IT IS budget time, and as usual, some Guyanese parliamentarians quickly develop a fancy for fiscal austerity, and make a ‘song and dance act’ over this newly-found friend, ‘fiscal austerity’, without any empirical understanding of the rationale for spending. Opposition parliamentarians claimed that the $161.4 billion budget of 2011 symbolizes poor management, as the overall deficit is circa 3% of the Gross Domestic Product (GDP). In today’s Perspectives, I will focus on ‘deficit’, building on a letter I wrote to the press last week. 
Deardoff of the University of Michigan (2010) defines ‘deficit’ as “…the excess of government expenditures over receipts from taxes.” Some may contend that ‘deficit’ is not a good thing, as spending surpasses income. Nonetheless, in 1962, in a Commencement Address at Yale University, former President John F. Kennedy said the enemy of truth is not the lie, but the myth. He was talking about ‘deficit’, where myth proclaims that deficits create inflation and budgetary surpluses prevent inflation.
Kennedy argued that huge budget surpluses after World War II did not stop the spread of inflation, and constant deficits at that time did not undermine price stability. He added: “Obviously, deficits are sometimes dangerous — and so are surpluses. But honest assessment plainly requires a more sophisticated view than the old and automatic cliche that deficits automatically bring inflation.” This assessment requires a theoretical explanation and empirical evidence.
Let us start with the theory. Keynes’ ‘The General Theory of Employment, Interest and Money’ (1936) has stunning relevance in this context. Reich (1999) explains Keynes’ theory as follows: In order to sustain full employment, governments would have to operate deficits when the economy decelerates; this is so because the private sector may not have the proclivity to invest as much as necessary. And so, as the private sector markets reach saturation, investments decline, creating a treacherous cycle — declining investment, fewer jobs, less consumption; and if no government intervention happens, perhaps, there may still be some balance reached in the economy. But this would be at great cost — rising unemployment, with mounting social and economic disadvantage. The Guyana Government, or any government worth its salt has to ensure that economic and social disadvantage is eliminated, or kept to a minimum; deficit spending may achieve this goal vis-à-vis effective demand and investment stimulation.
Next, look at some empirical evidence. Saleh and Harvie (2005) reviewed the literature examining the relationship between budget deficits and economic variables, and found these: (1) when assessing the impact of fiscal policy on private  investment and output growth, we should differentiate between public consumption expenditures (wages and salaries, goods, etc.) and public investment expenditures (education, health, infrastructure, etc. – capital expenditures); the literature showed that government consumption expenditures had a negative impact on growth, while government investment expenditures confirmed a positive influence on growth. Note that the Guyana Government’s budget deficit is largely under capital expenditure, that is, investment expenditures on education, health, infrastructure, etc. 
(2) Financing the deficit vis-à-vis monetization would increase money supply and produce inflation. Again, note that external borrowing would play a huge role in the Guyana Government’s deficit financing; use of the Bank of Guyana’s monetization is not on the cards for deficit financing, and so chances of invoking the wrath of inflation are practically nil. 
(3) The view that budget deficits could lead to current account deficits was overall inconclusive. Nonetheless, there was support for the Keynesian view that a budget deficit increase would boost domestic absorption and increase imports, resulting in a current account deficit. However, the Ricardian equivalence theorem counteracts the relationship between budget deficit and current account deficit in the Maldives economy (Datta and Mukhopadhyay 2010). So what we have is an ambiguous scenario pertaining to the unproven view that budget deficits would lead to trade deficits. Given these empirically mixed signals, the Guyana Government’s budget deficit should not be a humbug.
(4) There was support for the Keynesian view of a positive relationship between budget deficits and interest rates vis-à-vis the impact of increased spending on the demand for money. There may very well be underconsumption in the Guyana economy, where consumers are not spending sufficiently to stimulate investment. Boosting investment requires government intervention vis-à-vis deficit spending, and to use interest rates to control inflation or deflation.
These four findings from the literature on budget deficit and macroeconomic variables provide a sound rationale for deficit spending. But what should the amount of the deficit be?
Stiglitz (2010) would argue that the size of the deficit depends on the condition of the economy; and Stiglitz noted, too, that it is not appropriate to only review one side of the balance sheet through appraisal of what a country owes, but also what its assets and investments are on the other side of the balance sheet; and he explained that spending vis-à-vis investments in education, technology, and infrastructure may in the end result in reduced long-term deficits.
Look at the other side of the balance sheet to peruse the Guyana Government’s assets and public investments. Government assets include large tracts of land where some have become transferable for housing, all mineral properties, value of the forests, State Sector assets as Guyoil, GPL, etc. And a social cost-benefit analysis would demonstrate the utility of these expenditures (Stiglitz 2010). Perhaps, a 5-6% return on public investments may be sufficient to counteract any short-term increase in the national debt.
And parliamentarians talk as if Guyana has no linkages with the global economy, and more-so with the U.S., Great Britain, France, Germany, Japan, among others, that now are slowly recovering from the international financial meltdown that hit them hard in 2008. In addition, Guyana continues to face external shocks from intermittent global increases in oil and food prices. Under these conditions, spending may not be a luxury but a necessity.