Thu | Jul 2, 2020

Densil A. Williams | More creativity needed in COVID-19 budget cuts

Published:Sunday | May 31, 2020 | 12:31 AM

It is unsurprising that the Government of Jamaica returned to the Parliament with a recast Budget for 2020-2021 fiscal year. The developments since March 10, 2020, when Jamaica recorded its first case of the highly contagious COVID-19, are unprecedented. Almost all industry sectors closed whether through direct edict from the Government or proactive strategic planning by corporate and industry leaders. This resulted in significant slowdown in economic activities and in the outcome of serious contraction in the gross domestic product for, at least, 2020.

Various institutions concerned with economic planning have predicted massive contractions in the Jamaican economy for 2020. Predictions range from 3 –- 5.6 per cent. While the exact magnitude of the contraction is uncertain at this point – for one does not know how long the virus will be with us and how long the containment measures will last – what we do know, however, is that the impact will be massive and devastating to the local economy. Unemployment will skyrocket in the short- to medium-term, government revenues will fall, some expenditures, e.g., debt-servicing cost, will increase due to rapid depreciation of the Jamaican Dollar against the US Dollar. With this perfect storm on the horizon, it is no doubt that the Government would have had to recast its 2020-2021 Budget in order to take into account the extant realities of the new environment within which it will now have to operate.


On March 10, 2020, the Government presented a budget of circa J$853billion, J$50billion more than the Budget of the previous year. It presented this Budget against the background of declining economic growth despite the lowest levels of unemployment in the history of the country. Further, the growth outturn was moving in the opposite direction of the government’s stated objective of achieving 5 per cent growth in four years. As such, the Government, during the Budget presentation, had to find the necessary levers to stimulate growth in the economy to reverse the declining growth performance. The most attractive lever at March 10, 2020, was to use tax give-back to stimulate the consumption function in the aggregate demand equation and hope for a fillip in growth. As such, the Government gave back a whopping J$13billion in GCT by cutting the rate by 9.1 per cent, moving the GCT rate from 16.5 per cent to 15 per cent.

On the same day this give-back happened, Jamaica was faced with the grim news of COVID-19 hitting its shores. From then, it was downhill for the plans to stimulate consumption and drive growth. The Government, in its desire to save lives and contain the spread of the virus, played slavishly by the rule book of the WHO and implemented strict measures of containment for the virus. These measures led to serious contraction in spending, forcing many businesses to close and furlough workers. This affected tax revenues on the consumption side, on the corporate tax side and also on the income tax side. Also, with very limited activities at the ports, tax revenues from international trade were also reduced. Coupled with these declining revenues, the Government had to find circa J$10 billion to provide care packages to assist citizens who have been dislocated (i.e. became unemployed, closed their businesses, etc) by the containment measures. With these circumstances, it left the Government with very little choice but to review its spending priorities for the remainder of the fiscal year.


By May 13, 2020, two months after Jamaica started to implement its containment measures to deal with the spread of the virus, Finance Minister Dr. Nigel Clarke dropped the first sign of the devastating economic impact the containment measure have been having on the economy. His early estimates suggest that COVID-19 has brought about a J$120-billion bill to the public purse. A significant sum of J$81 billion in tax revenues has been lost, and he is predicting a 5.1 per cent reduction in GDP for 2020. I think when the final bill is settled, these figures will be revised upwards. The impact will be much more severe given that up to May 13, the containment measures were still two weeks from their loosening-up date. And further, it was not clear how the measures would be dealt with going into the month of June.

The Government’s response to these early estimates is to cut the budget of March 10, 2020, by roughly 1.7 per cent, taking off over J$15 billion from the expenditure, leaving a revised Budget of J$838 billion. The largest cut to this expenditure is from the Capital Budget, which moved from J$76 billion to J$46 billion, almost a 40 per cent cut.


By any stretch of the imagination, a 40 per cent cut in any budget is steep and devastating. At such a time when there will be great need for a lever to stimulate the local economy, bring back jobs, and allow people to have spending power, cutting the Capital Budget is the wrong thing to do. Some of the projects that might be sacrificed under this cut are those that are most critical to jump-start, and, I might add, restructure the economy going forward. These include projects such as:

• Boosting Innovation, Growth & Entrepreneurship Ecosystem (BIGEE)

• Rural Economic Development Initiative II

• Rural Road Rehabilitation Project (May Pen – Sour Sop Turn)

• Jamaica Integrated Community Development Project II

• Primary and Secondary Schools Infrastructure Project

• Major Rural Farm Road Improvement/Development Programme

• The Southern Coast Highway Improvement Project

All these capital projects have the potential to create much-needed jobs, give persons money in their hands for productive work done, jump-start the economy, and build back confidence in the consumption and investment class.

An alternative to cutting the J$30 billion from the capital project is to chop this off the interest and amortisation from the debt payments that will fall due in 2020-2021. Jamaica will pay both principal and interest on debt for the fiscal year of J$155 billion and J$132 billion, respectively. At a time when all hands have to be on deck to ensure that the ship continues to sail and people can be able to afford basic items such as food and medicine, debt holders should be very sensitive to these realities. Calling the debt holders and asking them to delay the repayment of 10 per cent of their interest and principal until there is some level of normalcy to our economy would not be unreasonable. This would be a better alternative to cutting the J$30 billion from the Capital Budget. The results from the capital spend will have a much more far-reaching impact on ordinary Jamaicans than the payment of the debt and interest. Yes, the capital markets might react, but saving lives is more important than a downgrade from rating agencies at this point. Governor Byles, on the monetary side, took the bold step by withholding dividend payments. The fiscal side now needs to act and negotiate with debt holders to delay the repayment of at least 10 per cent of their interest and principal. This will be a sacrifice well worth it.

- Densil A. Williams is professor of international business at The University of the West Indies. Send feedback to