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The FY 2003/04 budget was cast within a medium term framework that sought to reverse the deterioration that occurred in the fiscal accounts in FY 2002/03 and eliminate the deficit by FY 2005/06. The fiscal programme for FY 2003/04 was characterized by a substantial revenue effort and prudent expenditure management practices. These measures were expected to generate a marginal reduction in the debt/GDP ratio in FY 2003/04 and more rapid and sustainable reduction in that ratio over the medium term. The macroeconomic assumptions around which the 2003/04 budget was built were:
The targeted fiscal balance consistent with these assumptions was in the range of 5.0% - 6.0%, with the primary balance programmed at 12.6%. Budgeted expenditure of $171,396.1mn represented a 15.0% increase over FY 2002/03. Of this amount $162,350.0mn was allocated for recurrent spending, an increase of 15.1% over the previous fiscal year's outturn due largely to a 27.5% increase in interest payments and a 5.2% increase in wages and salaries. Public Debt Management at 48.8% accounted for the largest portion of the recurrent budget with Education Affairs accounting for 13.5%. Capital expenditure was allocated $9,046.1mn, an increase of 18.8% over 2002/03. Roads accounted for the largest proportion of the capital budget (23.8%) and Economic and Fiscal Management accounted for 13.7%. Revenue and Grants were forecast at $147,062.9mn, a 24.2% increase over 2002/03. Tax revenue, budgeted to increase by 32.6% was expected to account for 90.9% of the total inflows. The tax revenue increase was expected to arise from:
In response to vigorous lobbying by various interest groups the Government adjusted some elements of the new tax measures. Revenue lost as a result of the adjustments is estimated at $3,000.0mn. Fiscal performance during the first quarter generated a deficit of $13,903.2, which was 28% better than budgeted. A primary surplus of $6,150.0mn was generated, which was 127.8% higher than programmed for the quarter. The second and third quarters, however, were challenging with expenditure in excess of projections and revenue lower than budget leading to a higher than budgeted deficit. The adverse fiscal deviation during this period was driven by higher domestic interest payments as the effect of the significant rise in interest rates toward the end of the previous fiscal year materialized. In light of the significant interest rate impact and the adjustments to the tax revenue measures the Government revised the targeted fiscal deficit to 6.9% of GDP. Notwithstanding this revision the Government took strong and decisive action to bring the deficit within the range of the original target of 5% to 6% of GDP. Accordingly, capital and recurrent programmes were considerably curtailed and an aggressive drive was undertaken to boost revenue flows. This effort was quite successful with revenue inflows during the fourth quarter soaring above budget by 16.4%. As a result the fiscal accounts generated a surplus of $6,614.9mn in the final quarter, 87.3% better than originally targeted. This outturn reversed the deviation that occurred in the second and third quarters. Provisional data indicates that the Central Government met its fiscal targets for FY 2003/04. The fiscal accounts generated a deficit of $28,201.5mn or 5.8% of GDP, which was much better than the revised target of 6.9% and well within the original target of 5.0% - 6.0%. The primary surplus of $59,983.0mn, or 12.3% of GDP was also in line with budget. Revenue and grants amounted to $151,405.8mn, an increase of 3.0% over budget due mainly to higher than programmed inflows from capital and non-tax revenue. Expenditure of $179,607.3mn exceeded budget by 4.8%. The higher expenditure was largely due to a significant increase in domestic interest cost arising from the increase in interest rates. Wages and salary payments were also above target but these were offset by significant reductions in capital and recurrent programme expenditure. Tax Measures & User Fees As a critical part of the strategy to arrest the large fiscal deficit and the growing debt burden the Government sought to increase revenue intake with a package to yield $14,844.0mn as outlined in the table below.
A Parliamentary Revenue Committee under the Chairmanship of the Honourable Minister of Finance and Planning was established to review the tax measures following representations by various interest groups. Following consultations and presentations by these groups, a number of adjustments were made to the proposed tax measures. Among the adjustments were the replacement of the 4% cess on imports (to be credited against corporate income tax) by a 2% customs user fee and the reverting of a number of goods and services to exempt or zero-rated status with respect to GCT. Imposition of the 15% GCT on lottery winnings was initially adjusted to a 15% bet winning tax and this was later replaced by a $15,000 threshold for prizes for application of the 15% bet winning tax. Taxation Committee The last comprehensive review of the tax system was conducted in the mid 1980's and led to a simplification of the income tax system with the replacement of multiple rates by a flat personal income tax rate in 1986 and introduction of the GCT in 1991. The Government in recognizing the need for a new review appointed a Tax Committee in June 2003 with nominees from the Opposition and special interest groups under the Chairmanship of Mr. Joseph M. Matalon. Following the appointment of this Committee the Government contracted the services of a technical team from Georgia State University (GSU) who had conducted the mid 1980's review, to carry out a comprehensive review with a view to reforming the tax system. This review is slated for completion and final presentation to the Committee and the Government in September 2004. Memorandum of Understanding Against the background of the growing wage bill and the need to establish sustainability of the fiscal operations the Ministry of Finance and Planning (MOFP) took steps to reduce this growth through a directive to Permanent Secretaries and Heads of Departments in September 2003 that there should be no creation of new posts, no filling of vacant posts and no reclassification or upgrading of existing posts unless approved by the MOFP. Following the implementation of this policy and recognition by the Jamaica Confederation of Trade Unions (JCTU) of the need to contain the growth in the wage bill, the Government and the JCTU after months of discussions signed a historic Memorandum of Understanding (MOU) for the public sector on February 16, 2004. The main tenets of this MOU are:
Supplementary Budget Faced with an acute shortfall in revenues, increasing expenditures and worsening debt ratios, the government recognized that it was no longer possible to achieve the programmed fiscal target. By end-November the fiscal deficit stood at $29,198.7mn, $15,002.5mn over the budgeted amount and against this background the GOJ presented the First Supplementary Estimates in December 2002. These Estimates reflected a revision in the fiscal deficit target from 2.5% to 8.4% of GDP, occasioned by a projected $13,459.7mn, or 10% increase in expenditure above the approved budget and a $10,593.4mn, or 8.5% shortfall in revenue and grants. New IMF Monitoring Arrangement Following the IMF's decision to discontinue Staff Monitored Programme (SMP) arrangements, the Government and the IMF pursued discussions to identify a replacement programme that would facilitate IMF monitoring of the implementation and progress of Jamaica's economic programme. Technical discussions in March 2003 have set the groundwork for a new IMF monitoring arrangement effective in fiscal year 2004/05.
Fiscal operations in 2003/04 were characterized by an impressive first quarter performance with a considerably lower than programmed fiscal deficit, followed by significant slippages in the second and third quarters and a surplus in the fourth quarter ending the year on a very positive note. The fiscal operations generated a deficit of $28,201.5mn or 5.8% of GDP that was on target with the originally programmed deficit of 5% - 6% of GDP. Influenced by the over-performance in receipts from the capital and non-tax category, revenue and grants surpassed target by 3.0%. Expenditure was 4.8% higher than budgeted. The fiscal deficit was financed through an increase in net borrowing, mainly from the domestic market. It should be noted, however, that the Government raised more funds on the external capital market than originally programmed, in spite of adverse movements in sovereign credit ratings and unfavourable market conditions during the first half of the fiscal year. Also noteworthy is the fact that simultaneous with the poor outturn of the fiscal deficit in the second and third quarters, the primary surplus remained impressive, ending the year at a high of 12.3% of GDP. This impressive primary surplus illustrates the enormity of the fiscal consolidation efforts and underscores the point that lower interest rates and the attendant containment of debt servicing costs are paramount to returning the fiscal accounts to a surplus in the medium term.
Revenue and Grants Tax Revenue, which accounted for 86.6% of total revenue, grew by 27.4% over FY 2002/03. This performance largely reflected:
Tax revenue collections totaled $131,087.5mn, a shortfall of $2,605.3mn or 1.9% against the budget. This shortfall was due to:
In light of the $3,000.0mn given up from the changes to the tax package the shortfall of $2,605.3mn indicates that tax revenue would have exceeded target if the measures were implemented as proposed. Income and Profit taxes exceeded budget by 8.2% but this performance was outweighed by shortfalls of 12.2% and 2.3% in the Production and Consumption and International Trade categories, respectively. The main item that fell below budget was GCT (Local and Imports), which was the item most significantly affected by the changes to and delays in implementation of the tax package. On the other hand PAYE, Tax on Interest and Stamp Duty (Local) were significantly ahead of target.
Income and Profit Taxes Receipts from the income and profit tax category amounted to $54,265.1mn, an increase of $4,131.5mn, or 8.2% over budget. The main contributors to this increase were PAYE, Tax on Interest and Company taxes. PAYE, which totaled $27,450.7mn, was buoyed by higher wages and salary payments and considerable effort by the tax authorities to combat evasion and improve compliance. This effort is ongoing and as such the good performance of PAYE is expected to continue over the medium to long term. Collections from Withholding Tax on Interest totaled $14,823.4mn, which was $1,559.1mn more than budgeted. This increase was less than what would have been expected from the significant increase in interest payments. Collections were however dampened by higher than anticipated refunds and delays in amending legislation to remove tax-exempt status from some public sector entities. The amended legislation that is now in place has broadened the withholding tax base and augurs well for improved collections in future years. With respect to Company taxes, collections of $9,269.8mn were 6.4% better than budgeted and 30.2% ahead of FY 2002/03, representing a real increase of about 14%. This buoyancy is reflective of the improved performance of corporations over the past year and the overall improvement in the real economy.
Environmental Levy Government is reviewing required administrative processes for implementation of the environmental levy. There was therefore no collection from the levy during FY 2003/04 and the anticipated inflow of $192.2mn is now programmed for FY 2004/05.
Production and Consumption Taxes Production and Consumption taxes totaled $41,225.5mn, which were $5,702.4mn or 12.2% below budget. The items largely responsible for the shortfall were GCT and SCT. With respect to GCT, collections of $22,149.3mn were $5,657.2mn less than budgeted due largely to the fact that the proposed measure to widen the base was not implemented as envisaged in the budget. Following robust lobbying by various interest groups the Government made adjustments to some of the announced measures. SCT receipts fell $1,447.8mn or 20.5% below budget due mainly to lower collections from Petrojam arising from production downtime at the refinery. The Petrojam refinery was closed for about six months for upgrading of the facility. Despite the overall shortfall within the category, all the other items registered increases over budget, most notably Stamp Duty and Education Tax. A creditable performance was registered by Stamp Duty, which at $4,887.6mn surpassed target by 24.9% and collections in FY 2002/03 by 28.3%. Education Tax of $5,712.0mn, which exceeded budget by $209.0mn, was buoyed by higher wage payments while the transfer and sale of several high-value properties contributed to the increase in Stamp Duty. Collections from Betting, Gaming & Lottery (BGL), which totaled $1,094.2mn were 1% above budget and 22.4% ahead of the previous fiscal year. This increase occurred despite the loss of market share by the official games (notably the Cash Pot game) to illegal games following the imposition of the bet winning tax. The Lotto game, however, was not negatively affected by the tax and the higher receipts from the Lotto compensated for the reduction from the Cash Pot game thereby contributing to an increase in overall inflows to the Consolidated Fund.
International Trade Taxes This category of taxes amounted to $35,596.9mn, which was 2.3% less than budgeted. All items recorded shortfalls against the budget except SCT, which surpassed budget and collections in FY 2002/03 by $2,128.1mn (42.4%) and $2,696.6mn (60.5%) respectively. The increase in SCT was influenced by higher collections from Petrojam arising from the increased importation of refined petroleum due to the temporary closure of the refinery. Custom Duty and GCT receipts of $12,267.5mn, and $14,359.0mn, respectively, were below budget by 5.3% and 8.8%. The depreciation in the value of the Jamaica dollar boosted collections from these items, however, this was outweighed by changes to the tax package, delays in legislative amendments and lower than anticipated imports. Receipts from travel tax totaled $959.7mn, 41.5% short of budget and 35.7% below last year as collections from Air Jamaica continue to fall below expectations. Despite the shortfall against budget, International Trade Taxes increased by 26.4% over last fiscal year. In addition to the increase arising from the higher importation of refined petroleum and related products, the increase over last year was also influenced by administrative measures implemented by the Customs Department to combat evasion, the imposition of new tax measures and the depreciation of the Jamaica dollar against the US dollar.
Non-tax Revenue Non-tax revenue totaled $9,044.0mn, which was $1,240.1mn (15.9%) better than budget and $4,161.1mn ahead of FY 2002/03. This buoyancy was largely due to higher departmental revenues and the impact of the 2% Customs User Fee, which netted more revenue than anticipated. Collections from the Customs User Fee amounted to $4,000.2mn, compared to the budgeted $3,3394mn.
Bauxite Levy The bauxite/alumina sector has shown considerable buoyancy, registering significant output growth during 2003. This growth, alongside higher metal and alumina prices and the depreciation in the exchange rate (J$/US$) has contributed to bauxite levy receipts increasing by 21% over budget and 21.3% over FY 2002/03 to total $2,137.9mn. Capital Revenue Capital revenue collection of $8,596.7mn was $5,719.7mn higher than budgeted. This increase stemmed largely from the proceeds of $6,892.4mn, compared to the programmed amount of $600.0mn, from the Financial Institution Services (FIS), the institution that took over control of the assets held by FINSAC. Grants Grant receipts totaled $539.6mn and fell below budget by $382.0mn. The main factor behind the shortfall was the non-receipt of $435.5mn from the European Union for Support to the Economic Reform Programme (SERP III). Also contributing to the shortfall was the slower than projected disbursement of Grant funds for capital projects due to the curtailment of capital expenditure. This was however partially offset by the depreciation in the value of the Jamaica dollar. Expenditure Expenditure for FY 2003/04 amounted to $179,607.3mn, an increase of $8,211.2mn, or 4.8% over budget. The main areas of increase were domestic interest payments and wages and salaries as the other areas were contained below budget. The containment measures were mostly effected to recurrent and capital programmes, which are the areas of greatest discretion in the budget. The compression was however nullified by significantly higher inescapable spending. Recurrent Total recurrent spending was $173,917.1mn, an increase of $11,567.1mn above budget. Wages and salaries were above budget but this was somewhat offset by a reduction in recurrent programmes. Considerable savings were realized from lower external interest cost but these were outweighed by higher domestic interest cost resulting in total interest payments being higher than budget. Programmes Spending on recurrent programmes totaled $25,269.5mn, a sharp reduction of 12.8% against the budget and 8% below FY 2002/03. This level of spending represents a considerable reduction in real terms. The cuts in recurrent programmes were effected to compensate for increased spending on wages & salaries and interest payments in order to ensure the fiscal targets were achieved. Of note, these cuts took place despite costs associated with increased pension payments, higher utility and traveling costs and the holding of Local Government Elections. Wages & Salaries Wages & Salaries totaled $60,463.1mn, which was $6,300.1mn above the amount budgeted. This increase occurred against the background of higher than programmed new rates and retroactive payments resulting from, inter alia:
In light of these developments the contingency provision in the budget was inadequate to cover the increased costs.
Interest Total interest cost of $88,184.5mn exceeded the amount budgeted by $8,972.9mn. At this level interest payments constitute 49.1% of total expenditure compared to 41.7% in FY 2002/03. Also, interest payments consumed 58.5% of total revenue compared to 52.4% in the previous fiscal year. With respect to external interest payments there was a reduction of $2,027.2mn, or 10.8% against the budget for total payments of $16,723.8mn. This reduction occurred despite the additional cost arising from depreciation in the value of the Jamaica dollar. The impact of the depreciation was however outweighed by lower than projected interest rates on loans from multilateral creditors. Domestic interest payments amounted to $71,460.7mn, which was $11,000.1mn above target and a sharp 52.3% increase over FY 2002/03. The considerable increase in the interest bill was largely attributed to:
Capital Consequent on the revenue shortfall that occurred during the middle of the fiscal year and the increased level of non-discretionary spending (domestic interest and wages and salaries payments) there were significant cuts to the capital budget. Expenditure on capital projects amounted to $4,848.1mn, which was $3,550.7mn (42.3%) less than budgeted. This level of spending was considerably less than the amount for last fiscal year, with the 31.4% cut representing a substantial real reduction. The lower spending on projects arose largely from efforts by the Government to ensure fiscal targets were achieved. The other category of capital expenditure, payments to the IMF#1 Account, which totaled $842.1mn surpassed the target by 30.1% due to the revaluation of the SDR against the Jamaica dollar. Loan Receipts External loan receipts amounted to $24,131.8mn, an increase of $8,234.6mn over budget. The bulk of this additional amount was raised from the capital market as despite the unfavourable conditions that existed for the greater part of the year the Government raised the equivalent of US$353.0mn, compared to the budgeted amount of US$250.0mn. Loans raised from domestic sources totaled $108,148.9mn, an increase of $7,609.7mn over budget. Most of the domestic loans were raised during the second and third quarters to finance the larger deficit and higher amortization payments. Amortisation Amortization (principal repayments) payments of $99,197.6mn were 9.8% more than the amount originally budgeted. The higher than programmed payments assisted in containing the growth of the debt stock. Domestic amortization payments totaled $81,857.5mn, an increase of $5,129.3mn over budget. This increase was due mainly to the following factors:
With respect to external amortization, total payments amounted to $17,340.0mn, which was $3,759.5mn more than budgeted. The depreciation in the value of the Jamaica dollar was partly responsible for the increased payments. View.. Interest Payments External loan receipts amounted to $24,131.8mn, an increase of $8,234.6mn over budget. The bulk of this additional amount was raised from the capital market as despite the unfavourable conditions that existed for the greater part of the year the Government raised the equivalent of US$353.0mn, compared to the budgeted amount of US$250.0mn. Loans raised from domestic sources totaled $108,148.9mn, an increase of $7,609.7mn over budget. Most of the domestic loans were raised during the second and third quarters to finance the larger deficit and higher amortization payments. Accounting for these significant deviations from projections require among other things an understanding of how interest payments are determined and understanding of the budget preparation process that is described further in Appendix 6. Domestic Interest Payments The domestic debt stock is comprised of both fixed rate and variable rate instruments. The estimation of interest payments due on existing fixed rate instruments is known in advance given the nature of the instruments. Interest payments on new fixed rate instruments will reflect market conditions at the time of issue. Projecting interest payments on variable rate instruments, however, involves assumptions regarding the expected level of interest rates in the future. In addition to interest payment, the exchange rate is another variable that is critical to the estimation of interest payments and has to be projected. It is therefore highly likely that variations will occur between projections and the actual outturn. Since approximately 75% of the interest payments on variable rate debt are made semi-annually, interest rates changes from October to March of a given fiscal year have minimal impact on payments for that fiscal year. Instead, the coming fiscal year is more impacted by the change. The 6-month Treasury bill yield is the benchmark rate used to project interest payments due on variable rate instruments. Interest payments due on variable rate instruments during 2003/04 would be determined from 6-month Treasury Bill interest rates existing at October 2002 through December 2003. Taking the method of determination of interest payments outlined above into account, an examination of the deviation of actual domestic interest payments in FY 2003/04 from projections is provided below. External Interest Payments On the external side the lower than budgeted interest payments arose from international interest rates being lower than projected and delays in accessing funds from the international capital markets meant that a projected interest payment within the year was no longer possible. The Planning Process The Estimate of Expenditure for 2003/04 was tabled on April 3, 2003. The deadline for finalizing the estimates would therefore have been mid-March 2003. At the deadline date for submission of estimates, 6-month Treasury Bill rates for the period October 2002 through February 2003 would therefore have been known and payments on variable rate instruments in 2003/04 linked to 6-month Treasury Bill rates prevailing over this period would therefore have been estimated with a degree of certainty. Expectations regarding the 6-month Treasury Bill rate over the period March 2003 through December 2003 would determine interest payments on the variable rate instruments for which payment were due September 2003 through to the end of the fiscal year. The adjustment in reverse repurchase rates by the Bank of Jamaica on March 26, 2003 increased the 6-month reverse repurchase rate from 19.65% to 33.15%. The 6-month Treasury Bill tender on March 26, 2003 saw the average yield moving from 18.45% to 33.47%. This level of increase could not have been predicted and had a negative impact on the cost of existing variable rate and fixed rate instruments. Also contributing to the increase in domestic interest rates were payments on loan receipts in excess of budget. The additional loan receipts arose from the larger than budgeted deficit which was itself partly due to the higher interest payments resulting from the interest rate increase. Wages and Salaries Over the five year period 1999/2004, the public sector wages bill has grown from $38.1bn to $59.0bn. Increasingly the wages costs for Health, Teaching and Security personnel have been impacting significantly on the wages bill. This is especially significant in the Health Sector where that sector represents 7.4% of the total number of positions and consumes 18.37% of the wages bill as opposed to the Civil Service, which represents 18.4% of the total number of positions and consumes 16.27% of the current wage bill. The table overleaf illustrates the wages bill as a percentage of the Gross Domestic Product and the Non-debt expenditure and the relative contribution of each sector to the wages bill in percentage terms. During, 2003 the major wage settlements were to weekly and daily paid employees and education officers for the contract period 2002/04. There are settlements pending for the Medical Officers, Nurses and other Health Professionals for the period 2002/04 and 2003/04. The Memorandum of Understanding signed on February 16th, 2004 between the Government and the Jamaica Confederation of Trade Unions calls for, among other things, wage restraint during the two year period, 2004/06. In its first year, the Memorandum of Understanding will stem the growth of the wages bill by $5bn. Consequently there will be considerable moderation in the growth of the wages bill in the medium term.
View.. Contribution of Sectors to Wage Bill
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