With public sector wages and salaries already high and consuming approximately 44 per cent of total tax revenues, the Economic Programme Oversight Committee (EPOC) in its latest review of fiscal performance has again called for a reintroduction of the wages and salary fiscal rule.

The practice, if reinstated, could see the crafting of a fiscal rule that will clearly outline how much should be spent on salaries and wages in relation to the country’s gross domestic product (GDP).

A 9 per cent wages to GDP ratio was removed in April 2023 when the Financial Administration and Audit (FAA) Act was amended, the ratio, which thereafter continues to move in an upward manner, is now projected to be in the 12 per cent to 13 per cent range over the medium term.

“This elevated level of wage to GDP is of concern and brings along with it risks to fiscal flexibility. The same disciplined approach to debt reduction could be pursued to bring this ratio back in line with the target defined in this fiscal rule,” EPOC Chairman Keith Duncan said during a quarterly briefing held late last week.

The contentious debate on salaries, which grew louder after government officials and several other public sector personnel received increases in pay last year, saw expenditure in the area amounting to $139.3 billion at the start of this fiscal year or April-June period. Despite being in line with budget, the total, EPOC, said was $6.4 billion more than that for last year during the same period.

“Jamaica could continue to see this ratio moving higher, as economic activity slows along with growth in tax revenues. These ratios are extremely worrisome as the wages and salaries reduces fiscal flexibility and, if not controlled, could crowd out other areas of expenditure including capital expenditure and services to the Jamaican public including the social safety net which support the vulnerable,” Duncan said.

Despite government expenses marginally falling behind budget during the April-June period, amounting to $336.2 billion or $6.2 billion or 1.8 per cent below the projected target, due to lower-than-anticipated recurrent spending — total recurrent spending for April to July 2024 was said to be $32.4 billion higher than the same period in 2023 due to higher programme spending and increased wage bill, consequent on the public sector compensation restructure. Capital expenditure of $19.4 billion, which was also $986 million behind budget, exceeded spending for the similar period in the previous fiscal year by $4.8 billion.

The chairman, in cautioning government to remain prudent as it looks to complete outstanding negotiations with sections of the public sector and also move into new rounds of wage negotiations for the upcoming 2025/26 fiscal year, called for good sense to prevail and for growth in wages and salaries to be kept lower or in line with the growth in GDP. This, so as to ensure that productivity levels are increased or maintained.

“This slowdown in the economy brings along with it the attendant risks of lower than budgeted growth in tax revenues along with increased expenditures in public sector wages and salaries currently consuming an oversized share of GDP and tax revenues. The fiscal risks loom large.

“Achieving the fiscal balance targets and the debt reduction strategies will become challenging and will require significant political will to maintain Jamaica’s impressive fiscal performance,” Duncan warned.

EPOC in its review, however, said that as government continues to keep its macro-economic affairs in order with properly managing inflation and interest as it continues to build-up robust Net International Reserves (NIR) now tracking at over US$5 billion, a vast majority of the fiscal indicators for the period also continued to exceed budget expectations.

During the period total revenue and grants of $301 billion after outperforming budget projections by $12.9 billion was largely backed by contributions of $270.8 billion from tax revenue and $27.5 billion from non-tax revenue. These out-turns, which represent a year-over-year increase of $21.3 billion or 7.6 per cent when compared to April to July 2023, the economic watchdog body, said reflects ongoing improvements in domestic economic activities, though at a slower pace, along with gains in corporate profits and labour market conditions.

Tax revenue, which surpassed budget by $3.7 billion for the review period, was said to be primarily driven by stronger-than-expected total income and profits, was $5.5 billion higher than budget. This, as ‘Other Companies’ and ‘Tax on Interest’ were ahead by $2.8 billion and $2.3 billion, respectively. Outflows from the area were, however, tempered by lower-than-projected receipts from production and consumption, and international trade, despite special consumption tax (SCT) imports surpassing the target by $1.3 billion or 5.7 per cent.

“Notably, travel tax with inflows of $9.5 billion was $2.1 billion behind target reflecting slower than projected visitor arrivals,” EPOC also said in its report.

Non-tax revenues, which, on the other hand, exceeded the budget by $7.0 billion or 34.2 per cent, was positively impacted by the drawdown of GOJ insurance policies with the Caribbean Catastrophe Risk Insurance Facility (CCRIF), which was enacted after the passage of Hurricane Beryl which battered some parts of the island at the start of July.

Total payout of $4.2 billion or approximately US$26.9 million from the CCRIF Segregated Portfolio Company (CCRIF SPC) was triggered after the dangerous Category 4 hurricane occasioning a parametric tropical cyclone insurance policy payout of $2.6 billion or US$16.6 million and excess rainfall insurance policy payout of $1.6 billion or US$10.3 million.

In addition to the CCRIF policies, the portfolio includes the Contingency Fund and the National Natural Disaster Fund, with available financing in excess of $4.5 billion. The weather system, which was not devastating enough to trigger payments for an International Monetary Fund (IMF) catastrophe bond, resulted in no drawdowns from the contingent Credit Facility or Precautionary and Liquidity Line (PLL) arrangements.

“The Government remains committed to prudent management of resources, including disaster risk financing, to ensure the country is well-prepared for any storms or hurricanes later in the season,” Duncan stated.

The country’s fiscal and primary balances, which also outperformed targets for the period, saw central government operations securing a fiscal deficit of $34.3 billion, little over $19 billion less than the budgeted deficit of $53.4 billion. This was accompanied by a primary surplus of $21.7 billion generated for the review period.