To the average Guyanese the image of the government is one of ‘big government.’ In this week’s column I shall start to examine how big this notion of big government held by Guyanese is. As we are aware from our day-to-day practice government activity enters into almost every dimension of our lives. The colonial state has always been an omnipresent and intimidating agency and, since Independence it has continued to be authoritarian. This serves to magnify the presence of government in our social consciousness.
Government and the economy
As economists see it, government activity in the economy operates through certain definite channels. The first of these is through the collection of taxes, user fees and other revenues. These alter the behaviour of every individual or business that pays them. Second, government through revenue raising, borrowing, or printing money acquires resources for its own use. Third, government produces a multiplicity of goods services in the economy. Fourth, government transfers income, both vertically (from one income group to another along a hierarchical scale) and horizontally (that is, unrelated to income class). Fifth, government is heavily involved in regulating economic activity for a large number of reasons (minimum wage legislation, environmental and land-use regulation, consumer and health protection and so on).
Sixth, government seeks to influence the overall level of economic activity through its interest rate, exchange rate and monetary policy operations. Finally, governments issue edicts and proclamations regulating what can be produced, by whom, and under what conditions.
To undertake these wide-ranging functions governments need to take command over resources.
This requires the transfer of resources from the non-government to the government sector. In this sense therefore, government revenue raising/borrowing/outlays are at the core of determining the size and influence of government on the economy.
Determining size
Measuring the size of government is far from straightforward. It involves several crucial sets of decisions. First, what unit should be used: should it be Guyanese or US dollars? Should it be on a total or per capita basis? Or, should it be expressed in nominal or real (constant) values. Another unit of measurement sometimes used is the number of employees. As a rule economists would calculate the size of government in local currency and express it as a percentage of GDP at current factor cost or basic prices. The advantage of this procedure is that over time GDP incorporates both inflation and population growth.
A second set of decisions is whether the measure should be based on expenditure (outlays) or revenues (receipts)? The difference between the two reflects the size of the budget deficit or surplus. Over the long run, however, it is expected that the budget would be roughly in balance so that the two measures should broadly be the same. But, because of the greater variability of revenues, expenditures (outlays) are routinely used to indicate the size of government. Some economists would include state and local government expenditures while others exclude these.
The important point to note at this stage is that before comparisons are made between countries one must take great care to determine the basis on which government expenditures are measured.
The third set of issues is related to what major categories of government expenditure should be included. Economists recognize three categories as essential. These are 1) Central Government 2) Public Enterprises and 3) what are described by economists as Tax Expenditures. It should be noted that, the outlays measured by these three categories, exclude 1) offsetting receipts and collections and 2) government’s regulation activities because of their diffuse and difficult to measure impacts on the national economy. These issues will be taken up in later columns.
Category I: Central
Government Expenditures
This category includes both current expenditures as well as deferred expenditures. The latter are classified as capital expenditures. Government’s capital expenditure adds to the national capital stock in the same way as private investment does. Later on I shall discuss some of the merits/demerits of both central government’s current and capital expenditures in Guyana.
Category 2: Public Enterprises
Public enterprises provide market goods and services, thereby raising revenue to cover their expenses. They may do so in full, earn surpluses which are paid over to the central government, or obtain subsidies.
Their revenues and expenses are generated in the market. Public enterprises therefore, resemble private business in that they provide goods and services that are sold in the market, whereas central government usually provides non-market goods, such as education, defence, bridges and roads. Public enterprises may or may not compete with private business, frequently however they enjoy a monopoly.
The budget estimates identify eight public enterprises in Guyana: Guyana Sugar Corpora-tion, GuySuCo; Guyana Power and Light (GPL); Guyana National Newspapers Ltd (GNNL); Guyana Rice Development Board (GRDB); MARDs Rice Milling Complex; MARDS; Guyana Post Office Corporation (GPOC); Guyana National Printers Ltd (GNPL); and National insurance Scheme (NIS).
Category 3: Tax Expenditures
Economists term as tax expenditures, all government revenue losses attributable to allowances, exemptions, deductions from income for tax purchases, special credits, preferable tax rates, tax deferrals and other special exclusions, which government may provide to businesses, groups or individuals. The principle here is that the money value of these exemptions is the equivalent of not providing them and instead the government paying over the sums directly. The United States Budget Office has estimated the revenue loss from tax expenditures at US$1.2 trillion for financial year 2008. Indeed their projected loss for financial year 2011 due to income tax revenue losses alone exceeds US$10 billion!
We do not have comparable estimates for Guyana on tax expenditures. This awaits the establishment of the National Assembly’s Budget Office I have recommended. However, given the vast number of exemptions the executive has provided under the guise of ‘business incentives,’ the ratio of tax expenditures to total spending of the central government, could be very large.
Readers should recall the three types of government activity on the economy described here is not exhaustive. In particular it does not include 1) the effects of regulation and 2) offsetting receipts and collections. In effect therefore, budget outlays will be larger than those I shall provide.
Next week as I go forward with the discussion, I shall put numbers to these measures.
