Examination of Fiscal Policy Components - February 10, 2022

E EXAMINATION XAMINATION OF OF THE THE C COMPONENTS OMPONENTS OF F FISCAL ISCAL P POLICY OLICY P PAPER which was laid before the Houses of Parliament on February 10, 2022 OF THE THE APER

I reviewed the Fiscal Policy Paper (FPP), which was laid before the Houses of Parliament on February 10, 2022, in accordance with the Financial Administration and Audit (FAA) Act. Auditor Auditor General s General s Comments Comments The FPP met the requirements of the Third Schedule and included the minimum content under the Fiscal Responsibility Statement, Macroeconomic Framework and Fiscal Management Strategy. I adhered to the standards issued by the International Association of Supreme Audit Institutions and International Standard on Assurance Engagement (ISAE) 3000.

Auditor Generals Auditor General s Responsibilities Responsibilities Section 48B (6) of the FAA Act requires the Auditor General to examine the components of the Fiscal Policy Paper and provide a report to the Houses of Parliament indicating whether: - The Conventions & assumptions underlying preparation of the FPP comply with principles of prudent fiscal management. There are public bodies that do not form part of the specified public sector that were part thereof in the preceding fiscal year. Reasons given for deviations from the Budget are reasonable, having regard to the circumstances. A public private partnership involves only minimal contingent liabilities.

The Government suspended the Fiscal Rules in May 2020 but did not suspend the legislated Wage to GDP target. The projected Wage to GDP target for FY2022/23 is 10.9% and is projected to be 11.5% by FY2025/26, remaining above the legislated target of 9.0% of GDP. Performance against Fiscal Framework The Ministry of Finance, in response to our enquiry indicated that the legislated target is being considered for review.

a) Regarding the conventions and assumptions underlying the preparation of the Fiscal Policy Paper: Principles of Prudent Fiscal Management The revenue projections should be underpinned by realistic macroeconomic assumptions; Estimates of expenditure must be based on reasonable revenue projections; The public debt to be reduced to/ and maintained at a prudent and sustainable level; Risks must be identified/ evaluated, to enable cost- effective and appropriate risk mitigating measures.

a) Regarding the conventions and assumptions underlying the preparation of the Fiscal Policy Paper The FPP preparation largely complied with the conventions and assumptions of prudent fiscal management and the enhanced fiscal rules. What I found Various sources of fiscal risks were identified and strategies outlined to mitigate the impact on fiscal expenditure. Some public bodies will require further GOJ support; 4 PPPs have submitted claims or notice of their intent to claim, due to the impact of the COVID-19 pandemic.

GDP Trends and Variance Nominal GDP % Real GDP % 20 15 10 10.0 5 0 5.0 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 -5 0.0 -10 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 2023-24 2024-25 2025-26 -15 -5.0 -20 -10.0 Actual Target variance Actual Target variance Log. (Actual ) Log. (Target ) Log. (Actual ) Log. (Target ) -15.0

b) the reasons given, pursuant to subsection (5)(d)(ii) are reasonable having regard to the circumstances: The reasons advanced for deviations in the revenue from Budget, were largely reasonable. What I found for April- December 2021 relative to Budget Higher than budgeted inflows from International Trade resulted from better Travel Tax collections due to robust visitor arrivals; other components largely reflecting the impact of higher exchange rate on the values. Income and Profits mainly reflected a shortfall in PAYE collections despite improvements in the labour market. The assertion was that many newly employed persons were earning below the income tax threshold of $1.5 million. The underperformance of Production and Consumption was attributed to disruption in economic activity, which affected production and by extension, GCT collections. SCT (Local) was impacted by containment measures and lower production due to closure of the local refinery in October.

c) pursuant to my c) pursuant to my application of criteria application of criteria prescribed pursuant to prescribed pursuant to regulations made under regulations made under Section 50 (1), there are Section 50 (1), there are public bodies that do public bodies that do not form part of the not form part of the specified public sector, specified public sector, and identifying those and identifying those bodies (if any) which in bodies (if any) which in the preceding financial the preceding financial year formed part of the year formed part of the specified public sector: specified public sector: The FAA Act requires the Minister, no later than August 31, in every third year, to provide the Auditor General with a list of public bodies that the Minister wishes the Auditor General to consider for certification On October 18, 2019, the Ministry indicated that no public body met the requirement. The next request would be due by August 2022.

d) a public private partnership involves only minimal contingent liabilities The FPP identified that the Jamaica Ship Registry is a user pays PPP and is expected to be assessed for minimal contingent liability by the Auditor General. The FAA Act requires the Auditor General to assess whether a public private partnership (PPP) involves only minimal contingent liability accruing to the Government .

Fiscal Management Strategy Primary and Fiscal Balance 10.0 8.0 7.5 7.1 6.3 5.9 6.0 For FY2022/23, the Primary and Fiscal Balance projected at 5.9% and 0.3% of GDP, respectively. 5.3 5.1 5.0 targets are 4.0 3.5 % of GDP 2.0 1.2 1.1 The Primary balance is estimated to fall by 0.4 ppt relative to FY2021/22 while Balance is being maintained at 0.3% to FY2024/25, increasing to 1.1 % of GDP in FY2025/26. 0.9 0.3 0.3 0.3 0.3 0.0 the Fiscal -3.1 -2.0 -4.0 2018/19 2019/20 2020/21 2021/22 2022/23 2023/24 2024/25 2025/26 Primary Balance Fiscal Balance

Tax Revenue Revenue and Grants for FY2022/23 is projected at 30.3% of GDP, 1.5 ppt lower relative to the estimated outturn for FY2021/22. The ratio is projected to increase to 30.7% in FY2023/24, remaining flat at 30.3% thereafter to FY2025/26. Tax Revenue to GDP is projected at 27.1 % for FY2022/23, increasing to 27.8 % in FY2023/24 and levelling off at 27.6 % between FY2024/25 and FY2025/26.

Capital Expenditure is projected to increase to 2.6% of GDP in FY2022/23 and gradually to 3.3% of GDP by end- FY2025/26. As a percentage of GDP, this increase would be in line with pre-pandemic forecasted proportion of expenditure. Capital Expenditure 120,000.0 3.5 100,000.0 3 80,000.0 2.5 60,000.0 2 $Jmn 40,000.0 1.5 20,000.0 1 However, if the pandemic persists through the medium-term, then a downward revision would be expected to accommodate shifting priorities, similar to what obtained in the past. - 0.5 -20,000.0 0 2021/22 Estimate. 2022/23 Proj. 2023/24 Proj. 2024/25 Proj. 2025/26 Proj. 2018/19 2019/20 2020/21 Actual 66,204.3 70,392.9 49,184.1 Budget 59,825.1 72,110.6 53,514.3 54,201.3 65,067.3 87,210.2 95,269.3 100,660.3 Deviation from Budget 6,379.2 -1,717.7 -4,330.2 % of GDP (Act/Budg) 3.2 3.3 2.5 2.4 2.6 3.3 3.3 3.3

Medium-Term Debt (% of GDP) Total Public Sector Debt as a percentage of GDP is projected to decline to 96.3 per cent at end FY2021/22 down from 109.7% in FY2020/21. The downward revision in the debt ratio was due to higher than projected GDP growth which exceeded the increase in the debt stock. 140.0 0.20 130.0 0.15 120.0 0.10 109.7 110.0 0.05 100.0 - 96.3 The medium-term forecast for the Debt to GDP ratio reflects a continual downward trajectory consistent with the achievement of the legislative target of 60% or lower, by FY2027/28. 90.0 (0.05) 87.3 80.1 80.0 (0.10) 73.9 68.9 70.0 (0.15) 60.0 (0.20) 2022 Feb FPP Pace of Debt Deceleration

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