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Budget Performance Fiscal Year 1997/98
Overview
Budget Outturn
Revenues and Loan
Receipts
Expenditure
FINSAC
After years of surplus, the budget generated a large fiscal deficit in FY 1996/97. This was primarily due to the high costs associated with maintaining low inflation, sterilising capital inflows and providing financial sector support. At the same time, negative growth in the economy adversely affected revenue performance.
Against this backdrop, the FY 1997/98 Budget programmed a smaller fiscal deficit of $3,708 million to be fully financed with loan receipts leading to an overall surplus of $253 million. This was to be achieved within a framework of 8-9% inflation, interest rate reduction from 18% to 14%, a stable exchange rate and real Gross Domestic Product (GDP) growth of 2%.
Higher interest rates and poor growth, among other factors, limited the scope for recovery in the fiscal deficit for FY 1997/98. However, despite continued weak revenue inflows and increasing debt servicing and wage costs, the fiscal deficit of $15,969 million was substantially reduced from the FY 1996/97 level.
On the expenditure side, higher interest rates, coupled with unprogrammed increases in the debt stock for budgetary finance and monetary support, led to higher than projected interest costs. Rather than falling, interest rates rose to 28% to help stabilise the exchange rate and contain inflation. In addition, planned rescheduling was limited by the high interest rates, financial sector difficulties and sluggish economy. For wages and salaries, settlement costs on allowances exceeded budgeted amounts adding to the expenditure difficulties. In the face of these unanticipated increases, discretionary spending was tightly controlled during the year.
On the revenue side, the continued slowdown in economic activity contributed to lower than projected inflows. This was compounded by delays in introducing the Bill to Amend the Revenue Administration Act which undermined compliance efforts.
For FY 1997/98, the Central Government generated a fiscal deficit of $15,969 million, $12,261 million more than the programmed deficit of $3,708 million. This was primarily financed with above-programmed loan receipts leading to an overall deficit, including amortisation and loan receipts, of $6,388 million. This remaining deficit reflects the use of excess cash balances available from loan and revenue inflows received at the end of the previous fiscal year.
Tax Revenue
Tax revenue collections of $60,101 million were $4,594 million (7.1%) less than budgeted. The sluggish economy adversely affected tax revenues, including compliance efforts. In addition, much of the compliance efforts were predicated on passage of the Bill to Amend the Revenue Administration Act. The Bill was not passed in FY 1997/98.
Taxes contributing to the below budget performance include:
Income and Profit Taxes
Income and profit taxes of $23,813 million were $2,156 million (8.3%) below estimates. This was mainly due to shortfalls in PAYE, Tax on Dividend and Bauxite/Alumina Income Tax. Factors that contributed to the poor performance in this category included:
General Consumption Tax
General Consumption Tax (GCT) collections of $17,759 million were $2,194 million (11.0%) below estimates. Reduced economic activity, with declining production and several company closures, affected GCT collections. Though imports increased, zero-rated and tax exempt goods represented a significant portion. For motor vehicle imports, GCT collections have lagged assessments because of the lack of in-bond facilities for used cars. Only a portion of the GCT owed on used cars is collected at the port. Collections on the balance, to be paid at point of sale, are lagging. In addition, the incentive package in Phase II of the National Industrial Policy (NIP) increased the items eligible for waivers.
Stamp Duty
Stamp Duty collections were $306 million below estimates. Collections on local transactions fell substantially short while collections on imports were above target. The sluggish economy may have contributed to the shortfall on domestic transactions. Increased Stamp Duty on imports benefited from higher than projected imports and new measures implemented at Customs under the FY 1996/97 compliance programme.
Non-Tax Revenue
Non-tax revenue of $3,123 million was $576 million (15.6%) below estimates. The shortfall was primarily on Departmental and Other Miscellaneous Revenue.
Capital Development Fund Transfers
Transfers from the Capital Development Fund of $3,439 million were consistent with estimates.
Capital Revenue
Capital revenue (including grants) totalled $1,375 million, a shortfall of $1,860 million against estimates. The fallout of $1,015 million in divestment proceeds from the proposed sale of Petrojam and a reduction in expenditure on Capital B projects which reduced grant inflows caused the shortfall.
Loan Receipts
Loan receipts of $40,643 million were $8,866 million (27.9%) above estimates. The additional receipts were required to cover revenue shortfalls and finance additional expenditure. The additional borrowing was sourced locally. External loan receipts fell short of estimates as cuts in capital spending reduced project loan inflows.
Government raised US$300 million from non-project external sources, as programmed. US$200 million was raised in July through Government's first Eurobond offering on the international capital markets. The issue, originally for US$100 million, was five times oversubscribed. This allowed for doubling the issue size while tightening the spread. An additional US$100 million was raised through a syndicated bridge loan after the Asian crisis delayed issue of the second planned Eurobond.
Recurrent Expenditure
Expenditure on recurrent programmes, wages and salaries and interest payments during FY 1997/98 was $71,658.1 million, $8,478 million (8.0%) more than the approved budget.
Recurrent Programmes
Expenditure on recurrent programmes of $17,002 million was roughly in line with the budget of $16,649 million. Recurrent programmes represented 23.7% of recurrent expenditure and 14.8% of total expenditure.
Wages and Salaries
In FY 1997/98, $29,428 million was spent on wages and salaries, exceeding the budgeted amount by $1,925 million. This was due to earlier than anticipated settlements by some groups as well as higher than projected increases on allowances.
Interest
Interest payments exceeded the budget by $4,128 million. Higher domestic interest costs accounted for nearly all of the increase, or $4,028 million. The above programmed payments were a result of:
Capital Expenditure
Capital expenditure including amortisation accounted for $43,411 million, exceeding the programmed expenditure by $2,071 million (5.0%) due to higher levels of payments on the non-discretionary category of amortisation.
Capital Programmes
Expenditure on capital programmes in FY 1997/98 was $11,340 million, $990 million less than budgeted. Planned expenditure on capital programmes was reduced to accommodate both higher levels of expenditure on non-discretionary recurrent elements of the budget and the revenue shortfall.
International Monetary Fund #1 Account
Payments on the International Monetary Fund (IMF) #1 account of $1,009 million were $185 million lower than budgeted due to a revaluation of the Jamaican dollar against the SDR.
Amortisation
Amortisation payments exceeded programmed amounts by $3,246 million (11.7%) as a result of prepaying $2,341 million in LRS and amortising unprogrammed short-term domestic loans acquired during the year. Although external amortisation was $1,218 million (10.4%) less than budget, it was outweighed by the $4,464 million (27.7%) excess on the domestic side.
The financial sector received no budgetary support in FY 1997/98. All financial support to the sector was provided through FINSAC and Financial Institutions Services Ltd (FIS). Assistance was in the form of FINSAC-issued Government-guaranteed securities and cash resources generated by FIS from the sale of assets and the collection of loans. FINSAC has retained the option to service the securities with additional paper. Where cash is required, FINSAC-issued securities will be serviced from funds realised from the sale of assets and collateral held by FINSAC. To the extent that these funds are inadequate, the budget will provide the necessary support.
1. The 1998/99 Estimates of Expenditure were tabled two days after the end of FY 1997/98. With this early tabling, some FY 1997/98 data reported are preliminary. Revenue and loan inflow data are based on Consolidated Fund Receipts and expenditure data are based on the First Supplementary Estimates.
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