Identifier
Created
Classification
Origin
05KINGSTON1256
2005-05-12 20:30:00
UNCLASSIFIED
Embassy Kingston
Cable title:  

GOJ PROPOSES BALANCED BUDGET FOR 2005/06

Tags:  ECON EFIN JM 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 03 KINGSTON 001256 

SIPDIS

STATE FOR WHA/CAR/ (WBENT),WHA/EPSC (JSLATTERY)

SANTO DOMINGO FOR FCS AND FAS

TREASURY FOR L LAMONICA

E.O. 12958: NA
TAGS: ECON EFIN JM
SUBJECT: GOJ PROPOSES BALANCED BUDGET FOR 2005/06

REF: 04 KINGSTON 895

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SUMMARY
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UNCLAS SECTION 01 OF 03 KINGSTON 001256

SIPDIS

STATE FOR WHA/CAR/ (WBENT),WHA/EPSC (JSLATTERY)

SANTO DOMINGO FOR FCS AND FAS

TREASURY FOR L LAMONICA

E.O. 12958: NA
TAGS: ECON EFIN JM
SUBJECT: GOJ PROPOSES BALANCED BUDGET FOR 2005/06

REF: 04 KINGSTON 895

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SUMMARY
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1. (SBU) Finance and Planning Minister Omar Davies proposed
Jamaica's 2005/06 fiscal budget on April 14, 2005. The
budget, which is formulated within a medium term program
aimed at eliminating the fiscal deficit, increasing growth
and reducing the debt to GDP ratio, is forecast at USD 5.7
billion. This represents a decline of 5.8 percent over the
2004/05 revised budget. Debt-servicing costs of USD 3.7
billion, will again account for the largest share (more than
65 percent) of the budget. The new tax package is projected
to yield about USD 153 million. The budget has drawn mixed
reactions, with opposition spokesman on finance Audley Shaw
stating that Davies has again concentrated only on revenue
earning measures. However, a Jamaica Chamber of Commerce
contact told emboffs that while the private sector was not
happy with the budget process, he could not overemphasize
the importance of eliminating the fiscal deficit. While the
new tax measures will be burdensome, the balanced budget
objective is expected to reduce the GOJ's appetite for debt,
further reduce interest rates and increase investment,
growth and employment. End Summary.

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MEDIUM-TERM FRAMEWORK FOR 2005 TO 2008
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2. (U) On April 14, Minister of Finance and Planning Omar
Davies presented his twelfth budget formulated within a
three-year macroeconomic program aimed at eliminating the
fiscal deficit and generating moderate fiscal surpluses
thereafter. The medium-term program has also targeted an
increase in the primary surplus, a gradual reduction in
inflation and a rebound in real GDP growth. The reduced
borrowing requirements, in light of a balanced budget
combined with higher levels of economic growth, are expected
to result in a reduction of the debt-to-GDP ratio.
2004/05 2005/06 2006/07 2007/08
Inflation (%) 12.4 9.0 8.0 6.0
Real GDP Growth (%) 1.0 3.6 3.0 3.5
NIR (USD Billion) 1.9 1.9 2.1 2.2
Debt/GDP (%) 136.6 125.7 113.9 103.0
Fiscal Bal/GDP (%) -4.8 0.0 0.5-1 1-2
Primary Bal/GDP (%) 11.8 13.8 14.0 14.0
Source: Ministry of Finance and Planning


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EXPENDITURE BUDGET
--------------

3. (U) The expenditure budget for 2005/06 amounts to USD 5.7
billion or 5.8 percent (USD 310 million) more than the
revised budget for 2004/05. This level of expenditure also
represents a real decline of 6.6 percent, reflecting the
GOJ's commitment to a balanced budget. Of the total
expenditure budget, USD 3.1 billion, or 54 percent, is set
for recurrent or day-to-day spending, while the other 46
percent (USD 2.6 billion) is slated for capital spending.
While interest payments of about USD 1.4 billion will again
absorb the lion's share of recurrent spending, the
allocation represents a real decline of almost 19 percent.
The contraction in interest payments is a direct result of
consistent reduction in interest rates and has freed up over
USD 627 million for social services. Wages and salaries of
USD one billion also declined by 15.7 percent in real terms
due to the Memorandum of Understanding (MOU) between the GOJ
and trade unions (reftel).


4. (U) The reduction in interest payments has also freed up
extra resources for the physical development of the country
following years of neglect. Capital projects will account
for USD 284 million, or 11 percent, of the capital budget.
This represents a 57 percent jump over the allocation for
2004/05. The remaining USD 2.3 billion of the capital
budget will be consumed by principal payments, up 12.1
percent due to the repayment of a USD 250 million Eurobond
maturing in June 2005. This allocation to principal
payments, combined with the USD 1.4 billion in interest
payments, will bring debt servicing costs to USD 3.7 billion
or 66.3 percent of the budget. This compares with USD 3.6
billion or 67.3 percent of the revised budget for 2004/05.
Of the remaining budget, only USD 2.1 billion, or about 23.7
cents out of every dollar, will remain for non-debt
expenditures. In keeping with its commitment to improve
education, the GOJ allocated USD 621 million (up 9.6 percent
in real terms),or 32.5 percent, of the non-debt budget to
the sector. National security and health have been
allocated USD 280.3 million and USD 220 million,
respectively.

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FINANCING THE BUDGET
--------------

5. (U) The financing of the 2005/06 expenditure budget took
place within the context of a review of the tax system by a
committee appointed by the GOJ and headed by businessman
Joseph Matalon. The review, which highlights deficiencies
in the tax system, suggested a re-engineering from direct to
more indirect taxation. Given these recommendations as well
as the need to balance the budget, the GOJ proposed
borrowing only USD 2.3 billion (equivalent to principal
payments),4.7 percent less than in 2004/05. The GOJ also
projected a 14 percent increase in revenues and grants to
USD 3.2 billion. Higher revenues are predicated on the
trend during the last three years when revenues averaged
18.7 percent. The remaining USD 153.3 million is to be
covered by a new tax package. In keeping with the proposal
to shift the tax burden from income to consumption, most of
the new taxes (USD 153.7 million) will be sourced from
changes to the General Consumption Tax (GCT) regime. The
income tax threshold will be initially increased by over USD
800 per person and then by USD 400, costing about USD 25
million in revenues. Higher taxes on cigarettes will
provide USD 5.2 million. Additional revenues will flow
from: a two percentage points increase in the GCT on the
tourism sector, which brings it to half the 16.5 percent to
be charged on all other goods and services (USD 10 million);
a gross profit tax on gaming (USD 5 million); and, a revised
property transfer tax on death (USD 5 million).


6. (SBU) The GOJ frequently misses its targets, so emboff
asked Senior Fiscal Economist at the Ministry of Finance
(MOF) Courtney Williams about the robustness of the current
estimates. Williams said that, given the data the Ministry
is privy to, the estimates are "pretty realistic". Keith
Collister of the Jamaica Chamber of Commerce (JCC) in
supporting this position said the key factor was that most
of the underlying assumptions were credible. He opined that
the tax measures might well be understated to provide a
cushion in the event of a shock to the economy. These
positions are also similar to those espoused by Ralston
Hyman of the Sunday Herald, who argues that increased
compliance could result in the GOJ collecting more revenues
than expected, since the forecast, given recent trends, is
conservative.

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COMMENTS ON THE BUDGET
--------------

7. (SBU) While the 2005/06 budget has been well received by
most stakeholders, the private sector has been less than
happy with the process. Collister told emboffs that,
following the last tax hike, Davies had promised
consultations with the JCC, but this did not happen.
However, Williams said that consultations are never a good
approach. Following the last tax hike, lobbyists convinced
Davies to cut the package by up to 50 percent. He said that
the Minister's decision to meet with hoteliers peeved with
the small increase (two percent) in taxes on the sector was,
therefore, out of courtesy. "Given the recommendations in
the Matalon Report, hoteliers should have expected, and
planned for, an increase", he continued. When asked about
the position being taken by hoteliers, Collister said he was
not sympathetic to the sector as it was already under-taxed.
In his response to the budget in Parliament, Audley Shaw, of
the opposition Jamaica Labor Party, stated that Davies has
concentrated primarily on the revenue earning measures,
while delaying those aimed at easing the income tax. Shaw
bashed Davies for increasing the tax burden, since the
mandate of the tax reform committee was to simply the tax
system without changing the tax intake (tax neutrality).
"The taxation strategy cannot be limited to the constant
need for financing corruption and waste and the ever
widening stock of debt," Shaw concluded.

8. (SBU) However, Hyman, who focused more on the balanced
budget objective, argues that balancing the budget is not
just an accounting exercise, but demonstrates to creditors
that the GOJ is serious about reducing borrowing and debt.
He said this should further reduce interest charges and free
up resources for education and national security. "A
balanced budget puts the banking sector in a better position
to free up resources to the private sector at lower rates,
leading to higher levels of investment, growth and
employment," he continued. Hyman also opined that a
balanced budget will help to maintain investor confidence in
the country at a time when external funds are getting more
expensive. Collister shared this view, telling emboff that,
while he was not sure if increasing GCT was the right
approach, he could not overemphasize the importance of a
balanced budget. When asked about the importance of a
balanced budget, Williams said the GOJ had little choice,
since creditors have been promised this outcome since 2003.
He said any other approach would have been catastrophic.

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COMMENT
--------------

9. (U) Following the decline in investor confidence and the
subsequent steep decline in the local currency at the
beginning of 2003, Prime Minister Patterson in a bid to stem
the hemorrhaging promised investors a balanced budget by
2005/06. The Patterson-led administration has made good on
its commitment so far, and a success in tax reform would
have many positive impacts on the country.


10. (U) The country still faces some pressing issues, chief
among them the neglect of essential services (fire
departments in particular). While reduction in interest
rates has freed up some resources, the debt-to-GDP ratio of
125.7 percent still places Jamaica among the most indebted
countries in the world. The MOU with trade unions (reftel),
which caps annual wage increases at three percent, will come
to an end in March 2006, and workers are expected to agitate
for higher wages and salaries to compensate for the period
under the MOU. Indeed, Collister told emboff that there has
to be some payback at the end of the period, especially
given the proximity to the general elections
constitutionally due by October 2007. In the final analysis,
barring shocks, the GOJ should be able to navigate through
the challenges and deliver a balanced budget in March 2006.
End Comment.

TIGHE