Introduction
Today I start my usual extended commentary on the annual Budget. I plan to link the discussion of this year’s Budget with last year’s evaluation of the 2011 Budget (carried in my columns for the period February 6-May 22, 2011). To recall, last year’s review began with reference to two hard core considerations, namely, 1) the integrity of the statistical data, information, and calculations used by government in compiling the 2011 Budget; and 2) the resulting size of government revealed in the Budget and expressed as a share of GDP, after taking into account all its activities: central government, public enterprises and tax giveaways. As regards 1) the main tasks of national budgets are to review the economy’s performance for the period of the previous Budget; to indicate the spending, revenue targets and measures intended for the current Budget; and, to estimate the impacts of these on economic performance during the intended Budget period (in this case 2012).
The size of government is crucial, principally because resources used by government (after taking into account all its activities) are at citizen’s expense and is justified only if they serve to improve national growth, development, and welfare, given society’s preferences. In this sense therefore, government activity should be appraised in terms of whether society considers it “too much, too little or, just right.” Last year I had devoted six columns towards this task (February 25-March 27, 2011) and found that government activity in Guyana is large, averaging 60 or 100+ per cent of GDP depending on which GDP measure is used as the denominator (see discussion below).
Integrity of Budget data
Sadly, the concerns raised last year about the integrity of the Budget data remain. These continue to centre on three outstanding issues. First, as I have noted several times in this column before, Guyana’s National Accounts data have been recently rebased, no longer using 1988 prices as the base year and instead using 2006 prices as the new base year. Consequently, GDP estimates using 2006 prices when compared to 1988 prices (where official data are available for this comparison) reveal increases of between two-thirds and three-quarters in value for various national accounts components. Second, the revealed annual rates of economic growth for the years when comparisons can be made (again using official data) show increases when 2006 prices are used. Third, the resulting shares of various economic components/sectors of the national accounts differ significantly for the different base years.
Data quality
While it is possible that the data quality could have improved as a result of the rebasing thereby explaining the more favourable results, my concern is that, statistically, the actual improvement in data quality needs to be at least as large as the resultant increases in the value of the national accounts, their rates of growth, and sectoral shares if this is not to yield misleading datasets. If the improvement in data quality is less, then the datasets utilized for macroeconomic policy formulation (for example, expressing a target as government spending or debt as a share of GDP) is misleading. I stress this concern, as these types of macroeconomic ratios have improved sharply after 2006, when the rebased GDP series is used.
The second data quality concern is that, given the way GDP is calculated, this tends to show a bounce-back effect after severe natural disasters. This happens because the destruction of natural resources is not taken fully into account when measuring the GDP. Thus I believe the distinctive jump in the growth rate for the years 2006-2007 (from minus 2 per cent in 2005 to 5 per cent in 2006, and 7 per cent in 2007), reflects the influence of the bounce-back effect from the national disaster of the 2005 Great Flood.
Thirdly, in addition to these deceptive statistics, there is the decades old concern over Guyana Government’s persistent and deliberate abuse and misuse of statistical data. Thus last year I revisited the controversy over this between the government and the Economist Intelligence Unit. I do not intend to go there again, except to observe that political guidance continues to play a significant role in the generation and dissemination of Guyana’s economic data. It appears as if these data are being obsessively massaged in order to pre-empt criticisms. Thus for example, the Mid-Year Report, 2011 of the Ministry of Finance published estimates of mid-year GDP growth rates for 2011, with no indication of any GDP calculations being done for that period! Further, after I had indicated in last year’s review of the Budget the significant discrepancies/variances between Budget GDP growth rate forecasts and actual performance, it is more than passing strange that the Ministry of Finance, with no serious justification for it, in its mid-year Report revised upward the 2011 real GDP growth rate from 4.6 to 5.1 per cent.
Conclusion
In addition to spending time on a fairly detailed look at the integrity of the Budget economic data and measuring the size of government activity, last year I recommended that a Budget Office, established by and for the National Assembly could go a long way towards redressing some of the concerns expressed here.
Since then three things have happened to reinforce this opinion. First, a surprisingly large number of readers have been asking me for more information on the proposed National Assembly Budget Office (NABO).
Second, it has come to my attention that, among leading world authorities on government financial regulation, oversight, and management, budget offices (following on the United States introduction of this in 1974) are considered the single most important innovation countries can adopt to improve dramatically their economic governance and parliamentary oversight.
Finally, judging from public comments, I believe there is inadequate public understanding of what a budget office can do for Guyana and how it might be structured. Therefore, I will treat with this topic next, as I continue my assessment of the National Budget 2012.
