THE PIPER: Budget Blues

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A week after France Minister Winston Jordan presented Budget 2017, the howls of protests have still not died down. But rather uniquely in the history of budgets, these protests are not confined to the political opposition as they usually are, or to any one specific group. They cover the gamut of categories citizens identify themselves with in Guyana- business, trade unions, women, rural/urban etc.

 piperThe general consensus is the budget has not only failed to deliver the “good life” the government promised the society, nor even move it in that direction, but rather will push it into reverse gear once the Budget measures kick in. A budget is fundamentally an account of how a government will secure funds and spend it towards improving the welfare of the people and we can do worse that start from this point to appreciate what damage the budget can create if the government does not listen to the people.

 Governments can secure funds from the profits of businesses it may own, such as the Guyana Oil Company (GUYOIL), taxes imposed on the income of working persons and businesses and finally, through borrowing. In Guyana, the several governments had long accepted they should generally remove themselves from the ownership of businesses but maintain a few for “social reasons”. GUYOIL, for instance, was supposed to prevent exploitative price gouging by the private suppliers of fuel by not adding large markups while the Guyana Sugar Corporation (GUYSUCO) was supposed to transitionally cushion the sugar industry from pure “market” forces. Yet the government did not insist GUYOIL aggressively act to lower prices recently nor GUYSUCO’s social responsibilities be taken care of, in an equitable fashion.

But it was through its power to collect revenues through taxation that the government raised the ire of the populace most. For taxpayers, in seemingly “progressive” moves it marginally raised the individual income threshold for collecting taxes from $600,000 to $720,000, lowered non-commercial business taxes by 2% and the Value Added Tax from 16% to 14%. However, it ensured the prices of most items that were processed in Guyana would rise and wipe out whatever gains there were through moving a raft of items from a “zero rated” classification to an “exempt” one.

 This was a particularly galling policy change to both the average citizen and the business community since the Finance Minister actually publicly claimed the reverse effect would ensue. When items are “zero rated”, the processor/manufacturer is allowed to reclaim from the government all the VAT’s that were paid on intermediate inputs and the final price therefore does not have to be swollen by these. “Exempt” items, on the other hand, cannot reclaim intermediate VAT’s and thus the processor is forced to include them in the selling price, which then rises. So while the consumer is told she’s not paying VAT, the price rise has wiped out that “benefit”. For the businesses, they are seen as the “villains” for raising prices. Only the government and its coffers gain even though from a macroeconomic standpoint the dangers of increased inflation also rises.

In the last measure of raising funds, the finance Minister announced the government will now be selling bonds to private investors. Now this is way beyond the BOG’s issuing of Treasury Bills, as a macroeconomic tool to keep interest rates within specified bands and is a short term measure.

With Bonds, the government would be competing with private investors who would obviously prefer to go with the lower-risk government bonds and just as obviously interests rates would rise due to competition for funds. This governmental action is known as “crowding out” of private investment and would lead to lowered business expansion and job creation.

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