At the close of fiscal year (FY) 2010/11, the trajectory of the major fiscal indicators was broadly positive. Fiscal authorities basked in a fiscal deficit out-turn of 6.1 per cent of GDP, which was 0.4 percentage points better than budget, and lower than the 10.9 per cent recorded in the previous year. The debt-to-GDP ratio declined to 128 per cent, coming from 129.3 per cent the previous fiscal year. The primary balance (revenue less non-interest expense) declined to 4.4 per cent of GDP at the close of FY2010/11, after registering 6.1 per cent the previous year.

For the nation to realise further improvement in its fiscal profile, fiscal authorities have to undertake a series of critical public sector reforms (PSRs) directed at containing expenditure and enhancing revenues. Among the major issues are public employment and compensation reform, tax reform, divestment of loss making public entities and enabling growth. Even mild reform in these key areas will likely be insufficient, as under such a scenario the fiscal indicators worsen and the fiscal responsibility framework (FRF)/ fiscal laws breached by March 2016.

Public Employment and Compensation (PEC) Reform

If the wage bill-to-GDP ratio doesn’t decline over time, the government will breach the 9 per cent benchmark established in the FRF. Achieving a zero deficit by March 2016 (A benchmark of the FRF) and fiscal stability over the medium term will be very difficult. The wage bill as a percentage of GDP is relatively high within the context of the nation’s heavy debt burden. The nation has a wage bill that ended FY2010/11 at 10.7 per cent of GDP, which lies at the high end of our better rated Caribbean peers [all of whom have lower debt burdens, see figure 1].With the granting of the 7 per cent wage increase, the budgeted J$5.1Bn pension expense and the payment of retroactive emoluments, the wage bill could increase to 10.9 per cent of GDP by the end of FY2011/12. Without PSR fiscal authorities could find it difficult to lower the wage bill-to-GDP ratio over the medium term, in the face of rising pension costs, legacy wage payments and possibly high inflation rates.

In a scenario of little or no PSR, fiscal authorities could face medium term pension expense edging closer to 2 or 3 per cent of GDP. In FY2007/08 fiscal authorities faced a pension expense of approximately 1.3 per cent of GDP, and by FY2011/12 fiscal authorities budgeted for a pension expense of approximately 1.7 per cent of GDP. The proportion of the population above the pensionable age, over the period 2007 to 2010, has fluctuated between 8.14 and 8.38 per cent, while life expectancy remained at 74.13 per cent over the period. The wage increases granted to the public sector between FY2007/08 and FY2011/12 has increased the average wage at which public sector workers retire. Conservative forecasts put the medium term inflation rate between 7.5 and 10.5 per cent annually, such erosion of purchasing power could agitate public sector workers for another wage increase. The problem is compounded by the fact that there are no assets backing pension liabilities, which mean that the full cost of pension is borne directly by tax payers.

Without PSR, non-pension wage expense could head north of the 9.2 per cent of GDP estimated for FY2011/12. Non-pension wage expense increased from 8 per cent of GDP in FY2007/08 to a projected 9.2 of GDP in FY2011/12. Over the same period, public sector workers got wage increases on two occasions as well as other market based adjustments. With most of the nation’s public sector work force unionized, public sector workers have huge bargaining power. Conservative forecasts put the medium term inflation rate between 7.5 and 10.5 per cent annually as indicated above, such erosion of purchasing power could agitate public sector workers for another wage increase. The recently concluded wage pact between the government and public sector workers will see the government shouldering legacy payments of approximately J$21.1Bn within the next two fiscal years.

Conclusion

Public sector reform, and public employment and compensation reform in particular, is a key ingredient to reducing the fiscal deficit and slow debt accumulation overtime. Public employment and compensation reform alone however, will not solve the deficit and debt problems that the nation currently faces. Cost containment of the operation of the other public bodies and tax reform remain key issues to be dealt with. With limited fiscal space and a high debt burden, fiscal authorities have few options to enable growth. However rest assured that a gradually improving fiscal profile is in the best interest of the nation in the long term. An improving fiscal profile paves the way for a low stable interest rate environment and economic efficiency, which are factors that make the economic environment hospitable for growth.Kario-Paul Brown is an Investment & Quantitative Analyst at JMMB