The FY2001/02 Budget was cast within the framework of entrenching Government’s fiscal consolidation efforts, which have resulted in a marked reduction in the budget deficit over the past 4 years and a surplus in FY2000/01. These efforts however, were challenged by the assumption of FINSAC bonds by the Central Government, with a projected interest cost of $8,124.0mn, or 2.3% of GDP. This addition to debt service costs pushed the budgeted fiscal deficit to $9,498mn, or 2.8% of GDP.

The Budget forecast a 13.4% increase in expenditure to $118,194.3mn over the outturn for FY2000/01, while revenues projected at $108,696.3mn, were expected to remain flat due mainly to some one-off inflows in the previous fiscal year. These forecasts were consistent with a programmed inflation rate of 6.0%, a stable foreign exchange market, real economic growth of 3.0% and an average Treasury Bill rate of 14.0%.

A number of revenue measures projected to yield incremental revenue of $292mn for the fiscal year were outlined in the FY2001/02 budget. The budget also proposed amendments to the General Consumption Tax and Customs Act in an effort to broaden the tax base and improve compliance. On the expenditure side, an increase of 11.1% in recurrent spending was programmed, driven mainly by higher interest payments. Of paramount importance however, was the substantial 29.5% increase in allocation for capital projects.

Public Debt Management (interest payments) took the lion’s share of the recurrent budget of 45.6%, followed by Education Affairs (17.6%) and Public Order and Safety Services (9.2%). With respect to capital projects, the largest allocations went to Roads (17.1%), Economic and Fiscal Management (12.4%) and Education Affairs and Services (11.3%).

The fiscal year commenced with the Government reinforcing its commitment to prudent fiscal management. This was clearly evident during the first quarter of the year when revenue grew by 7.3% above projections. This allowed for increased spending while adhering to the deficit target. However the civil disturbance in July, terrorist attacks in the USA in September and flood rains in October and November imposed significant challenges on the fiscal accounts throughout the remainder of the year. The shocks severely impacted Central Government operations leading to a reversal in the positive revenue trend and necessitating increased spending. As a result the fiscal deficit deviated from its programmed path.

Provisional data indicate a fiscal deficit of $14,057.7mn, or 3.8% of GDP, representing a significant deviation of $4,559.7mn from the budget. The larger fiscal deficit was largely driven by lower tax revenue, which fell $5,711.8mn below budget. The shortfall in tax revenue was offset by higher than programmed capital revenue arising from proceeds from the divestment of FINSAC assets, which led to revenue and grants surpassing budget by $1,037.7mn, or 1.0%. The tax shortfall was compounded by increased expenditure, mainly on wages and interest payments resulting in total expenditure exceeding budget by $5,597.3mn, or 4.7%.

Given these circumstances, the targeted IMF Staff Monitored Programmed (SMP) fiscal deficit of $14,841mn, or 4.1% of GDP was exceeded by $6,362.4mn. (The IMF measurement of the deficit does not include divestment proceeds of $7,145.8mn as revenue).

FISCAL DEVELOPMENTS

Tax Measures & User Fees

Revenue measures during FY2001/02 focused primarily on increasing revenue flows to the Government through plugging loopholes in the tax system, thereby reducing the incidence of non-compliance. In addition, a few measures encompassed adjustments to tax rates and user fee charges with an estimated revenue yield of $292mn. These measures included:

• An increase in the stamp duty on selected instruments, such as Memorandum and Articles of Association, Deed Poll and Promissory Notes. The revenue yield from this measure was estimated at $12mn;

• A 50% increase in drivers’ license fees so as to recover a portion of the cost associated with the introduction of a new driver’s license system. Estimated incremental revenue from this measure was $130mn;

• An increase in user fees at Jamaica Customs and amendments to the flat rate structure for C78 import entry forms. It was estimated that these measures would yield $151mn.

There were also cost recovery adjustments to postal rates and passport fees, with anticipated revenue flows to the Consolidated Fund of $265mn, as well as increases in traffic fines, which were estimated to raise $80mn in revenue.

Take-Over of FINSAC Debt

As at April 1, 2001 the Central Government took a mammoth step in the move to wind up FINSAC by assuming the remaining $79,297.3mn of FINSAC liabilities, in the process converting them to Local Registered Stocks and paying cash interest to the bond holders. Total interest payments on these securities were $5,394.9mn, which significantly improved the liquidity position of those institutions that were under the control of FINSAC. Additionally, the Government utilized proceeds from the divestment of JPSCo and some of FINSAC’s assets as well as low-cost loan funds to prepay $15,378.0mn of these bonds.

Revised IMF Staff Monitored Programme (SMP)

Fiscal policy remained resolute during the first half of the year with the fiscal variables being broadly on track with target. However, the resolve of the fiscal programme was later to be severely challenged by three major shocks - the civil disturbances mainly in Kingston in July; the terrorist attacks on the USA on September 11 and flood rains in October and November that severely disrupted Government’s fiscal operations for the remainder of the year. Accordingly, the ability of the fiscal authorities to keep the programme on track was derailed with a significant fallout in revenue.

To minimize the impact of the shocks on the economy, the Government implemented a number of measures, including a rehabilitation exercise that aimed to put the economic programme back on track while maintaining some measure of protection for the most vulnerable groups in the society. In support of these measures, the Government secured a US$75mn emergency rehabilitation loan from the World Bank.

Provisional estimates were that the impact of the shocks would drive the fiscal deficit to over 5% of GDP, up from the 2.8% originally projected. In an effort to address the pending imbalance, the GOJ and the IMF agreed to a revised SMP, with the Government taking corrective actions to reduce the fiscal deficit to 4.1% of GDP.

Shelf Registration

In December 2001, the GOJ filed a Schedule B Registration Statement with the United States Securities Exchange Commission (US SEC) and registered its first US$250mn 20-year Global Bond. This was followed in February 2002 with the filing of a Shelf Registration to cover US dollar bond issues for the next two years. The Registration will give the Government greater flexibility and the ability to access the international capital markets at very short notice in order to take advantage of market opportunities.

BUDGET OUTTURN

The fiscal outturn for FY2001/02 was largely influenced by the local disturbances of July, September 11 terrorist attacks on the USA and flood rains in October/November. Provisional data indicates that the fiscal accounts generated a fiscal deficit of $14,057.7mn, which was larger than the budgeted amount by $4,559.7mn. The primary surplus was also behind projections as the $36,952.7mn generated was $2,005.7mn, or 5.1% less than programmed.

Revenue and grants, in particular, tax revenue, performed strongly over the April to August period. However, this buoyancy was disrupted by the shocks to the economy resulting in a significant downturn in tax revenue for the remainder of the year. Revenue and Grants increased by $1,037.7mn over budget, with tax revenue falling by $5,711.8mn relative to budget. At the same time, expenditure amounted to $123,791.6mn thereby surpassing projections by $5,597.3mn, or 4.7%, influenced by higher spending on non-discretionary items, notably wages and salaries and interest payments.

The fiscal deficit was financed by net loan inflows of $13,501mn, resulting in an overall deficit of $384.6mn, which was financed by surplus funds from FY2000/01.

Revenue and Grants

FY2001/02 was an atypical year for revenue. The first quarter was impressive, with revenues exceeding target by 7.3%. In particular, tax revenues surpassed budget estimates and collections in the similar period of the previous fiscal year by 13.1% and 9.4%, respectively. However, this pace slowed considerably in the following two quarters consequent on the adverse shocks to the economy. As a result, by end-December 2001, revenue and grants were only 0.3% above budget and 4.6% above receipts in the corresponding period of FY2000/01. Importantly, a rebound in tax revenue was experienced in the final fiscal quarter though not sufficient to compensate for the sluggish performance in the preceding quarter. For the fiscal year, revenue and grants amounted to $109,733.9mn, an increase of 1.2% over FY2000/01 and 1% over the budgeted amount as higher capital revenue compensated for the downturn in tax revenue.

Tax Revenue

Tax Revenue, which accounts for close to 90% of total revenue, showed considerable buoyancy up to August of 2001. Specifically, tax revenue receipts up to August surpassed projections by $1,676.4mn, or 5%. Income & Profit taxes were behind budget by 4.9%, however, taxes from the Production & Consumption category exceeded projections by 4.8%, and, International Trade taxes were $1,805.6mn, or 21% ahead of target.

Following the tragic events of September 11, there was a marked reversal of the strong positive trend to August. Tax revenue receipts for the September to March period were 11.8% less than budgeted. This adverse performance retarded the growth momentum that was realised during the first five months of the year thereby resulting in a substantial fallout in revenue. Collections for the fiscal year of $90,568.2mn, fell below budget by $5,711.8mn. Compared to FY2000/01, there was only a 4% increase, representing a real decline of just under 4%.

Most items registered shortfalls against the budget of which the most significant were GCT (Local), Company Taxes, Tax on Interest, GCT (Imports) and Custom Duty. However, PAYE, SCT (Imports) and Stamp Duty (Local) recorded notable increases.

 

Income and Profit Taxes

Receipts from income and profit taxes totaled $35,516.4mn, which was $1,851.3mn less than budgeted. This outturn represents a very marginal increase of 0.2% over the previous fiscal year. Company taxes, Tax on Interest and Bauxite/Alumina Income tax, which fell below budget by $1,910mn, $1,772.3mn and $706.3mn, respectively, were the main contributors to the shortfall.

With respect to the Bauxite/Alumina sector, the gross export value for alumina fell below the level projected in the budget due largely to the US and global economic slowdown. The situation was exacerbated by the temporary closure of a refinery emanating from a labour dispute that resulted in loss of production and significant slippage in export earnings. Total export earnings for the fiscal year fell about 8% below the amount originally budgeted. Additionally, the average price for aluminum was about 7% lower than anticipated at the beginning of the fiscal year. These developments had a negative impact on the companies’ profitability and concomitantly on income tax flows. Total collections from Bauxite/Alumina companies were $698.1mn, a shortfall of 50.3%.

Collections from Other Companies of $5,986.1mn were 24.2% less than budgeted. The growth in corporate taxes for FY2001/02 was predicated on a 3% growth in the economy. However, that level of growth was not realised, with preliminary estimates indicating an economic growth rate of just under 2%, which adversely impacted company taxes. The negative effect of the September 11 tragedy on some companies, alongside the utilization of investment-incentive tax breaks by some corporations and an apparent reduction in compliance have also contributed to the fallout in Company taxes.

A significant number of companies have paid lower taxes than in the previous fiscal year, though the economy grew at a faster rate during FY2001/02. As a result, Company taxes were also less than collections in FY2000/01, falling $1,210.5mn, or 16.8%. This development is not consistent with a growing economy and accordingly, there will be increased audit activity in the next fiscal year to ascertain and stem incidents of non-compliance.

Tax on Interest, which amounted to $8,462.8mn was 17.3% less than budgeted and 11.2% below the outturn for FY2000/01. The lower receipts stemmed largely from the higher than anticipated refunds granted to bond holders. However, audit investigations are being conducted to verify the legitimacy of some of these claims for refunds, as well as the tax-exempt status for some of the securities traded by financial institutions.

The under-performance of Company taxes, Tax on Interest and Bauxite/Alumina Income tax dampened the buoyant flows from PAYE, which surpassed budget by $2,653mn, or 16.3%. This outturn of $18,907.2mn was ahead of collections in FY2000/01 by 14.5%. PAYE returns were bolstered by higher salary payments and an aggressive audit and compliance effort that has helped to combat the incidence of tax evasion and avoidance.

 

Production and Consumption Taxes

Collections from the Production and Consumption category of $28,549.1mn were 7.9% behind budget. The fallout was led by GCT, which fell $2,556.3mn, or 15.7% below the amount budgeted. The lower than projected economic growth has impacted consumption activity thereby lowering GCT collections. Additionally, the delay in passage of legislative measures has impeded the widening of the GCT base thereby lowering revenue flows. In comparison to FY2000/01, GCT collections increased by only 5.5%, representing a real decline of about 2%. The other item of note that showed a shortfall was SCT, which fell $561.7mn, or 9.8% below budget due partly to unanticipated production downtime at the Petrojam oil refinery.

On a positive note, there was a $165.6mn, or 29.9% increase in Betting, Gaming and Lottery (BGL) over budget. Total BGL collections were 42.6% higher than in the previous fiscal year. This performance was largely due to the broadening and deepening of the gaming industry with the advent of a second lottery company, Supreme Ventures, which commenced operations in June with attractively packaged games. The other positive performance of note in this category was that of Stamp Duty, which exceeded budget by $449.6mn, or 15%. This increase resulted mainly from the sale of the Alcan Alumina Company.

 

International Trade Taxes

For the April to August period, International Trade Taxes showed considerable buoyancy, surpassing the budgeted flows and collections in the similar period of FY2000/01 by 21% and 12%, respectively. However, after the September 11 tragedy, this trend was reversed markedly, as international travel and trade were disrupted. Concomitantly, International Trade Taxes plummeted to 16.7% below budget and a marginal 2.9% ahead of last fiscal year’s collections for the period from September to March.

The sluggish performance between September and March resulted in International Trade taxes being well below budget for FY2001/02. Collections totaled $26,502.6mn, representing a shortfall of $1,424.1mn, or 5.1%. All items fell below budget with the exception of SCT, which was $971mn, or 22.5% higher than budgeted due mainly to higher importation of refined petroleum by Petrojam to supplement the production downtime.

Apart from the reduction in air travel, travel taxes, which declined by 7.5% against budget, was also affected by the replacement of the travel tax on cruise ship passengers with a fee to be collected and retained by the Port Authority.

The most significant fallouts were recorded by GCT (Imports) and Custom Duty, which were below budget by $1,163mn (10.9%) and $875.7mn (8.9%), respectively. These shortfalls were largely influenced by an estimated 8% reduction in consumer and capital goods imports, relative to budgeted levels. Although GCT and Custom Duty receipts were less than budgeted, they were nevertheless ahead of inflows during FY2000/01 by 2% and 5.7%, respectively. These increases arose as the marginal decline in imports was offset by the depreciation in the exchange rate.

 

Non-tax Revenue

Non-tax revenue totaled $4,949.3mn, an increase of 7.9% over budget. This outturn, however, represents a decline of $2,834.6mn, from the previous year’s collections. Receipts in FY2000/01 were bolstered by the one-off proceed of $2,800mn (US$69mn) from the sale of cellular licenses.

 

Bauxite Levy

Inflows from the bauxite levy amounted to $2,252.3mn and were on track with budget. Collections were nonetheless behind the previous fiscal year by $500.3mn, or 18.2%. This reduction stemmed largely from the netting off of gross levy payments by Clarendon Alumina Partners (CAP) against the US$100.0mn pre-paid levy in 1999, coupled with lower price for the metal.

 

Capital Revenue

Capital Revenue of $9,989.5mn, was ahead of the amount budgeted. This total includes $1,601mn, being part proceeds from the divestment of the Jamaica Public Service Company Limited, (JPSCo), as well as $5,544.8mn from the divestment of FINSAC assets. The inflows from FINSAC compensated for lower than projected loan repayments.

 

Grants

Grant inflows totaled $1,974.7mn, which was $163.9mn less than budgeted. The budget included Euro38mn from the European Union for Support to the Economic Reform Programme (SERP). However only Euro25mn was received, with the remaining Euro13mn programmed for FY2002/03. Additionally, the disbursement of grant funds for capital projects was slower than anticipated. The fallout in these two areas was however, partly offset by the receipt of Canadian grant of CAD 20mn from the Canadian International Development Agency (CIDA).

 

Expenditure

Total expenditure (excluding amortization) was $123,791.6mn, an increase of $5,597.3mn, or 4.7% over budget. Recurrent expenditure was higher than budgeted whereas capital expenditure fell below the amount budgeted. Given the limited discretionary room on the recurrent side of the budget, containment measures were effected to the capital budget in an effort to remain within the fiscal deficit target. The compression was however nullified by significantly higher inescapable recurrent spending.

 

Recurrent

Recurrent expenditure increased over budget by $7,300.5mn to total $113,665.2mn. Spending on Recurrent Programmes of $20,066.5mn, was within the budgeted level. However, spending on some items was cut back and contained to accommodate unprogrammed spending on items. These unanticipated recurrent programme expenditures, which also contributed to a 13.4% increase over last fiscal year included relief efforts in response to the flood damage in November, increased utility payments and higher than programmed pension payments to retired public officers.

The increase in Recurrent Programmes was also driven by expenditures associated with some one-off eventualities such as the Air Jamaica pension payments, compensation to victims of the 1999 gas riots, and, procurement of security equipment, the calling out of the National Reserves, the Operation Grow tourism project and damage control consequent on the July civil disturbance in sections of Kingston.

Wages and Salaries showed the largest increase of all expenditure items. The total payment of $42,588.2mn was 12.7% more than budgeted. The increase arose mainly from earlier than expected settlements of new salary pacts for several groups of workers.

The Government had programmed to push significant amounts of these salary adjustments into the next fiscal year. However, in the interest of fostering industrial peace and harmony, salary negotiations were actually settled and paid earlier than anticipated. These new wage pacts were essentially for increases of 4% on the basic pay in each of the two-year contract period.

Interest payments amounted to $51,010.4mn, an increase of 5.3% over budget. However, while external payments were $917.4mn, or 7.9% less than budget, domestic interest rose $3,471.4mn, or 9.4% above the amount budgeted. A significant increase in domestic loan receipts with interest payments falling due during the current fiscal year, alongside the temporary disruption to the downward interest rate trajectory after September 11 were largely responsible for the higher domestic interest cost. With respect to external interest payments, while there were higher payments on bond issues, these were negated by lower payments on multilateral loans. However, with an increase in the GOJ’s holding of Eurobonds, coupled with unfavourable movements in the exchange rate, external interest costs rose 23.7% above that of FY2000/01.

 

Capital

Expenditure on capital projects was reduced relative to the budget by 16% to $9,290.9mn. Capital spending bore the brunt of the expenditure restraint measures as the GOJ worked assiduously to remain within fiscal targets, given the highly non-discretionary nature of most recurrent items. In addition, some projects were slowed or postponed to accommodate additional requirements for national security, tourism and flood damage rehabilitation in the aftermath of the shocks affecting the nation. Importantly, though the total spending on capital projects was less than budgeted, it represented a notable increase of 8.7% over the previous fiscal year.

Payments to the IMF#1 Account totaled $835.5mn, an increase of 8.9% over budget due to the revaluation of the SDR against the Jamaica dollar.

Loan Receipts

Consequent on the widening of the fiscal deficit above the programmed level, GOJ’s borrowing requirement rose during FY2001/02. Total loan receipts were $104,475.2mn, a 36% increase over budget, with both domestic and external receipts being ahead of budget.

Loans from external sources amounted to $39,000.4mn, which was $6,696.8mn ahead of budget. Of the total amount raised, $2,723.2mn was from multilateral/bilateral sources for capital projects, a reduction of 1.5% against the budget due to lower capital expenditure. The remaining $36,449.3mn was $6,911.6mn higher than budgeted and consisted of:

• US$75mn Emergency Recovery Loan (ERL) from the World Bank earmarked as fiscal support for assisting the recovery effort of the flood damage and cushioning the anticipated devastating impact of the September 11 tragedy;

• US$250mn 20-year US-SEC registered (shelf registration) bond, of which US$200mn was for pre-funding FY2002/03 Budget;

• A US$400mn bond issue, which was originally issued at a par value of US$225mn. The overwhelming response led the GOJ to raising an additional US$125mn, leading to the full amount budgeted raised via a single issue;

• US$30mn from the IDB for the Social Safety Net programme;

• US$40mn financial sector loan from the IDB.

While the ERL and shelf registration bond, which totaled US$275mn, were not budgeted for, they compensated for the shortfall in financial sector loans. The budget included loan inflows of US$162.5mn from multilateral institutions for the financial sector, however only US$40mn was received.

Domestic loan receipts totaled $65,474.8mn thereby exceeding budget by 47.1%. The excess amount was in direct response to the need to finance a larger fiscal deficit in light of the adverse shocks to the domestic economy.

External amortization of $13,573.7mn was broadly on track with budget, increasing by only 3.9%. However, Government amortized $24,278.3mn more in domestic debt than the $53,122.3mn originally budgeted. Of this increase, $15,378mn relates to the pre-payment of FINSAC securities. The additional amortization payments were facilitated by proceeds from the divestment of FINSAC assets ($5,544.8mn), as well as from the divestment of JPSCo. The amortization of the FINSAC bonds, coupled with the cash payment of interest improved the liquidity positions of the financial institutions and facilitated a benign reduction in domestic interest rates.

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