AT first glance, Jamaica’s current fiscal situation, as revealed by Finance Minister Dr Peter Phillips at Wednesday’s Jamaica House post-Cabinet press conference, looks significantly worse, or as he put it “disastrously off track”, than many expected.

Phillips projects a J$10 billion dollar “fiscal gap” for the current fiscal year ending in March, meaning that the central government deficit will be $10 billion above the revised projection. Revenues and grants are projected to end up at $25.1 billion, or 7.2 per cent below, the revised budget, as inflows dependent on the IMF programme are not forthcoming. This suggests that expenditures, primarily capital, will need to be $15 billion below budget in the soon to be released supplementary estimates.

Tax revenues are projected to be $14.6 billion, or 6.6 per cent below, the revised projections for the fiscal year. This figure is however almost exactly the same as the $14.55 billion that tax revenues are below projections for the period April to December, suggesting that tax revenues are expected to be in line with projections for the rest of the year. This seems reasonable as a higher, now clearly unrealistic, rate of tax revenue growth had been projected for the first nine months of the year relative to the last three months.

However, for the first nine months, revenues and grants were off track by $15.42 billion, but, as previously noted, this overall number is expected to increase to $25.1 billion. The good news is that the massive increase, from just under $1 billion to $10.5 billion, in the projected shortfall in non-tax revenues is largely due to a shortfall in grants. Specifically, there will be no disbursements of the programmed receipts from the European Union (EU) due to the delay in the IMF review. Hopefully, this means that the EU will still be willing to disburse these much needed grant funds, currently approximately 60 million Euro, if a new IMF agreement is negotiated as planned.

The emphasis of his presentation on the fact that the revised primary surplus target of five per cent of GDP will not met, is meaningful. The primary surplus, defined as revenue minus non-interest expenditures, is primarily a measure of debt sustainability as it refers to the amount of money left over to pay interest. Phillips stated that the deviation will be by about 1.5 per cent of GDP, giving an estimated primary surplus for the full fiscal year of 3.5 per cent of GDP, right at the edge of debt sustainability. It is worth noting that the original IMF agreement had a primary surplus target of approximately 8.7 per cent of GDP, which was the number required to bring the debt to GDP ratio close to the 100 per cent of GDP ratio over a five-year period. It had been agreed that this would be reduced to just over five per cent in the revised budget, to give Jamaica some additional fiscal space for investments with multiplier effects, but as we can see this fiscal space has also been used up. The debt to GDP ratio, estimated at 131 per cent, is therefore actually rising slightly, and not falling as originally agreed, after two years of an IMF programme.

If interest costs are about 9.5 per cent of GDP, then a 3.5 per cent primary surplus would suggest a central government fiscal deficit of about six per cent, which although not stated in his presentation (we will have to wait for the supplementary estimates to be tabled on the 21st of February) is probably not too far off. The good news is that sources suggest that the overall fiscal deficit, despite overruns in some government projects, will not be significantly higher, being offset by under-spending in other statutory corporations.

Minister Phillips’ bigger challenge will be in constructing next year’s budget that can satisfy the IMF and our other creditors. The very low projected primary surplus of 3.5 per cent for the end of the fiscal year will have to be increased to put us back on the path to reducing our debt to GDP ratio. As Minister Phillips notes, the seven per cent increase in public sector wages was not included in the original budget, leading to an increase of $7.2 billion in wages and salaries, from $133.83 billion to $141.05 billion in the revised estimates. In addition to a multi-year period of paying back pay by way of instalments for the 2008 to 2010 contract period, the next fiscal year would see a full year of the seven per cent wage increase, as opposed to only half a year in the revised budget. The wage contract negotiations for 2010 to 2012 are just starting, and it is almost certain that the IMF will want the 2012 to 2014 wage negotiations settled (at least in principle) before signing any new agreement. At the press conference, Minister Phillips advised that a solution involving widespread public sector layoffs was “not contemplated, infeasible, and not part of the government’s calculations”. All of this suggests that, at the very minimum, to achieve the needed “reduction in the wage bill over the medium term”, will require a multi-year freeze in public sector wages, as well as an acceleration in the timetable for pension reform.

Finally, the issue of tax reform, and improvements in administration, are, in the words of Minister Phillips, “Not a simple or easy task, but one on which the entire future of Jamaica depends”. As he puts it, the Cabinet took the view that the work of the Parliamentary tax committee should continue, as it provides a “focus for consensus building”. He noted that the committee had already received over 20 presentations, and expected the process to continue for a couple more weeks. In the current financial context, in the absence of anything remotely resembling a fiscal cushion, such a reform would need to be revenue positive, not only in the medium but unfortunately in the short term. It will also need to be growth enhancing, as without much faster growth, Jamaica remains very vulnerable to negative shocks.