PIOJ Growth-Inducement Strategy - Planning Institute of Jamaica

1.0 Introduction
1.1 While the country has successfully passed both IMF tests, based on prudent fiscal
management thus far, the PIOJ is forseeing potential danger to the socio-economic
environment on the horizon if Jamaica continues with the current pace of fiscal
consolidation. Given the current global economic environment, characterized by the
slower than anticipated recovery, the present pace of fiscal consolidation may lead to a
worse than anticipated deterioration in the socio-economic indicators. This may hinder
Jamaica’s recovery efforts, possibly resulting in a double-dip recession and consequently
threatening the success of the fiscal consolidation programme.
1.2 Slower than expected recovery in external demand coupled with weak domestic
demand will inhibit the very critical private sector absorption. The recent socio-economic
developments and trends, coupled with the pending implementation of the
recommendations for Public Sector Transformation, have implications for:
further contractions in output, stalling the projected recovery process in 2010
halting the positive recovery trends in employment levels
further declines in consumer confidence.
1.3 The International Monetary Fund (IMF), in both reviews, highlighted that going
forward the performance of the programme could be adversely affected by the costs
associated with the security situation in May 2010 and recent external shocks. These
concerns are critical, particularly due to the absence of shock absorbers in the current
programme.
1.4 Given the pro-cyclical nature of the programme, the PIOJ is recommending,
among other things:
• an adjusted fiscal space, in combination with key structural changes in the
IMF SBA, to facilitate the incorporation of a growth-inducement strategy
which would make the financial/fiscal consolidation effort economic-growthfriendly
and, hence, sustainable.
2.0 Expected Outcome of the Fiscal Consolidation Programme
2.1 Fiscal Consolidation is the process by which a country controls its rising debt and
deficits through increasing revenue and/or reducing expenditure. Empirical studies
suggest that reducing expenditure is more likely to be sustainable and produce better
economic outcomes, as increasing taxes depress economic activities. Conditions for fiscal
consolidation leading to economic growth include the following:
• Private Sector - reduction in government expenditure through structural
reforms, signals to the private sector that the government will be smaller.
This implies less borrowing, which puts downward pressure on interest rates,
thus stimulating private investment and growth and, further, reduces market
expectation of future tax increases, which will spur private investment. This
requires that the government withdraws from areas in the economy in which it
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