Fiscal-responsibility laws, transparency and the Budget

Colin Bullock, Guest Columnist

Are fiscal-responsibility laws and transparency the new flavour of the month? Several other flavours have been in vogue and have been consumed internationally with varying rates of indigestion. These have included aggregate demand stimulus and inflationary financing, market liberalisation in a context of globalisation, central bank autonomy and inflation targeting, privatisation and the adoration of various 'miracles' (East Asian, Irish or Brazilian) of varying degrees of resilience. All these flavours are relevant in their appropriate context, with attention to proper implementation and avoidance of the speculative excess that often accompanies market liberalisation.

Macroeconomic analysis is conclusive that without prudent fiscal management and a controlled burden of public debt, all talk of stabilisation (low inflation), sustainable poverty alleviation and employment, economic transformation and accelerated economic growth, is little more than vanity. There is, of course, the acute challenge of balancing growth-enhancing expenditure with fiscal prudence in a highly indebted economy. The raw arithmetic of uncontrolled fiscal deficits leading to increased debt and coming back to higher debt servicing crowding out discretionary expenditure is, however, beyond question.

Fiscal prudence

Whereas fiscal prudence is seen as a necessity for economic 'progress', fiscal-responsibility laws and transparency provisions are put forward as being necessary (if not sufficient) to ensure fiscal prudence. It is hoped that laws that specify broad fiscal objectives and, perhaps, specific quantitative targets, supportive procedures for public financial management, appropriate sanctions for breaches and transparency provisions (public availability of information) will encourage appropriate fiscal management. At the same time, most experts conclude that these responsibility and transparency provisions are not likely to be implemented successfully unless there is strong political commitment that is driven by a significant measure of 'social consensus' for the absolute importance of fiscal prudence.

These requirements for political commitment and social consensus are troubling for the prospects for successful implementation of responsibility and transparency provisions and their translation into enhanced fiscal and debt out-turns. The incentive system for both politicians and voters may well deviate from the path to fiscal prudence. Fiscal prudence may require difficult (read 'deflationary') economic decisions now, with a promise of greater fiscal space (to build social and economic infrastructure) in a medium term of five years or more. The politician's time horizon, bounded by the next election, is likely to be shorter. At the same time, voters in need of instant benefits (medical bills, school fees or even money for food) are not likely to appreciate the finer points of fiscal prudence and medium-term transparency. At the same time, the public debt really belongs to the 'taxpayer', a nameless and faceless person who may not be strident about the impact of fiscal irresponsibility on their future tax liability and standard of living.

Superficial interpretation

The popular conception of the Budget, therefore, often limited to who is getting what (how is expenditure allocated) and are there any new taxes? The format of presentation in the Budget lends itself to this superficial interpretation. For example, the Estimates of Expenditure is presented prior to the presentation of how this expenditure is financed. The presentation of expenditure sums total expenditure as including amortisation (payment of principal on public debt). When 'financing' of this total expenditure is presented, it includes taxes, grants, levies, non-tax revenue and capital revenue, as well as borrowing by Government. What is not always presented so clearly is expenditure net of amortisation, from which we subtract revenue net of borrowing, which defines the fiscal balance. To the extent that this is negative (deficit), it is financed by borrowing net of amortisation which, under normal circumstances (see below), should approximate the increase in the public debt stock.

Jamaica has a history of fiscal deficits spanning both sides of the political spectrum. There are always explanations, including international market crisis, financial-sector failures and natural disasters. The explanations notwithstanding, the fact is that there were large deficits and a tendency for actual fiscal deficits to be larger than budgeted deficits. It is this unfortunate history that informed the Nettleford Committee recommendation for the study of central-bank autonomy, taken up explicitly by the Coke Committee and then a subcommittee of Parliament chaired by Errol Ennis. This body of work reflects that in 1976 there was a significant loosening of constraints on Bank of Jamaica financing of Government. The World Bank, in the early 1990s, sought to address the peculiarity of a central bank making huge and chronic financial losses and recognised that in exchange for losses arising from financing various aspects of government expenditure, BOJ had been repaid with government debt instruments with zero coupon and 50-year maturity (essentially worthless). This was corrected within the ambit of the 1992-1995 Extended Fund Facility with the IMF, the correction required Government to pay for BOJ losses with securities with market rates of interest.

Hiding gov't expenditure

There were then other means of 'hiding' government expenditure. The unamended Financial Administration and Audit Act expli-citly recognises the use of deferred financing. This allows for a private-sector entity to undertake a project for Government on the basis of bank credit, where the project and responsibility for the loan are only taken over by Government at the end of the project. This avoids the recording of what is essentially government expenditure when it takes place but not the eventual recognition of public-sector debt. Another means of hiding government expenditure is through public enterprises. These are allowed to undertake projects and accumulate losses (sometimes on the basis of overoptimistic projections), the costs of which eventually have to be taken over by central government. This has informed the requirement for the tabling of Estimates of Revenue and Expenditure for Jamaica Public Bodies in the current IMF standby agreement.

Mechanisms which were perhaps intended for flexibility have come to be abused. Beyond adding significantly to public debt outside budgeted expenditure approved by Parliament, they make nonsense of economic statistics and analysis. In the context of the Vision 2030 macroeconomic discussions, I had to explain why the rise in the public debt increases by so much more than what would be implied by the fiscal deficit, measured as described above. In a previous life as financial secretary, my most cherished gift was a policy decision, actually predating my tenure, that the use of deferred financing had been discontinued. I never tired of quoting it.

It is unfortunate, although perhaps unavoidable, that much of the economic policy discussion has been politicised. "Who mash up the country?" "Who have the lower interest rates and inflation?" "Who 'grow' the economy faster?" "Who did go off-budget first?" The latter question, in keeping with the thrust of this article, is particularly unfortunate. "For all have sinned and fallen short ..." does not lead to the conclusion that all should continue in sin. If we are to make progress as a nation, we should be open about the negatives of the past (whoever created them) and try to learn from them by not repeating them.

The coexistence of high debt and low growth means that Jamaica has extremely limited degrees of policy freedom. The old habits of underestimating or hiding expenditure and overestimating revenue may give cosmetic relief in the near term but fiscal failure and unprogrammed debt accumulation follow inevitably. We need to be sure that we have a clear reading of the state of the economy, with all 'upside' and 'downside' risks, if we are to design effective policy for social and economic improvement. In this vein, the Budget should be an instrument of transparency and best judgement available.

Colin F. Bullock is a lecturer in the Department of Economics, UWI. Email feedback to columns@gleanerjm.com and colinb3@yahoo.co.uk.