Dear Editor,
This past week saw another major economic policy action by President Irfaan Ali and his government to help those in need throughout Guyana. The President announced that a one-off tax free grant will be distributed to members of the public sector, pensioners and disciplined services totaling $1.7 billion with each individual receiving $25,000 in December 2023. This fiscal policy initiative seems to be welcome news to many Guyanese who would directly benefit from this economic action, which includes households, businesses as well as community organizations.
This action on the part of the Government of Guyana (GoG) has major economic implications beyond its social impact. Economists would argue that this policy would have direct impact on the nation’s gross domestic product (GDP) due to a principle in economics that is referred to the multiplier effect. Simply put the multiplier effect occurs when there is an injection into the economy, in this case the GoG cash grant of $25,000. The multiplier effect is based on the economic principle that households would do either one of two things with an increase in resources, spend or save. Given the season, it is safe to assume that a significant part of the $25K will be spent.
Economists have quantified the impact on GDP because a change in aggregate expenditures by GoG circles throughout the economy. Guyanese will use the grant to buy products/services from businesses, “…households buy from firms, firms pay workers and suppliers, workers and suppliers buy goods from other firms, those firms pay their workers and suppliers, and so on. In this way, the original change in aggregate expenditures is actually spent more than once.” (OpenStax College). This economic impact is based on Keynesian Economics. The GDP impact will be seen directly on the local level. For example, consider a local poultry producer who would have seen an increase in sales because households have the income to increase their demand. The producer would then increase their production, hire more people and also expand their business. The multiplier effect is one of the most common economic tools when analyzing the impact of government spending, the GoG.
Economists can also calculate the direct impact of the cash grant on GDP by measuring the impact of the spending of $1.00 on the level of GDP. For example, if we spend $1 and we assume that the marginal propensity to consume is .70, then we know that an extra $0.70 will be created in the economy for now a total of $1.70 and this impact continues.
Beyond the economic impact of the cash grant, there are also significant psychological impacts referred to by behavioural professionals as the social multiplier effect. This principle is based on the behaviour that one person’s action will impact others’ actions. In our example, a Guyanese household increases their consumption of poultry which leads to the producer increasing their spending as well. Obviously, we see comments from Guyanese impacted by this grant and we know that households welcome this increase and will help them to celebrate their holiday season.
President Ali and his government should be commended for this fiscal policy initiative especially given its economic and social impact. It is also a magnanimous gesture by the GoG given recent increases in global inflation, which would also soften the price increases to Guyanese. Let the holiday season begin!
Yours faithfully,
Dr. Tilokie Depoo
Economist
