- Financial analyst, Ralston Hyman says the soon to be enacted fiscal rules, which will dictate how the Government spends and borrows, should boost investor confidence.
- The fiscal rules, which are to be introduced this financial year, will force the country to live within its means.
- He pointed out that these rules will seek to lock in the gains the country has made in bringing the fiscal accounts down.
Financial analyst, Ralston Hyman says the soon to be enacted fiscal rules, which will dictate how the Government spends and borrows, should boost investor confidence.
Mr. Hyman who was speaking on the JIS current affairs programme ‘Issues and Answers’ recently, said the fiscal rules, which are to be introduced this financial year, as a requirement of the four-year Extended Fund Facility with the International Monetary Fund (IMF), will force the country to live within its means.
He pointed out that these rules will seek to lock in the gains the country has made in bringing the fiscal accounts down. He explained that the Government will not be able to spend more than it earns.
“If the Government collects revenues of 27 per cent of GDP (Gross Domestic Product), it means that our expenditure must be 27 per cent of GDP or less, except in exceptional circumstances where there is a natural disaster. This will result in fiscal discipline and boost investor confidence,” he said.
Both the Financial Administration and Audit Act and the Public Bodies Management and Accountability Act were amended in Parliament in March, effectively paving the way for the implementation of the fiscal rules.
The commitment by the Government to establish fiscal rules is stipulated under section 14 to 15 of the Letter of Intent submitted to the IMF in December 2013. It is aimed at transforming the economy and achieving growth.
These rules are essentially being established to help the Government achieve a balanced budget. They will also eventually limit the annual budgeted overall fiscal deficit of the public sector to achieve a reduction in the public debt of about 140 per cent of Gross Domestic Product (GDP), to no more than 60 per cent of GDP by 2025/26.
Fiscal deficit occurs when the government spends more than it earns from revenues and grants.
The IMF’s Letter of Intent states that the Minister of Finance and Planning will be required to explain deviations from the fiscal rule in a mid-term budget review in Parliament, and outline corrective steps to get back on track with the annual fiscal rule target.
Consequently, only in the event of severe external shocks, such as natural disasters, will the Minister of Finance be able to spend more than outlined in the budget, and that decision will require two-thirds majority support of the Parliament.
According to Mr. Hyman, implementation of fiscal rules is very important for Jamaica, in cultivating a culture of fiscal discipline.
“For 45 of our 51 years of independence we have been running fiscal deficits so there is no culture of fiscal discipline in Jamaica,” he said.
During his presentation in the House of Representatives on March 18, Minister of Finance and Planning, Dr. the Hon. Peter Phillips, noted that the maturity and capacity of the Parliament will be tested by the administration of this legislation.
“The international community, the financial markets, the multi-lateral agencies, private and official leaders are not convinced that we, collectively, have the fiscal discipline to prevent the future run-up of our debt. We need to prove them wrong,” the Finance Minister said.
The IMF identifies four types of fiscal rules that a country may enact. These are, debt rules, budget balance rules, expenditure rules, and revenue rules.
Debt rules sets an explicit limit or target for public debt in per cent of GDP, which is defined as all final goods and services produced in the country during a year.
Budget balance rules constrain the variable that primarily influence the debt ratio and are largely under the control of policymakers. These rules provide clear operational guidance and can help ensure debt sustainability.
Expenditure Rules set limits on total, primary or current spending.
Revenue rules sets maximum or minimum on earnings and are aimed at boosting revenue collection and/or preventing an excessive tax burden.
The choice of fiscal rule depends primarily on the Government, its goals, and the specific biases the rules need to address.
For Jamaica, a mixture of all the four rules will be enacted. Once the fiscal rules are in place, the Government will consider legal options for strengthening the sanctions regime, to enhance the credibility of the legislation, which according to the IMF, may include strengthening the oversight role of the Parliament in reviewing ministerial actions on recommendations by the Attorney-General and the Auditor General.
Minister Phillips said these additional regulations will be tabled this fiscal year.