Parliamentary Opposition

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Mr Speaker, I speak at an almost unique period in our history with the politics of the country delicately balanced. It is not difficult for an Opposition, bent on mayhem, to disrupt the affairs of the country, even whilst staying within the law. But to what end?

We know and recognize that any such action is counter-productive as our domestic traditions at home and our reputation in the international community are much too important to allow short term objectives to warp our actions. In any event, it is imperative that the country, starting in this House, recognize that whilst there are short term gains in "sweating the small stuff", unless we begin to identify and focus on the real issues, the rest of the world will leave us behind.

My presentation will be structured as follows. First I will provide a brief review of the world economic situation. Next I will provide a brief review of the domestic economy for calendar year 2007 and where data are available for fiscal year 2007/08.

INDEX TO BUDGET PRESENTATION

Section Page No.

A: Introduction 1

B: World Economic Situation 6

C: Calendar Year 07, Fiscal Year 08/09 & 14
The Medium Term

D: Expenditure Budget 19

. Debt Servicing 19
. Transport & Works 20
. National Security 21
. Local Authorities 22

E: Financing the Budget 23

F: "Setting the Record Straight" 29

. Constituency Development Fund 29
. Bauxite Levy 31
. Income Tax Threshold 32
. Estate Duties/ Transfer Tax/Stamp Duties 33

G: Relationship With Multilaterals 35

H: Fundamental Issues 41

I: Conclusion 48

A: INTRODUCTION
1. Protocol/pleasantries.

2. Congratulate Minister Shaw on his first major presentation in that capacity. Major difference between making prescriptions as Opposition Spokesman/"Man a Yard" and having the responsibility to take action.

3. All in all, a commendable effort with an attempt to be even handed even whilst scoring political points - highlighting, even magnifying positives whilst minimizing even skipping negatives.

4. Essence of Political Debate.

5. Special acknowledgment of the Speaker of the House. First time in charge of proceedings. More on your responsibilities anon.

6. Thanks to all the officials, Heads of Departments, Heads of institutions, Financial Secretary, Governor of the Central Bank, Directors General of the Planning Institute and STATIN, Deputy Financial Secretaries, all the staff members who have toiled to produce the documentation in time for budget presentation.

7. Also acknowledgment, in absentia, of the Leader of Government Business.

8. This debate is a follow-up to the deliberations in the Standing Finance Committee. Do not wish to dwell too much on the negatives but the deliberations were marred by two deficiencies -

(a) Difficulties in making comparisons over fiscal years given changes in the structure of Government. In that regard the document was not very helpful. Will not go as far as the Minister of Industry and Commerce in condemning it.

(b) The behaviour of some members not only affected the progress of the deliberations, but perhaps even more important has damaged the image of Parliament and us as Parliamentarians.

9. Mr Speaker a great deal of the responsibility for ensuring order and proper decorum will rest with you.

10. The deliberations of the Standing Finance Committee, being the first major exposure by many Ministers, allowed us to identify those with a strong grasp of their areas of responsibility. Could single them out by name but I have communicated to them individually.

11. The presentations by the three of us selected to speak on behalf of the Opposition will be coordinated. The presentation by the Leader of the Opposition, the Spokesman on Industry and Commerce and by me, will reflect complementary positions around central issues, but with varying emphases.

12. In terms of the approach we will take I will begin by explicitly identifying what is not our objective.

(a) It is not our objective to highlight every failure, every abandoned promise. However, I should indicate that it is necessary to point to some glaring discrepancies in pursuit of the objectives of laying the foundation for the development of national positions on several fundamental areas of concern.

(b) It is not our intention to seek to trivialize serious issues, to seek to provide simplistic answers to difficult problems. There is never any time or place for such an approach. We, from the Opposition, give our commitment to Parliament and to the country that we will never take such an approach.

13. At the same time we will seek to identify fundamental issues where we, as representatives of the people, need to isolate and focus more on the concerns which bind us together rather than to highlight those matters which separate us.

14. Mr Speaker, I speak at an almost unique period in our history with the politics of the country delicately balanced. It is not difficult for an Opposition, bent on mayhem, to disrupt the affairs of the country, even whilst staying within the law. But to what end?

15. We know and recognize that any such action is counter-productive as our domestic traditions at home and our reputation in the international community are much too important to allow short term objectives to warp our actions. In any event, it is imperative that the country, starting in this House, recognize that whilst there are short term gains in "sweating the small stuff", unless we begin to identify and focus on the real issues, the rest of the world will leave us behind.

16. My presentation will be structured as follows. First I will provide a brief review of the world economic situation. Next I will provide a brief review of the domestic economy for calendar year 2007 and where data are available for fiscal year 2007/08.

17. I will then examine specific areas of the expenditure budget as well as how the Budget will be financed. I have included a section which I call "setting the record straight".

18. Related to this is a brief discussion on a desired relationship between Jamaica and the multilaterals. Finally I will look at some of the fundamental issues on which this Parliament through its various committees and in its deliberations should focus. I do this as these issues, along with a few others, will determine the country's future, regardless of which party holds political power.

B: WORLD ECONOMIC SITUATION
1. Anyone who seeks to remain abreast of international developments, will recognize that the world economy is at an interesting juncture.

2. I speak not only of rapidly increasing prices for energy and basic commodities, but more important the fact that fundamental changes are taking place in the world economic order.

3. At the heart of these changes is the growing recognition that the dominance of the US as THE world economic power is receding. The ability for the US to adjust to this reality is of importance not only to that country and its citizens, but also to those countries such as Jamaica, the economic survival of which is inherently intertwined with the fortunes of the US.

4. The upward movement in energy prices need not be rehashed at this stage. Even though these movements are erratic and reflect issues above and beyond normal supply and demand challenges, e.g. political uncertainty and instability, none of the movements have been in favour of oil importing countries - particularly ones which are virtually 100% dependent on imports, such as Jamaica.

5. We have obtained some relief through the generosity of our Caribbean neighbour, Venezuela, and once again I feel obliged to place formally on record, our gratitude to the Government of President Hugo Chavez for the Petro-Caribe Facility.

6. The data provided to me by the Minister of Finance indicate that to date, through this Facility, we have obtained loans at the concessionary rates totalling in excess of (US)$500 Million at an interest rate of 1% per annum for a 25 year maturity period.

7. This facility has allowed us to evade what would be the most damaging consequences of the sharp jump in energy prices in terms of the impact on the balance of payments.

8. Let me place on record sincere appreciation for the role played by our former Prime Minister, P J Patterson in working with President Chavez and with that giant of the twentieth century, Fidel Castro, in designing this facility which has given countries like Jamaica a chance to "stay in the ring".

9. Commodity prices have also moved and although not influenced to the same extent by the same political factors, these increases pose perhaps an even greater threat to social stability and development than energy prices. The rapidly growing economies of China and India, backed by their formidable international reserves, are demonstrating demand for commodities which have pushed the prices to unprecedented levels.

10. For the first time in several decades, social stability in many countries is being threatened by the potential for food riots, even in instances where countries posses the financial wherewithal to purchase.

11. The gravity of the crisis is reflected by the fact that food security and the prospects of shortages leading to riots and social instability has occupied deliberations at the two major multilaterals, the IMF and the world Bank.

12. I now turn to the state of the US economy. For a host of cosmetic reasons, the US officials continue to dodge the characterizing the present state as a recession. Regardless of this reluctance to make a formal admission, all agree that the US economy is in trouble. This is related not simply to the impact of the sub-prime crisis, but more fundamentally to the fact that the economy has not managed to adjust to changing world economy with a greatly diminished manufacturing sector and increasing reliance on other countries for critical inputs into their own productive activities.

13. Virtually all of us have been following the US Presidential Primaries with a greater interest than before. However, after we get past the special nature of this event where the Democrats are guaranteed to have a "first" in either a woman candidate or a black candidate, the fundamental problem relates to the US economy.

14. It is ironic that the US which, as the leading/dominant member of the multilaterals, has preached to countries like us about the inevitable nature of globalization and the need to readjust our economies is now itself resisting those changes.

15. This recognition that the market is not always right is a critical point to which I will return later in my presentation, particularly in light of the renewed reliance on the multilaterals for guidance.

16. Whatever the case may be, the fact is that the US economy is in trouble and our plans for growth and economic expansion must formally take this into consideration.

17. I also wish to say something about the US financial system. The sub-prime crisis has had a major impact on the US economy in terms of the loss of homes, the reduction in purchasing power as well as the fortunes of basic industries, such as forestry which provide inputs into the construction sector.

18. However, the probe into the sub-prime crisis has revealed that many of the premier institutions have been involved in practices which undermined the credibility of the financial system and betrayed the trust of their clients, savers and investors.

19. Almost incredible to realize that the US financial giants have had to be "bailed out" by funds from foreign countries and by the FED.

20. Some of the proposals which are now emanating from both Congress and the Administration can only be termed radical and it is imperative that we, in Jamaica, take an interest in the proposed changes.

21. One of the interesting points about this whole process is that we here, who have been so mentally enslaved to assume that the so called developed world has thought through all of these problems, will be surprised to see that many of the regulatory steps which we have long taken to improve our own financial sector, are only now being considered by the US authorities.

22. Upcoming visit to Washington.

23. From this perspective, the future of the US financial sector is of importance to us not only in terms of the fact that the US has been the primary source of credit for us, from the private financial market, but also in terms of lessons which can be learnt.

24. Finally, there is the issue of the US dollar to which our currency is pegged. The US dollar has been, is, and will for the foreseeable future be, under pressure.

25. The rationale is simple. This weakness relates not only to the problems faced by the US economy but also to the debilitating effects of the war in Iraq.

26. The latest data indicate that the war in Iraq cost the US taxpayers just over (US)$12 Billion per month. To put this matter into perspective the budget which we are discussing is just under (US)$7 Billion. What this means is that in each month the US spends nearly twice our annual national budget on a war which is leading nowhere and has no popular support.

27. When this massive expenditure on the war is combined with declining production, particularly in manufacturing, as well as the multiplier effects of the sub-prime crisis, the weakness of the US dollar against other major tradable currencies is a logical outcome and this logical outcome translates into difficulties for us Jamaica.

28. All the above means that we are faced with significant challenges and our best chance is to seek to cushion the blows and simultaneously to diversify our economic linkages. This is not a new discovery to us on this side. It is one of the underlying reasons why we sought to become involved in initiatives which would diversify our options in terms of sourcing energy.

29. The country must move to the point of recognizing that our economic linkages should not be dictated by the influence of any other country, regardless of how highly we regard them, but rather by what is best for Jamaica. This speaks to all our economic initiatives through the various ministries but particularly through the Ministry of Foreign Affairs and Foreign Trade and through the Prime Minister. Enough said.

C: CALENDAR 07, FISCAL YEAR 08/09 AND MEDIUM TERM

1. It is not necessary, nor does time permit, a comprehensive review of all the data demonstrating economic outturn for calendar year 2007 and fiscal year 07/08. I will focus on but three.

2. The first is the fiscal outturn which the Minister triumphantly announces to be 4.7% which he said bettered his initial projection of 5.5% of GDP. Two points which I wish to make and I will move along. The first is that the way in which this 4.7% of GDP was achieved is not "new technology."

3. Every Minister knows that in the last six weeks of the fiscal year, very little was done except to pay salaries. I will not go into details as to what was not done as there will be claims that I have a "mole" in every ministry.

4. However, there were a couple other tricks. The first is that a deficit target of 4.5% was that which was announced when I spoke a year ago. When this Administration took over they indicated that because of all the new commitments which had been "discovered", they were obliged to raise the deficit target to 5.5%.

5. The Minister has not indicated where these additional expenditure were in the new budget so he simply raised the target from 4.5% to 5.5% and then having made his new target he now triumphantly indicates that he has bettered the target.

6. Where did the additional revenues come from? He does not indicate that he, who is now in charge as "man a yard", has missed the original deficit target of 4.5%.

7. How this was done also is that included in revenues are certain extraordinary items such as the Universal Access Fund as well as Venezuela's payment for its 49% holding in the refinery. Just out of interest, the Administration may wish to tell us if they are still of the view that the price which was negotiated for that 49% of the refinery was too low.

8. I wish to turn to another issue which the Minister of Finance in his review of the economy, studiously avoided. It is the level of inflation. Let me say, without any attempt to score points, that the Administration ignores this critical statistic at its own peril, as we are talking about literally life and death for many members of the society. Why do I say this?

9. That the inflation outturn for calendar year 07 was 16.8% and close to 20% for fiscal year 07/08, is worrying by itself. However, the greater concern, from the point of view of the Opposition relates to the sub-sector of "food". This grouping constitutes 55% of the CPI "basket" for lower income households.

10. When such households are faced with non-negotiable increases in their utility bills and food prices increase over the fiscal year by over 25%, as certified by STATIN, then logically there must be many households in crisis. As such the social stability of the country is being threatened and the budget, as outlined by the Minister of Finance, does not speak to this issue.

11. I am not speaking simply about the unemployed. I am also speaking about workers who each day find themselves facing increased expenses for non-food items which then translate into an inability to purchase basic foodstuff. Unless steps are taken to moderate the rate of increase in prices we will be facing a major social challenge in terms of household survival.

12. It was for this reason that we pleaded, to no avail, with the Government to increase the minimum wage a little more, in order to ease the burden on the lowest income groups.

13. Let me now turn to the matter of interest rates. Whilst every attempt has been made to seek to allocate blame for every challenge, either to external forces or to the sins of the past Administration, that excuse cannot hold for domestic interest rates.

14. Those increases are the full responsibility of the Administration, in general, and the Minister of Finance in particular. They cannot be passed off to anyone else.

15. The increases have been costly. When this Administration came to office, the 6-month Treasury Bill was at 12.21%. Since then the rate has moved to where it is at present 14.22%.

16. The importance of the Treasury Bill rate is that the interest rate on variable government instruments is recalibrated quarterly based on the results of the Treasury Bill auction.

17. As such, upward movements in the Treasury bill rates, have resulted in a significant jump in interest expenditure in the last fiscal year, and will have the same consequences in 2008/09.

18. For the good of the nation, both economic and social, we hope that the projected 9-10% inflation rate holds. If it doesn't, then we are in for rough seas on both the economic and social fronts. I note that the Minister, in discussing the assumptions underlying his inflation targets states that it is based on " an anticipated deceleration in rate of increases in international commodity prices". Nothing which we have seen so far this year gives any reason, other than "youthful optimism", for such a view.

19. Within that context, I sincerely hope that unrealistic assumptions have not been made on inflation, on domestic interest rates and consequently on interest payments simply to make the numbers fit a pre-determined deficit target.

D: EXPENDITURE BUDGET

1. Debt Servicing. It is generally recognized that debt servicing continues to dominate the expenditure budget. However a particular concern is the one area which is under our control - i.e. interest payments on domestic debt.

2. The theories on the main factors determining domestic interest rates are diverse. Apart from the various economic causal factors there is that intangible:- confidence. Hence the reduction in domestic interest rate is clearly related to domestic inflation, is clearly related to the budget deficit and also undoubtedly related to 'confidence'.

3. The plain fact is that the previous Administration had had marked success in bringing domestic interest rates down to around 12%, only for this improvement to be reversed following the election of the new government.

4. I pointed out then, and I repeat now, that there would have been a significant fiscal costs. The additional interest payments this fiscal year will be significant and that is on the assumption that there are no further increases during the fiscal year.

5. Transport and Works. One of the areas which has been under funded is that of "roads". This was clearly recognized by the Minister during the hearings of the Standing Finance Committee and he opined that he expected to supplement his meagre budget allocation by Members of Parliaments contracting his Ministry to effect road works in their constituency, financed from the Constituency Development Fund.

6. And we thought that these funds were going to be "additional". The fact is that we will have a Ministry of Transport and Works which will be expending hundreds of millions of dollars on wages under the recurrent budget but with very little to do in terms of capital projects.

7. Tourism. The treatment of the Ministry of Tourism is particularly puzzling. The allocation to that Ministry in current Jamaican Dollars is virtually flat, 07/08 compared to 08/09.

8. Even stranger is the manner in which overseas marketing has been treated. The Minister performed brilliantly during Standing Finance Committee, explaining how he would effect "miracles". But the plain fact is that his overseas marketing budget in US$ terms is the same as last year, which means a real decrease given that he will be seeking to expand marketing efforts in Europe and the Far East.

9. Regardless of how much faith we have in the Minister's abilities, this under funding of the main area which can assist in our balance of payment difficulties is puzzling.

10. National Security. I now turn to the sensitive and critical area of National Security. The way in which the allocation for this Ministry has been handled is not only bewildering but is a cause for worry. The devil is in the details. For several areas - e.g. the Staff College, the Training Branch and the Police Academy- the allocations for utility services have been slashed.

11. Those institutions must have discovered ways, unknown to the rest of the society, which could facilitate such a budgeted reduction. I sincerely hope their methodology falls squarely within the parameters of the law.

12. Another specific example of seeking to achieve targets by unrealistic budgeting is demonstrated by the allocation for the operations of the motor vehicle fleet of the Constabulary Force. The increase in this instance is a measly 10% - from $500 Million to $550 Million.

13. Again, if this allocation is to be believed, the management of the relevant department should seek to share their secret, not only with the rest of the government, but also with the rest of the motor vehicle owning population, as a 10% increase in current terms in this area translates into a cut of approximately 20%, when one takes into account the increase in the price of gas, tyres, batteries etc.

14. Local Authorities. There are also puzzling cuts in the area of services provided through the local authorities. The amount to be allocated from the consolidated fund is now a token figure of $400 Million, as opposed to $2.5 Billion for 07/08.

15. Similarly, in the area of payments for street lights, the allocation for FY 08/09 is $1.2 Billion, but the amount actually expended for the first few months of 07/08 (April through February) was in excess of $1.5 Billion. We need some explanation here.

16. Mr. Speaker, whilst I have given only a few examples, there are numerous others throughout all Ministries and Departments which demonstrate that, in an attempt to provide support for a few high profile initiatives, several other basic but crucial areas of operation are being starved.

17. This will translate simply into government grinding to a halt in terms of effective operations, with civil servants sitting around waiting for pay day, since there are not enough resources to carry out their basic tasks or even to pay for basic utilities.

E: FINANCING THE BUDGET

1. The financing of the Budget is dependent on two main sources - (i) debt and (ii) tax revenue. As regards debt, the government proposes to borrow $183.4 Billion to cover the fiscal deficits and the amortization payments. Of this amount $130.7 Billion will be raised from domestic markets and $52.7 Billion from external sources.

2. The debt/loan numbers were taken from the presentation given by the Minister but I wish to draw the House's attention to a document entitled "Debt Management Strategy", circulated over the signature of the Minister.

3. The reason I draw attention to this document is that this is an area where I received a great deal of criticism from the Minister in his previous incarnation, but there is nothing in this document which suggests any change of course as he had been urging over the years. Welcome to the real world!!

4. In fact, the document quite correctly points out that a factor which restricted achievement of some of the major objectives of the debt management strategy during 07/08 was "increasing domestic market rates and market preferences for variable rate securities at the shorter end of the curve".

5. Translated into layman's language, what this document is saying is that investors, faced with galloping inflation, were no longer willing to purchase fixed rate instruments but were demanding variable rate instruments where the interest rates would be adjusted on a regular basis.

6. We saw the effect of that reaction from the market over the last six months of the fiscal year, and unless the Minster is able to bring inflation under control this unhealthy trend will continue, since no rational investor will seek to gamble with his resources on fixed rate instruments, in the face of unpredictable inflation movements.

7. A specific example illustrates the point. Late last month, a 20-year fixed rate instrument at 15.50% yielded only $60M. At the same time a 3-year variable rate instrument yielded $4.9B.

8. This now leads to how interest rates in the variable instruments are set. I draw particular attention to paragraphs 23 and 25 of the document. One is headed "Increase the Use of the Auction System" and the other "Increased Transparency and Predictability".

9. Mr. Speaker, as you may well be aware, an unfortunate event took place late last year, when the government in an attempt to avoid the inevitable increase in interest rates, abruptly cancelled a scheduled auction which would guide the re-pricing of variable rate instruments.

10. The market at home and abroad revolted, and the Ministry of Finance was forced to back down and have the auction as was originally scheduled. I chose not to comment on the chain of events at that time, although there were several requests, from home and abroad, for me to give an opinion.

11. My advice to the Minister of Finance, and other members of his supporting political directorate, is that such behaviour is not tolerated in modern capital markets and any further attempts of this nature can have disastrous consequences, not only in terms of increased interest rates, but more so, in terms of the country's ability to access new funds.

12. Simply put this sort of behaviour does nothing to engender confidence, perhaps the most critical of ingredients for economic management.

13. The final point I wish to make in terms of the financing of the budget through loans, is that there needs to be constant monitoring of the international financial markets, given the unstable situation which currently prevails.

14. The Minister has projected a need for loans of approximately US$600 Million during the fiscal year. In previous years, we were often able to pre-fund our requirements thus eliminating the possibility of a crisis, which would require using a significant portion of the NIR.

15. Naturally, if push comes to shove, then that step must be taken and the new Administration and the country in general, will fully appreciate the reason why we sought to provide back up security by means of a "healthy" NIR.

16. I now turn to "the givebacks" of the revenue programme. I will first deal with the raising of the income tax threshold. To speak bluntly, the upward movement of the threshold in July is simply a token political act. In fact, it is a waste of time and an unnecessary administrative burden for firms and government departments as it translates into an increase of approximately $35 per week in take home pay for each worker.

17. A far better and "respectful" solution would have been to skip this first round and make the adjustment as of January 2009 more meaningful.

18. The adjustment of the Customs User Fees (CUF) whereby payment may be used as a tax credit for certified manufacturers is welcomed. If the truth be told, this was part of a more comprehensive and far reaching proposal advanced approximately 5 years ago, but which was hijacked by certain elements of the private sector, reportedly with support and encouragement from some present members of this House.

19. The Opposition welcomes this change.

20. The changes to Transfer Tax, Stamp Duties are again token moves made to compensate for loose commitments given by the Minister in an "off the cuff" speech. The fact is that the Matalon Report, which the Minister is fond of quoting, advocates fundamental changes of these taxes within the context of implementing a capital gains tax. It was recognized that there had to be compensation for the revenues lost. These token reductions do not represent the way to go and reflect the danger of seeking to substitute political "tinkering" for true tax reform.

21. In terms of the new taxes it would be a foolish Opposition which would seek to endorse the government's actions. Nonetheless, in terms of the increase in gun licences fees, these are still too modest. We should set, as a target, that the fees collected for gun licences should cover the costs of regulating this activity.

22. Revenue Projections. The Minister has laid great emphasis on significant increases from improved compliance and greater efficiency. I genuinely wish him all the best in his endeavours.

23. However, the projected increase of $44B, resulting from improved compliances simply not credible. Let us examine some of the specific tax areas.

24. Custom receipts can only increase by 16% in the short term if there is a large devaluation or a significant jump in luxury imports. The former occurrence would be disastrous and the latter unlikely.

25. A 21% growth in PAYE makes no sense, given the expected MOU settlement and the raising of the Tax Threshold. The only explanation would be a veritable EXPLOSION in private sector wages.

26. A growth of 39% in Corporate Tax collection is not credible, nor is a 29% growth in GCT collections. In terms of the latter area, an increased percentage of disposable household income will be consumed by expenditure on utilities and on basic foods. Very little left for those discretionary purchases which attrac