Auditor general validates rationale for suspension of fiscal rules
AUDITOR General Pamela Monroe Ellis has validated the Government’s rationale for the suspension of the fiscal rules provided for in the Financial Audit and Assessment (FAA) Act, based on the estimated severe impact of the novel coronavirus pandemic which has forced a return to the macroeconomic drawing board.
The auditor general outlined the basis for her validation in an independent report on the impact of the pandemic on the Government’s fiscal targets, which was tabled in the House of Representatives on Tuesday.
“Based on the results [of a review of briefs from the Planning Institute of Jamaica and the finance ministry], which I found to be similar to the ministry’s revised forecast for the central government accounts, I validate that the estimated fiscal impact of the eventuality — the COVID-19 pandemic — exceeds the GDP[gross domestic product] threshold of 1.5 per cent,” Monroe Ellis reported.
The auditor general said that in order to validate the estimated fiscal impact in the prescribed manner under the FAA Act, her team had reviewed details provided by the Planning Institute of Jamaica (PIOJ) outlining an amendment to the initial growth projections submitted for inclusion in the 2020/21 fiscal policy paper, as well as a submission from the Ministry of Finance and Public Service on the impact of COVID-19 on the 2020/21 fiscal operations, indicating a need for the suspension of the fiscal rules.
Auditors also examined the revised central government accounts arising from the COVID-19 pandemic that was presented in the first supplementary budget for 2020/21 on May 13.
Those estimates were stalled at the Public Administration and Appropriations Committee (PAAC) a week later, after the committee said it needed legal advice on whether the estimates were properly before it, given the extensive revision of targets and the fact that the revised budget pushed back, by two years, the legislated fiscal target of a 60 per cent debt to GDP ratio by 2026.
The Government and the Opposition then butted heads in Parliament over the passage of an amendment to the FAA Act, which gives legal backing to more than $17 billion in expenditure on COVID-19 social assistance programmes. The PAAC is now slated to examine the supplementary budget next week.
Monroe Ellis said a review of the finance ministry’s submission indicated that central government accounts balance would move to a deficit of 2.9 per cent of GDP at end of March 2021, from a surplus of 0.7 per cent outlined in the fiscal policy paper for this financial year.
“This represents a deterioration in the fiscal balance of 3.6 per cent of GDP. Of note, the primary balance was estimated to deteriorate by 3.0 per cent of GDP at end March 2021,” she said.
In order to validate the estimated fiscal impact, the auditor general said auditors also looked at the revised medium-term projections for nominal GDP, exchange rates, and interest rates, along with other macroeconomic indicators to project for central government revenue, expenditure, fiscal balance, and the public debt stock.
Monroe Ellis pointed out that the preliminary estimates from the PIOJ indicate that the decline in real GDP for the first quarter (April – June 2020) could be as much as 12 to 14 per cent, compared to April to June 2019.
In its rationale for the suspension of the fiscal rules, the finance ministry said the unprecedented fiscal burden imposed by the pandemic has “derailed the trajectory to attain the legislated debt to GDP target by financial year 2025/26” and indicates that the Government will need more time to reduce the public debt.
The ministry argued that while a two-year extension to meet the target may trigger negative reactions by international rating agencies, the Government and the International Monetary Fund agreed that it is a prudent policy response that facilitates efforts to effectively deal with the impact of the pandemic.
“The Ministry of Finance and the Public Service has generated a revised fiscal forecast and based on the macroeconomic framework this revised profile was presented in the first supplementary estimates. Those estimates revealed that the central government revenue and grants are expected to fall $81,000 million [13 per cent] below the FY [financial year] 2020/21 approved budget,” the finance ministry said.
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