26B. The Minister needs to explain to us why there should be confidence that he will be able to meet the target of $287B, given the clear evidence that taxpayers are "maxed out

ll in terms of

disposable income. 137. The reality is that potential taxpayers have basic necessities to meet and with the increased GeT, which affects the cost of virtually everything, the new tax on electricity, the increased taxes on gasoline, there is very little scope for discretionary spending. 138. This is reflected in the extent to which there is a fall off in consumption taxes, both for imports as well as

• domestically. Therefor<;, there is a major issue in terms of whether the projected $287B in revenues can be

realized.

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We must raise yet another issue ­ the manner in which Parliament and the country has been treated in

~39·

terms of the imposition'oftaxes. Let us reflect on what has happened during the past year. Following the first tax package, announced in April, chaos reigned and it was several weeks before there was a clear understanding of precisely what had been taxed. A similar situation occurred in December when the initial proposals by the Minister tabled, as a Statement

~4°'

by the Minister, had to be revamped and a new set of tax measures announced in an extraordinary public broadcast by the Prime Minister, two days before Christmas. ,

~4~·

Again Parliament was totally left out of this loop and there was no chance of any discussion in Parliament of the tax measures.

~42.

The most recent instan'ce of this "new" approach to announcing taxes came about during the Standing Finance Committee Meeting. At the end of his testimony the Minister pulled out piece of paper and read to us the new measures as they related to property taxes.

~43·

Again this seems a very informal, offhand way to treat the imposition oftaxes.

~4·

Apart from the aesthetics there is a basic challenge which will be facing the Ministry and indeed the country. This fiscal year will reflect the first full year in which the population will be facing the full brunt of the four tax packages presented to us from the last fiscal year. Increased GCT, taxes on electricity, taxes on telephones, gas, as well as the increased property taxes. Has any serious analysis bean carried out to assess whether the expected revenues can be squeezed from the population?

~47·

But there is even more. cause for worry. It has only now come to light that the MOF has 'extracted' an additional amount of just under $8B from the BOJ and a subset of the public bodies. To the best of our knowledge, this 'extraction' was not planned a year ago. As regards the BOJ, that institution has been required to pay over profits of $2.75B in FY 09/~0 and will be paying over $4B during '.lo/n. That figure of $2.75B was not in the revenue projections for 09/'10. What of the payments which should flow in the other direction, from the MOF to the BOJ ?

~49·

The list of public bodi~s which have been required to pay over an amount in excess of $SB makes interesting and disturbing reading. How could the NHF be ordered to pay over $300M when hospitals need drugs and basic equipment for which they are told there is no "cash to care'? What madness could have led to the CHASE Fund being asked to pay over $250M when all the sectors, in which that institution operates, have good projects which need funding. There are several other questions which arise but two stand out. What will the Administration do for an encore? Is the plan to "raid the barn" every year?

~53·

The second question relates to the need for Parliament to look very seriously at the issue of the governance

• fthese public bodies.

f

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154.

It makes no sense for us to go through this elaborate process of establishing the legal framework for these institutions, only for the,rules to be 'bent', at will, by a desperate Administration.

155.

There is no question that financing the budget this year poses special challenges. However, the special difficulty we face is that within the context of an IMF Agreement, with specific deficit targets agreed to, the

• ptions are few if

revenues fall below projection.

156.

On the one hand, you can seek to cut expenditure even further but as the Minister has indicated, this really represents a "bare bones" budget and it would be interesting to determine what areas would feel the knife.

157.

The other option would be to come with yet another tax package. All I can say to the Minister is "every day bucket a go to the well ........... ". I would not advise him to go down that route.

158.

Therefore, all this suggests is that the management of the fiscal accounts within this year in terms of meeting basic needs, collecting the revenues and meeting the deficit targets will present a major challenge. F: MAJOR MACRO­ECONOMIC AND SOCIAL CHALLENGES

159.

There is no question that everyone in the country recognizes that we are facing major challenges in manoeuvring our way through difficult times. 160. The JDX has provided the Administration with some breathing room, both in terms of amortization payments on domestic debt as well as lower interest rates. There are other implications down the road but the reality is that there will be a lower level of borrowing required this year, compared with last year.

:1.6:1..

Nonetheless, there are several challenges inherent in seeking to manage our way through this situation. will speak to four ­ two on the social front and two in terms of macro­economic management.

:1.62.

I begin with the social Ghallenges. Not surprisingly I turn to the two major planks of social policy ­ health and education.

:1.63.

I have chosen them because the Minister asserts that these were two areas which represented commitments made by the Administration, which have been kept. I not only beg to differ but would suggest that within this period when all are aware of the challenges the country faces, we need a reality check in terms of policy in those two areas.

:1.64.

Consider for example the situation with health. No one could object to the abolition of hospital user fees for those who simply cannot afford it. In fact a recent publication from SALISES, based on research carried

• ut some years ago, indicates that there was a need to not only address the issue of user fees for certain

patients at public health centres, but even when fees are abolished, the very real problem of patients being unable to afford pharm~ceuticals still remains

..

:1.65.

If we are to be honest, all sixty of us recognize that there is a real problem, not just in terms of accessing medical services, but in terms of being able to pay for the related pharmaceuticals prescribed by medical

• personnel. Let us not pretend that there is not a major problem. Let us not pretend that in most hospitals
• r public health facilities, there are inadequate drugs to meet the prescriptions which are written.

166. Let us not pretend that for many patients in the hospitals, relatives are dispatched to source needed drugs from nearby pharmacie$.

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167. It is against that background that the decision to 'extract' $300M from the NHF is inexplicable. 168. However, there is also tl'le issue that, in many instances, persons are put on "priority" list for surgery and are given dates several years hence. 50 to trumpet the abolition of user fees as a major triumph in the provision of health care is stretching the truth a bit. 169. Incidentally, I was fascinated by the table which was presented on page 34 of the Minister's speech which

• stensibly sought to demonstrate increased usage of public health care services following the abolition of

user fees. 170. I do not know whether' no one actually checked the data but the 16­32% increase to which the Minister refers, must be based on a data set which he did not present. The analysis in his text does not reflect the data which he has presented. In fact in some instances the use of the public health facilities has either decreased or remained flat since the abolition of user fees. 171. The basic point which I am making is that the health sector is in crisis in that we are simply not able to provide adequate service or the pharmaceuticals for many who simply cannot afford it. This represents a crisis which needs to be ~tended to, particularly for those from the lowest income groups. 172. I next turn to education and the Minister once more identifies this area as one where the Government has kept its commitment in doing many things including the abolition of tuition fees. Again let us not stretch the truth. I do not know which label to give to fees required by schools. What I do know is that the request for payment of fees for students from my constituency has not decreased in any way, since the abolition of tuition fees. 173. Not surprisingly, the scjlOols have found ways of recouping some of the revenues lost by the so­called abolition oftuition fees. 174. I would say to the Minister Education, let us forget the politicking and let us have a serious debate as to whether persons who are able to pay tuition fees, persons who pay significant sums for tuition for their children at the Prep 5choollevel, should be exempted at the secondary level. What is the rationale for the subsidy being provided through the abolition oftuition fees? 175. Let us not, in seeking to. highlight the achievements of the abolition of tuition fees be scared to look at the benefits of implementing an efficient and equitable "means test" which protects those who genuinely cannot pay. 176. Let us look at how the additional funds could be best utilized to focus on those who need help most.

177.

But there is yet another issue and any MP who works closely with the schools in her/his constituency will know that the Ministry is an equal opportunity debtor. 178. Grants which are due to the schools are either late or are simply not paid over. 179. There are also progral11mes where the Ministry has outstanding obligations e.g. the loan programme to assist teachers who are pursuing further education. 180. There are many tertiary institutions who are owed funds by the Ministry with no clear idea when these debts will be cleared.

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181. Whilst the Minister must be commended for his enthusiasm and initiative, the reality is that virtually every single education institution which is dependent on the Ministry of Education for the bulk of its funding is under stress. 182.

,

It is time therefore, that as a country as we look at the reality of the public finances we determine whether this policy of the across­the­board abolition of tuition fees, even for those who can afford it, is a sensible

• ne.

183. I now turn to two related macro­economic challenges, but they are discussed individually for clarity. 184. The first relates to the cost of borrowing (interest rate) for the amounts which the Administration will need during this fiscal year. rhe Minister has not indicated the interest rates assumed on domestic borrowing and I do not expect him to speak to this publicly. What is clear is that our present situation represents an economic anomaly and I sincerely hope that there is no expectation that this will continue in perpetuity. 185. What is this economic anomaly? At present inflation is running at over 13%. At the same time, the interest being paid on Government instruments is anywhere between 10% and 12%. Simply put, after tax, the real interest rates are in the range of 7­9%. 186. The question which must be faced by the Administration is: Is it reasonable to expect that investors, big, small and in between, will continue being irrational by investing, through the purchase of Government paper, even when there are negative returns on these investments. In other words, why will a rational person accept negative interest rates in the long term on their savings? 187. I do not feel there is a need for me to develop that point morel but it should be clear that there are other

• ptions open to those who have resources and this has nothing to do with persons being disloyal or
• unpatriotic. Each individual, or each institution, must plan in order to protect his/her own long­term

interest. 188. To expect differently and to base a long­term economic programme on the expectation that individuals will subsume their own financial future in the national interest is irrational. 189. A related issue relates to the role ofthe Central Bank in conducting monetary policy. In Jamaica, because of the potentially damaging impact of steep devaluations on the economy, the Central Bank/s use of monetary policy is both to address inflation as well as to stabilize the foreign exchange market.

,

190. This is an issue which I raised previously. What is the scope for the Central Bank's use of interest rates in this manner ifthere are signs of instability in the foreign exchange market or ifthere are signs that inflation, for whatever reasons, is.moving in the wrong direction. 191. These questions have become even more relevant and urgent as a result of clear evidence of increasing 'control' of the BOJ by the Ministry of Finance. What is this evidence? The granting of significant, unplanned 'advances', without any specific timetable for repayment is one. , 192. The transfer of nearly $3B in 'profits', when no such action was planned a year ago. 193. These actions must raise suspicions and hence the Opposition is demanding full disclosure of the financial 'arrangements' between the BOJ and the MOF. Are the obligations one­sided? 194. The full picture must be brought to light.

Prepared by Dr. Omar Davies - OppOSition Spokesperson on Finance and Planning Page 15

G: CONCLUSION: THE NEED TO RESTORE CONFIDENCE AND TRUST 195. Although it has been said many times it is worth repeating that Jamaica is in a social and economic crisis. From the economic pdint of view the IMF Agreement and support form the other multilaterals have provided us with "breathing room". We should recognize the IMF Agreement, not as a solution, but as a means towards a solution. 196. The Ministers has made a great deal in terms of the triumph of being loaned (US)$2.4B by the multilaterals and at very low interest rates, What must not be forgotten is that this is debt. What must not be forgotten is that the stock of debt has increased by 55% under this Administration. What should not be forgotten is that the country cannot JDX its way out of this debt again. , 197. The challenge facing the Administration and indeed the country is, how do we ride through the storm, create the conditions for economic recovery even whilst recognizing that there are significant social pressures? 198. In terms of the economic recovery, the Government's range of

• ptions is narrowed by the fact that there is

reduced purchasing power from the man or woman in the street. There is simply no room for expanded consumption and hence, economic activity, by definition, will be limited unless it is geared solely at exports. 199. However, the Budget is predicated on the twin bases of increased tax revenues and artificially low interest rates. 200. In terms of increased tax revenues, it is difficult to envisage how these will materialize given the extent to which the majority of households are facing challenges in meeting basic necessities. The minority, with some savings, are rapidly de­saving.

, 201. In terms of the interest rates, we have pOinted out the artificial situation whereby the Government is

projecting its borrowing from the public at negative real interest rates. This cannot be a long­term solution. 202. On the social scene, for those employed, wages are frozen while the costs of all goods and services are

• increasing. For those who used to be employed, adjusting to this new status, even with a redundancy

package poses significant challenges. How do you allocate between consumption and putting away some

• f

the redundancy to survive the medium­term. 203. For those who were previously unemployed, or marginally employed, the crisis deepens as even securing the basic necessities has become more challenging. 204. As we discuss those at the bottom of the socio­economic ladder, I must raise in passing, the absence over the last two years of the vital publication on the Survey of Living Conditions (SLC). That publication, which is a critical tool in both assessing the socio­economic status of the lowest income groups as well as providing guidelines for the framing of social policy, cannot be abandoned. I wish to have some reassurance as to wherr the documents for 2008 and 2009 will be presented because we need scientific analysis of the state­of­affairs, not PR utterances. 205. Whilst the Administrati!'n has the primary role to respond to these challenges there is also a role for the

• Opposition. An honest appraisal of our stance over these two and a half years would have shown that in

Prepared by Dr. Omar Davies - Opposition Spokesperson on Finance and Planning Page 16

many instances we warned ofthe consequences of different actions and it would be useful if more attention had been paid to some <?fthe questions we posed very early in the game.

206.

There can be no question that, whilst not reneging on our role as Opposition, we have sought to be

• responsible. There is no better example than our response to the significant hikes in gasoline prices. It is

for this reason why we take equally seriously the Government's solemn commitment to utilize the increased revenues in a particular way.

207.

But the truth is, regardless of how responsible an Opposition tries to be there are some harsh realities out there which cannot be ignored. My advice to the Administration is: consider last year an anomaly but do not try to push against the same door in the same way.

208.

Once again regardless of any agreement with any organization, anywhere, there is no chance that any further taxation can be tolerated by the population. The hardships are very real and there are significant sections ofthe population which are hurting.

209.

Impact of bus fare increases.

210.

This is not just about the poorest of the poori there are middle income persons who are facing extreme challenges in terms of basic survival.

211.

But there is a most important "intangible". It is called "trust". In its absence, no Administration can mobilize a country which is in crisis. In two and a half years, this Government has done several things which have undermined public trust. The terms of the JDX and the unilateral postponement and in some instances, cancellation of increases due to workers are concrete examples. There are others, some not in the economic field.

212.

The times call for sensitive, sensible and humble leadership.

213.

We of the Opposition have every interest in maintaining social stability, but we also have an obligation to defend not only those who elected us but the broader population.

214.

In that regard even whilst we seek to preserve calm in the society it is imperative that the Administration recognize that the betterment of the lives of the ordinary citizens of this country is of paramount importance.

215.

We, on this side, have no option but to recognize this. We are duty­bound to uphold and defend these

• bjectives. They are de~jved

from the fundamental principles on which the Movement, which we represent, was founded.

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