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PULL QUOTE: ‘Many of the excised projects already have started life, and so you do not wait for a budget debate to present your diagnosis of their feasibility. Such diagnoses have to appear circa project conception; and certainly before delivery’
THE battle of the Guyana Budget 2013 excision rages on. You would think that the cuts happened because Donald Ramotar and his team are wild spenders. But when you try to work out reasons for the cuts, there is little macroeconomic thinking for the taste-bud. Many of the excised projects already have started life, and so you do not wait for a budget debate to present your diagnosis of their feasibility. Such diagnoses have to appear circa project conception; and certainly before delivery. Most of 2012’s budget projections were realized, and they are now critical for underpinning Budget 2013 estimates. And as the battle becomes more than what it should be, parliamentarians need to remind themselves that Guyana is a member of the developing world, and try to grasp what has been happening to this world since1980.
Since 1980, many poor countries’ economic crises had to do with macroeconomic imbalances; these imbalances were really increased budget deficits and foreign exchange (Rodrik, 1996). To remove the imbalances, governments used stabilization and liberalization measures (IMF-World Bank structural adjustment programmes (SAP)). These measures intending to reduce consumption and produce exports to repay external debts rarely brought economic expansion to poor nations.
During the Collor (1990-1992) and Cardoso (1995-2002) administrations, Brazil suffered from liberalization that resulted in excessive fiscal deficits, high interest payments on public debt, a squeeze on spending for the poor, and a worsened income distribution producing high levels of inequality in the country (Vernengo, 2007).
Again, poor countries rely on foreign trade taxes. But financial liberalization and ensuing seigniorage and revenue loss from discarding foreign trade taxes produce greater interest payment on government debt. The result is a rise in the fiscal deficit (Toye, 2000). The fact is, liberalization has failed many poor countries, especially those which were unable to renegotiate SAP to their advantage.
The new PPP/C Guyana Government, in 1992, used a modification approach toward the inherited SAP, resulting in tensions with the international financial institutions; further, the PPP/C Government in 1994 negotiated for a new Extended Structural Adjustment Facility (ESAF), which was approved in 1995 (France, 2005) . Notwithstanding the PPP/C’s modified approach, liberalization and now the Budget 2013 cuts play havoc with Guyana’s economic development.
In Guyana, where unemployment has to be tempered and job creation is a necessity, it is critical for the Government to pursue an expansionary fiscal policy comprising tax increases with equity and efficiency, and increased social spending. Budget 2013 has had proposals to increase spending, until the cutters arrived.
However, what kind of economic expansion would Guyanese expect when they are hit with a double whammy; that is, the prevailing austere modified SAP, and now the savage 7% cuts to the Guyana Budget 2013 equivalent to $31 billion. This double whammy will force a contractionary policy at a time when an expansionary policy is necessary, given the Government’s ongoing policies of unemployment mitigation and job creation.
However, there is a view that spending cuts are not necessarily contractionary, because the central bank may reduce interest rates to make up for spending cuts. Nevertheless, this may be true when interest rates are high, but not when they are low (see Paul Krugman’s ‘Playing Whack-a-Mole with Expansionary Austerity’ in Conscience of a Liberal, May 3, 2013).
Guyana, on the whole, has relatively low interest rates, so the Bank of Guyana, as the central bank, may have little ‘interest rate’ leverage to reduce the contractionary consequences of the budgetary cuts. Contractionary budgetary cuts, therefore, will negatively impact unemployment and job creation, with deleterious consequences for the poor and vulnerable.
Pronouncements on the separation of some State funds (NICIL, lottery, etc.) from the Consolidated Fund, arguably more a financial procedural matter, and corruption, more a matter of law enforcement, are a few reasons the combined opposition majority provides for excising the budget; but they are not really macroeconomic reasons for cutting any budget, especially that these matters can be deliberated and concluded in other domains.
I am not suggesting that there should not be budget cuts; but the cuts should not be for these aforementioned reasons. The bottom line is that the excision is a cudgel against the poor and vulnerable, especially those cuts related to public capital investments, such as, Cheddi Jagan Airport Modernization Project, Ogle Aerodrome assistance, CJIA cooperation, Civil Aviation equipment and Hinterland/Coastal Airstrips, among others.
There is evidence to indicate that public capital investments can present more gains to the people than private capital investments (Toye, 2000). Furthermore, the literature (Saleh and Harvie, 2005) showed that government consumption expenditures have a negative impact on growth, while government capital investment expenditures showed a positive influence on growth. Note that the budget cuts largely under capital expenditure, therefore, may place a question mark on growth.
THE battle of the Guyana Budget 2013 excision rages on. You would think that the cuts happened because Donald Ramotar and his team are wild spenders. But when you try to work out reasons for the cuts, there is little macroeconomic thinking for the taste-bud. Many of the excised projects already have started life, and so you do not wait for a budget debate to present your diagnosis of their feasibility. Such diagnoses have to appear circa project conception; and certainly before delivery. Most of 2012’s budget projections were realized, and they are now critical for underpinning Budget 2013 estimates. And as the battle becomes more than what it should be, parliamentarians need to remind themselves that Guyana is a member of the developing world, and try to grasp what has been happening to this world since1980.
Since 1980, many poor countries’ economic crises had to do with macroeconomic imbalances; these imbalances were really increased budget deficits and foreign exchange (Rodrik, 1996). To remove the imbalances, governments used stabilization and liberalization measures (IMF-World Bank structural adjustment programmes (SAP)). These measures intending to reduce consumption and produce exports to repay external debts rarely brought economic expansion to poor nations.
During the Collor (1990-1992) and Cardoso (1995-2002) administrations, Brazil suffered from liberalization that resulted in excessive fiscal deficits, high interest payments on public debt, a squeeze on spending for the poor, and a worsened income distribution producing high levels of inequality in the country (Vernengo, 2007).
Again, poor countries rely on foreign trade taxes. But financial liberalization and ensuing seigniorage and revenue loss from discarding foreign trade taxes produce greater interest payment on government debt. The result is a rise in the fiscal deficit (Toye, 2000). The fact is, liberalization has failed many poor countries, especially those which were unable to renegotiate SAP to their advantage.
The new PPP/C Guyana Government, in 1992, used a modification approach toward the inherited SAP, resulting in tensions with the international financial institutions; further, the PPP/C Government in 1994 negotiated for a new Extended Structural Adjustment Facility (ESAF), which was approved in 1995 (France, 2005) . Notwithstanding the PPP/C’s modified approach, liberalization and now the Budget 2013 cuts play havoc with Guyana’s economic development.
In Guyana, where unemployment has to be tempered and job creation is a necessity, it is critical for the Government to pursue an expansionary fiscal policy comprising tax increases with equity and efficiency, and increased social spending. Budget 2013 has had proposals to increase spending, until the cutters arrived.
However, what kind of economic expansion would Guyanese expect when they are hit with a double whammy; that is, the prevailing austere modified SAP, and now the savage 7% cuts to the Guyana Budget 2013 equivalent to $31 billion. This double whammy will force a contractionary policy at a time when an expansionary policy is necessary, given the Government’s ongoing policies of unemployment mitigation and job creation.
However, there is a view that spending cuts are not necessarily contractionary, because the central bank may reduce interest rates to make up for spending cuts. Nevertheless, this may be true when interest rates are high, but not when they are low (see Paul Krugman’s ‘Playing Whack-a-Mole with Expansionary Austerity’ in Conscience of a Liberal, May 3, 2013).
Guyana, on the whole, has relatively low interest rates, so the Bank of Guyana, as the central bank, may have little ‘interest rate’ leverage to reduce the contractionary consequences of the budgetary cuts. Contractionary budgetary cuts, therefore, will negatively impact unemployment and job creation, with deleterious consequences for the poor and vulnerable.
Pronouncements on the separation of some State funds (NICIL, lottery, etc.) from the Consolidated Fund, arguably more a financial procedural matter, and corruption, more a matter of law enforcement, are a few reasons the combined opposition majority provides for excising the budget; but they are not really macroeconomic reasons for cutting any budget, especially that these matters can be deliberated and concluded in other domains.
I am not suggesting that there should not be budget cuts; but the cuts should not be for these aforementioned reasons. The bottom line is that the excision is a cudgel against the poor and vulnerable, especially those cuts related to public capital investments, such as, Cheddi Jagan Airport Modernization Project, Ogle Aerodrome assistance, CJIA cooperation, Civil Aviation equipment and Hinterland/Coastal Airstrips, among others.
There is evidence to indicate that public capital investments can present more gains to the people than private capital investments (Toye, 2000). Furthermore, the literature (Saleh and Harvie, 2005) showed that government consumption expenditures have a negative impact on growth, while government capital investment expenditures showed a positive influence on growth. Note that the budget cuts largely under capital expenditure, therefore, may place a question mark on growth.
