SUMMARY OF FINDINGS

PFM strengths and weaknesses

The PEFA assessment shows that budget reliability at an aggregate level is generally sound with actual revenues and expenditures within a 10 percent variance of the original budget estimates for 2021/22 and 2022/23, narrowing to within 5 percent in 2023/24. At the same time, there have been variations in the administrative classification of expenditures, which appear to be partly due to mid-year reorganizations and reallocations. Together with the frequent use of supplementary estimates and reallocation of resources, particularly to employee compensation and debt service, this raises questions about the credibility of the overall initial budget. The capital budget outturns have also consistently fallen short of targets.

The chart of accounts and budget classification are well-detailed, offering administrative, economic, program, and functional classifications of receipts and payments at the Government finance statistics (GFS) 5-digit level. Nonetheless, the way in which concepts of capital and recurrent spending are distinguished in the budget (where capital spending does always results in acquisition of an asset), and the inclusion of financing items within receipts and payments, does not fully reflect international norms. In addition, the inclusion of a portion of the grants for public bodies within the “compensation of employees” object code line items is unorthodox and belies the otherwise opaque nature of the support to these entities. Other than such specific grants for compensation of employees, the manner in which the general grants received by such entities, and the revenue that they collect, is not fully disclosed and results in these entities being assessed as EBUs. Some budget entities also collect and retain own-source revenues which are not budgeted or disclosed and the extent of these EBUs also cannot be quantified at this time.

Budget documentation includes most of the essential elements required by the PEFA framework, such as fiscal balance, current year estimates, medium-term fiscal forecasts, and data on debt stock, fiscal risks, deficit financing, financial assets, and tax expenditures. A table setting out the fiscal implications of all revenue measures announced in the budget is also included with the budget documentation, but a similar document is not prepared for new expenditure policy initiatives. There is no reconciliation of the budget estimates with the previous year’s forward estimates. The budget documents also lack outturns for the most recently completed fiscal year, providing only ‘provisional’ actuals.

The GoJ's policy-based fiscal strategy and budgeting have been reinforced by amendments to the FAA Act, which set specific requirements for the budget call circular and the FPP as well specifying a fiscal rule on debt to GDP ratio. The FPP includes detailed macroeconomic projections and fiscal forecasts, supporting informed decision-making and strategic planning. The introduction of medium-term budget estimates has enhanced the credibility and comprehensiveness of fiscal planning.

The absence of a formal process for preparing and considering high-priority new spending proposals (and savings options) is a weakness. The absence of cabinet-approved (rather than ministry-approved) budget ceilings before the issuance of the budget call circular.

Regarding asset and liability management, the GoJ receives timely financial information from public corporations and subnational governments, enabling effective fiscal risk assessment. The development of a detailed fiscal risk statement and the implementation of the Public Investment Management System (PIMS) would provide a structured approach to identifying and mitigating fiscal risks. The Debt Management Branch (DMB) of the Ministry of Finance (MoF) has also strengthened debt management by implementing a monthly reporting system and producing a comprehensive Medium-Term Debt Management Strategy (MTDMS).

Public investment management has some weaknesses, with inadequate economic analysis for major investment projects. The absence of a centralized register for fixed assets, except for land, and incomplete asset management policies further exacerbate this weakness. The financial performance information for subnational governments and public corporations is not published in a timely manner, reducing transparency.

Budget execution is underpinned by a strong risk-based approach to compliance and control, systematic cash management, and the implementation of the Treasury Single Account (TSA). The use of the Government Financial Management System (GFMS) ensures reliable internal controls and segregation of duties, enhancing the integrity of financial transactions. Supplementary budget adjustments, although frequent, are conducted transparently, allowing for flexibility in addressing budget pressures. Predictability and control in budget execution, however, face challenges due to significant revenue arrears and gaps in revenue reconciliation between entities.

The presence of budget execution reports without analytical insights further limits the effectiveness of budget monitoring, and delayed bank reconciliations for budgetary and non-budgetary units for accounts outside the Treasury impact the integrity of financial records. While the financial parameters outlined in the FAA Act are commendable, the multiple outstanding audit certifications for budgetary and non-budgetary units are unacceptable for effective financial management and corporate governance.

The external scrutiny and audit process is robust, characterized by adherence to International Standards of Supreme Audit Institutions (ISSAI) and the INTOSAI Code of Ethics. The Auditor General’s Department (AuGD) conducts comprehensive audits covering most government expenditures and revenues, with audit reports submitted timely to the Legislature. The independence of the AuGD and its unrestricted access to records ensure effective and impartial audits, contributing to accountability and transparency.

Impact of PFM performance on three main fiscal and budgetary outcomes

The main objective of PEFA and PFM reform is to support sustainable development and better and more effective service delivery outcomes that meet the citizens’ needs and priorities. Progress is measured through the contribution of PFM systems and processes to the following three main fiscal and budgetary outcomes.

1. Aggregate fiscal discipline

Reforms in Public Financial Management (PFM) in recent years have supported the achievement of aggregate fiscal discipline in Jamaica, including amendments to the FAA which established a quantitative target for a debt-to-GDP ratio of 60 percent or lower by the end of FY 2027/28 and a fiscal balance that supports the achievement of the debt-to-GDP ratio. The progress towards these targets is notable, with gross government debt as a percentage of GDP decreasing from 94.2 percent in 2021/22 to 71.8 percent in 2023/24, reflecting prudent fiscal policies and effective debt management strategies. Fiscal discipline was also supported through general reliability in fiscal aggregate outturns (although challenges remain in terms of the reliability of the administrative and economic outturns).

The GoJ produces annually a Fiscal Policy Paper. The FPP, among other things, sets out the government’s fiscal strategy. It includes the Fiscal Responsibility Statement, a Macroeconomic Framework, and a Fiscal Management Strategy. The Macroeconomic Framework assesses economic growth prospects, underpinned by underlying assumptions and indicators of the medium-term trajectory for main macroeconomic variables. The FPP also references several qualitative objectives including improvements in simplicity, equity and efficiency of the revenue systems to support economic growth, commitment to fiscal discipline (in respect of declining expenditure ratio) and reduction in public debt interest.

The Fiscal Management Strategy within the FPP presents fiscal indicators, including annual public sector borrowing, fiscal balance, and primary balance, enabling measurement of economic performance and establishing targets. The FAA mandates that the FPP compare the outcomes of these fiscal indicators with previous targets and provide reasons for any deviations. Additionally, an interim FPP, is prepared as a mid-year update and includes the economic outturn of the previous fiscal year, fiscal performance of the first quarter, projections to the end of the fiscal year, and updated medium-term economic and fiscal projections.

Both the annual and interim FPPs contain a Fiscal Risk Statement, which outlines and assesses the government's exposure to fiscal risks. These risks include deviations from the macroeconomic assumptions used in preparing the FY 2023/24 budget and medium-term projections, as well as scenarios related to contingent liabilities from natural disasters, public bodies, public-private partnerships, judicial awards, wage settlements, and monetary policy. The statement highlights measures taken and those being explored by the government to mitigate these risks.

The availability of essential elements in budget documentation, such as fiscal balances, medium-term forecasts, debt stock data, and fiscal risks, supports effective fiscal planning. This information enables policymakers to make informed decisions on budget allocations, deficit financing, and managing financial assets. However, the lack of explanations for new expenditure policy initiatives and incomplete outturns for the most recent fiscal year may hinder comprehensive fiscal planning. The lack of financial reports covering Appropriations-in-Aid (AIA) and budget-funded public corporations, despite their significant share in expenditure and revenue.

The MoFPS Debt Management Branch’s (DMB) implementation of a system for monthly reporting and the preparation of a detailed MTDMS have contributed to prudent debt planning and monitoring. This strategy, tabled in the legislature alongside annual estimates, outlines the government's borrowing plan and ensures that debt levels remain sustainable. By having a structured approach to debt management, the government can mitigate fiscal risks associated with borrowing and maintain fiscal discipline by adhering to predetermined borrowing limits and strategies.

The framework for managing and controlling budget execution, including revenue and expenditure, is generally sound. This contributes positively to fiscal discipline by ensuring that resources are obtained and used as intended. The risk-based approach to compliance and control implemented by revenue collection agencies helps in meeting revenue targets, although significant revenue arrears older than 12 months remain a concern. Nonetheless, internal reconciliation and systematic transfer of revenues to treasury accounts support effective cash management within the TSA, enabling the MoF to forecast and manage cash flows effectively. This capability reduces the risk of overspending and helps in accommodating spending plans of Ministries, Departments, and Agencies (MDAs).

While treasury-managed accounts are generally reconciled within a six-week period, backlogged reconciliations for ministries such as the Ministry of Health and Wellness (MOHW), Ministry of Education and Youth (MoEY), and Ministry of Local Government, indicate delays and potential inaccuracies in financial reporting. This can impact the reliability and timeliness of financial information crucial for decision-making and fiscal management.

Requirements for audited financial statements under the FAA Act are essential for transparency and accountability. In the Jamaican context, two sets of consolidated financial statements are required to be prepared: (1) those of the Consolidated Fund which are not submitted for audit (but tabled directly in the Parliament) as required by Section 24(G) of the FAA Act, and (2) those which are required by Section 24(H) of the FAA Act which are required to be submitted for audit. In addition, individual ministries and agencies must prepare their own financial statements, which are subject to audit. However, in practice, the GoJ consistently produces the financial statements of the consolidated fund which are not required for audit but is highly inconsistent and untimely in preparing those that are required to be submitted for audit. In relation to the financial statements of individual MDAs, there are significant backlogs in the completion of these audits, particularly for large ministries like Health and Education. The overall lack of timely audited financial statements raises concerns about the timeliness and reliability of financial information provided to stakeholders. Delays in audits can hinder effective fiscal oversight and decision-making, impacting aggregate fiscal discipline.

2. Strategic allocation of resources

The introduction of medium-term budget estimates and program based presentation with the budget estimates document provides a solid foundation for the strategic allocation of resources. The Estimates of Expenditure for FY 2024/25 include detailed medium-term forecasts and strategic priorities for each ministry. This alignment of ministry-specific goals with national and sector objectives supports strategic planning. However, the estimates do not include performance indicators of outputs and outcomes for most ministries.

The absence of a formal process for ministries to submit new policy proposals and identify savings within the budget cycle limits the ability to systematically introduce and evaluate new spending initiatives and/or reprioritize budget allocations. Instead, ministries are instructed to submit ‘unbudgeted expenditures’ via memoranda, which is not the most efficient or transparent method for incorporating new spending priorities. In addition, while the budget ceilings are issued through the Budget Call Circular, there is no evidence that these ceilings receive Cabinet approval prior to issuance. This lack of formal high level government approval may undermine the strategic direction and political buy-in necessary for effective budget planning and prioritization.

The inclusion of a Fiscal Responsibility Statement, Macroeconomic Framework, and Fiscal Management Strategy within the FPP, along with the Public Sector Investment Program, promotes a holistic approach to fiscal planning and resource allocation. The annual and interim FPPs include comprehensive fiscal forecasts and explanations for deviations from previous projections, enhancing transparency and accountability. The Fiscal Risk Statement included in the FPP provides an assessment of potential risks, including economic uncertainties and contingent liabilities. However, the lack of specific fiscal scenarios based on alternative macroeconomic projections limits the government's ability to anticipate and plan for different economic outcomes.

Government prepares a Revenue Measures table with the budget documentation, which sets out the fiscal implications of any changes to tax policy and administration. There is no equivalent document for expenditure measures, which could provide a clearer picture of the policy and financial implications of new spending initiatives and reallocations. Similarly, the system of rolling medium term budget estimates, while intended to facilitate medium-term planning, is not adhered to.

Variance in fiscal outcomes by economic classification generally reflects additional resources assigned to employee compensation and debt service. Some of these resources have been from savings in capital expenditures, savings likely attributable to an overly ambitious capital budget. Capital budget outturns have been less than budget for all three years under assessment. The reallocation to compensation has been significant in the last two years, accounting for most of the interim increases. In terms of strategic allocation, it is important that public sector investment plans and capital budgets reflect realistic expectations.

3. Efficient use of resources for service delivery

The detailed chart of accounts and budget classification, which includes administrative, economic, program, and functional classifications of receipts and payments at the GFS 5-digit level, provides a solid basis for allocating expenditures and monitoring budget execution.

For entities using the Government Financial Management Information System (GFMIS), internal control is generally reliable, with embedded access controls, segregation of duties, budget controls over commitments and payments, and audit trails. However, for entities maintaining accounts outside the consolidated fund and not using the GFMIS, controls are less reliable, though audit reports indicate that these entities still produce reliable reports. The internal audit function is well-established, with broad coverage including entities outside the TSA and GFMIS, adherence to international standards, and defined activity plans. Recommendations from internal audits are generally acted upon.

The absence of program performance information (output and outcomes) in the budget documentation means that there is limited information available to regularly and systematically monitor how efficiently and effectively public resources are being utilized in achieving specific service delivery goals. Performance audits conducted by the Auditor-General provide an independent evaluation of the efficiency and effectiveness of selected service delivery programs. These audits are publicly available, ensuring that findings and recommendations are accessible to stakeholders. However, the frequency and coverage of these audits could be improved to ensure more comprehensive oversight.

The transparent and rules-based transfer of property taxes and motor vehicle license duties to municipal corporations, represents a significant portion of total transfers and assists with predictable and equitable funding for local governments. This approach helps municipal corporations plan and deliver services effectively. The provision of additional discretionary ‘needs based’ grant funding through budget allocations by the Ministry of Local Government and Community Development for purposes such as drought relief, natural disasters, and road rehabilitation, introduces an element of flexibility that can address urgent local needs but also requires careful oversight to prevent misuse and ensure that funds are directed to the highest priority areas.