Between Scylla and Charybdis: Jamaica’s budget after Hurricane Melissa

For the first time in eight years, Jamaica’s national budget will see the introduction of revenue measures that will result in a net addition to tax revenue. This period saw no new taxes introduced, no increases in existing tax rates, the abolition of some categories of nuisance taxes, and even the lowering of Jamaica’s General Consumption Tax (GCT).

The move to implement a J$35-billion tax package over the next two fiscal years to 2028, along with the central government’s decision to continue its annual transfer of J$11.4 billion from the state agency responsible for housing, has stirred considerable debate. The government argues that this became a last resort in the aftermath of Hurricane Melissa, which struck the island with devastating force last October, and is intended to prevent the need to rely entirely on borrowing to fill its fiscal gap, projected to range from 1.5% to 4.9% of gross domestic product (GDP) over the next four years.

Those accumulated deficits translate to just over J$500 billion and will bring Jamaica’s total debt stock to J$2.9 trillion by 2030, with inflows from several multilaterals and an uptick in domestic borrowing accounting for the increase. Some debt obligations have also been deferred owing to a planned reduction in the primary surplus to almost nil, which releases more resources previously dedicated to debt repayment to be redirected to the initial phase of the recovery effort.

Much focus has been on the necessity of tax measures to supplement borrowing. The government has insisted that, to the greatest extent possible, any borrowed funds should be directed to capital expenditure to enable faster reconstruction, revenue generation and economic growth, while tax revenues should finance recurring expenses — an unobjectionable position in principle.

Borrowing, capital spending and fiscal reality

In practical terms, however, this is not borne out fully in the nature of the budget. Jamaica’s capital budget has historically been small as a proportion of GDP and represents less than 5% of the entire budget. The opening up of fiscal space over the last 15 years has resulted in only marginal increases to that growth-enhancing side of expenditure, which remains well below the levels needed to truly accelerate development.

This year, the capital budget is projected to increase from J$55 billion to just under J$100 billion and will remain above J$80 billion until 2030. Meanwhile, loan receipts over the same period total between J$230-billion and J$440-billion — a significant increase from previous years when loans tracked under J$200-billion annually — and the lion’s share will be financed by domestic rather than external borrowing.

As total borrowing exceeds the amount dedicated to capital expenditure, the balance is expected to assist in funding operating expenses. It therefore becomes clear that some borrowing each year will continue to finance day-to-day government needs.

The government has also maintained a policy of shifting its debt profile toward Jamaican dollar-denominated debt, effectively reducing its appetite for foreign-currency borrowing. Laws, rather than economic forces alone, have largely undergirded Jamaica’s macroeconomic transformation over the last 15 years, beginning with the passage of the Financial Administration and Audit (FAA) Act, which contains the country’s fiscal rules and was later strengthened to provide policy flexibility precisely for shocks such as Hurricane Melissa.

This legislative framework curtailed the government’s earlier inclination toward overspending and compelled successive administrations to adhere to a sustained programme of debt reduction. The result has been the stabilisation of the public debt stock at around J$2 trillion. Jamaica’s initial debt target of 60% of GDP was set to be achieved this March, prior to Melissa’s intervention.

Debt structure and vulnerabilities

Jamaica’s success in bringing its debt down to more manageable levels as a proportion of economic output underscores the difficulty of the task. Much of the country’s debt is owed to multilateral institutions, including the World Bank, IMF and USAID. Interest rates have historically been comparatively higher than the concessional terms offered by some bilateral lenders, making repayment conditions more rigid and largely non-negotiable.

This has conferred a deeper responsibility on the country to maintain creditworthiness and meet strict repayment obligations. While some counterparts carry higher debt-to-GDP ratios, their interest rate structures are often more favourable, reflecting lower perceived risk and greater certainty of repayment. Jamaica has not always enjoyed that luxury.

Additionally, with roughly two-thirds of Jamaica’s debt denominated in foreign currency — mostly US dollars — exposure to exchange rate depreciation remains a persistent risk, adding billions of Jamaican dollars to the debt stock annually despite reduced volatility and ongoing efforts to shift toward more local-currency instruments. Taken together, this debt profile reinforces the need for continued fiscal caution.

Growth pressures and the taxation dilemma

The government’s instinct to guard against excessive borrowing is therefore well-founded, leaving expenditure cuts or additional taxation as the main alternatives. It has opted for the latter, but not without consequences.

Prior to Hurricane Beryl, which preceded Melissa by a year, economic growth in Jamaica had already been decelerating for 18 months following its rapid COVID-19 recovery. Growth is now projected to be negative for all of 2026, while inflation is expected to rise in the medium term and interest rates remain elevated. This is not a spender’s economy. Yet consumption spending typically drives recovery in the immediate aftermath of a crisis.

Additional taxation — particularly on consumption — could further dampen activity at a time when it needs to accelerate. The benefits from capital expenditure projects will take time to materialise. Unlike the post-COVID period, there is little pent-up demand to fuel a spending rebound, meaning economic activity will require stronger incentives if GDP recovery is to occur quickly enough to prevent further strain. Growth is only estimated to peak at around 3% before returning to Jamaica’s long-run trajectory of 1–2%.

Proponents argue that the government needs the additional revenue to fund recovery. However, it is worth recalling that at the height of COVID-19, when Jamaica similarly needed revenue, GCT was lowered from 16.5% to 15%, helping to stimulate consumption and support recovery — a classic example of counter-cyclical fiscal policy.

Undoubtedly, the government faces serious choices in the years ahead and difficult trade-offs in balancing fiscal prudence with economic recovery. Navigating the aftermath of yet another external shock will require careful judgment, precision and sustained policy discipline.