The snap election budget of 2013
Development Watch
APRIL 3, 2013 
BY DR TARRON KHEMRAJ 

http://www.stabroeknews.com/20...tion-budget-of-2013/

Introduction

GINA makes sure we are reminded that the G$208.8 billion budget is the largest ever presented in Parliament. No one there bothered to check whether this is indeed the case by deflating the nominal into real numbers. Nor did they bother to convert the G$208.8 billion into US$ terms, the preferred mode of comparison of Minister Ashni Singh. Guyana’s GDP grew at a reasonable 4.2% in 2012. This growth is coming mainly from sectors like gold, rice and bauxite that can witness a sudden reversal of fortunes. The forecast for 2013 is 5.3% that is likely to come mainly from a rebound in sugar, which will be emerging from a very low bottom. Nevertheless positive growth is always better than a stagnant or shrinking economy.

The budget reads to me like an election preparedness document. It proposes very little fundamental policies that will address the coming structural problems in the economy, particularly the expected ballooning of the external debt after 2016. And the large projects proposed will add significant fiscal risks in the coming years. Subsidies, tax credits and some tax reductions are proposed. Overall the budget is long on political merits, but short on economic and environmental rationale. A full review of the budget cannot be done in a single column. Therefore, I urge people to read Mr Christopher Ram’s detailed review and analysis of the 2013 budget. However, here are some of my thoughts.

Some Short-Term Goodies

As is well known housing has been a main aspect of the economic policy agenda of the PPP. While commendable, many housing areas are poorly planned. Families have built beautiful middle class homes in areas with mud streets and gigantic pot holes. All it takes is a small shower for yards to flood. I have observed this in Diamond on the East Bank of Demerara. No green areas or parks are created. Rum shops however are already taking hold in the new housing areas.

In keeping with the focus on housing, the 2013 budget reduced the property tax by increasing the property tax exemption for homes with a value of up to G$40 million. In addition, home owners can deduct interest payments from taxes paid. The Private Sector Commission (PSC) welcomes this move. I can see tremendous political merit in the proposals. However, I am waiting to see someone from the PSC or Ministry of Finance explain the environmental or economic merit of the decisions. In particular, I would be grateful if someone can explain to me why an enclosed concrete home worth G$40 million that will require more energy to cool is to be exempted from property taxes Has the PPP government forgotten that taxes can be used to shape behaviour and encourage the economy on a low carbon path? Would reducing the property tax stimulate the demand for home improvement products manufactured in Guyana?

Pensions to senior folks were increased from $10,000 to $12, 500. This is a welcome increase. The AFC has also championed this increase; therefore it is good to see the government and the AFC agreeing on something. However, nothing fundamental was proposed to save NIS (a short-term subsidy was proposed), which some analysts have noted is technically insolvent. The government will be increasing the fiscal deficit to allow for increased old age pensions and property tax reductions. However, deficits have to be financed by printing money or borrowing. Deficits will also have to be incurred to allow for the slight reduction in PAYE tax. Given that the Minister is a PhD in accounting, I would have liked to hear about some model simulations of how this policy will stimulate the economy. Given that Guyana imports a large percentage of what it consumes, would this policy to reduce the property tax stimulate imports instead of domestic production?

University of Guyana

A country like Guyana needs an effective teaching-research university that is financially viable; a university moreover that studies and proposes solutions for the myriad problems Guyana and the Caribbean face. The budget proposes G$1.7B for the University of Guyana. Minister Singh noted several important capital upgrades at the university that are meant for enabling scientific research. These are welcome moves in the right direction. However, I still do not believe they address the fundamental needs of the university for keeping it financially viable and less dependent on the government. However, these fundamental requirements may not be palatable given the taste of politicians for the short-term.

First, tuition needs to increase by equating revenues and costs at the market exchange rate. We noted in a previous column that revenues are still indexed at the old exchange rate of G$127 to one US$; however costs are indexed to the prevailing market exchange rate of G$205 to one US$. Second, foreign students – charged a premium above Guyanese students but below major competitors in the region and North America – should form 40% of the student body. This not only brings in revenues but also adds diversity to the student body, particularly diversity of ideas. Third, faculty has to be paid better through a base pay system plus a merit top up. Fourth, the student loan system has to be computerized and modernized so that repayment can be made even when people migrate. This has to be merged into a national credit score system.

Long-Term Projects

The big capital projects on which the government is betting are Amaila hydroelectric dam, the Marriott, the speciality hospital, a new floating bridge for the Demerara River and the airport expansion. Each policy has consequences and risks, some more than others. The speciality hospital will have favourable spill overs on the society while adding little risks to the country’s financial health. Doctors and other skilled professionals will get jobs. These are highest end jobs. However, like so many other policies from this government, this progressive proposal is bogged down by procurement problems and lack of transparency.

The expansion of the airport runaway makes a lot of sense. However, the funds to be spent on the terminal could have been spent on developing another airport on the Essequibo to allow tourists to fly directly from Caribbean vacation spots to the eco-destinations in Guyana. I typically do not like floating bridges because they seem third world to me. Moreover, they require significant future costs to maintain even though the initial expenses may be cheaper. If the bridge can pay for itself then it is a welcome infrastructure. However, a cheaper alternative could be two synchronised roll-on-roll-off ferries.

As noted earlier in these columns, the Marriott does not seem to be a critical investment that is needed at this period of Guyana’s development. The US$14 million the government is spending could be directed towards cleaning up and draining Georgetown, and preserving the historical architecture of the city. Amaila hydro will add significantly to the external debt. The probability that something will go wrong is high, particularly given the experience with the Skeldon factory. The bilateral loan from China seems to be coming with a high interest rate of 8.5%, according to Mr Christopher Ram. It should be noted that the World Bank lends at 1 to 2% to poor countries. However, borrowing from the World Bank will require a level of transparency that the government is not willing to accept. In addition, dealing with the World Bank will remove completely the opportunities for kick-back taxes. There are alternatives to Amaila, however. Medium, micro hydroelectric power plants could be built for now and linked up in a smart grid system. In the next column we will pick up this issue: “Towards a true Low Carbon Development Strategy.”

Comments: tkhemraj@outlook.com