More Govt. expenditure is not synonymous with economic growth

Jul 30, 2013 Letters

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DEAR EDITOR,
I have read with some concern the garbled comment attributed to me regarding the claim by the GBTI Chairman that the 2013 budget cuts have caused an economic slowdown in Guyana.
I actually made three observations:
First, economics is not law and there are direct, unequivocal links of the kind suggested by GBTI. The author of the report should have been more careful because the alleged link is specious.
Secondly, the budget was approved at the end of April and the cuts applied overwhelmingly to capital projects. Little, if any of the funds in question was scheduled to be, and indeed would have been, spent before June 2013.  So the causal link claimed is erroneous.
Finally, the idea that increased Government expenditure means higher rates of economic growth has been around for a long time. It survives unchallenged in Guyana because the quality of public analysis on both financial and economic fronts is generally poor – witness Ministers and the current PSC chairman publicly arguing that a Value Added Tax is a ‘luxury tax’ of benefit to the poor, so the rates should not be reduced.
Ordinary Guyanese would know that channa is not a luxury, neither are detergent, toilet soaps, cooking oil, etc.  Any ‘O’ level GCE or CXC economics student would also know that such a declaration would result in exam failure. All the dictionaries of economics that could be consulted provide both a definition and examples of regressive taxes which are a heavier burden on the poor than on the rich. Even the local Indian Accountants’ publication confirms the truth of the claim.
The case in point is budget cuts. Cutting the annual national budget and therefore Government expenditures will not necessarily reduce economic growth. Spending does not automatically enhance economic growth rates or change the growth path. It should not require much thought to appreciate this point.
An apt example is school feeding. In India, contaminated foodstuff killed a number of school children. Taken to the extreme, if every citizen was killed by the Government or state programme, would anyone in their right mind suggest that Government expenditure increased growth? If the Government spent all or part of the revenues it collects from us to import cattle which die and are left in the streets of GT with the usual garbage like the dead horse I saw in Hadfield Street recently (or even at the Mandela site) causing a cholera epidemic that kills off half the population of GT – apparently the publicly expressed hope of at least one former PPP Minister. The result would not be economic growth.
But one does not need such an extreme example to make the point. Imagine that the only economic activity in the country was farming and the Government took money that farmers would use to build warehouses and buy pesticides to protect their vegetables. The Government uses the money it has collected to have a contractor build a wharf which promptly floats away, like that at Charity. That expenditure would not have contributed in any way to a higher rate of economic growth in the country!
Why then would a Bank, the representative of the Chamber of Commerce and others be so mindless and definitive about higher government expenditure causing growth? Indeed, if any increase in Government expenditure causes growth, why would Governments sit and endure negative growth rates as Guyana did between 1997 and 2006? Why did the UK and the Japan ever experience negative economic growth? Are these Governments too stupid to tax citizens and to spend money?
Obviously not!
The effect of Government expenditure depends on the quality of the expenditure and the nature of the projects or the activities funded. Again, when Guyana experienced significant negative growth in the past was Government not spending money? Were there not new Government buildings going up? In that case it is not appropriate to equate new buildings with growth. Is the Skeldon sugar plant which was supposed to bring down the cost of exporting sugar, able to achieve its aims? Has GuySuCo not made a loss since that plant was built, have sugar production and exports not been below target since that time?
Put simply, if a Government takes money from taxpayers and uses it to do something less efficiently or to fund a less important or more wasteful undertaking  than the private individual would have done, the country would be worse off and higher growth would not automatically follow expenditure. This is the real heart of the issue.
To say that a Government’s request for money would favourably affect growth is therefore really a joke, unless one is able to speak to the purpose of the expenditure. In a country where getting electricity connected takes longer than it would in most of the rest of the world, where paying taxes is more difficult than most places, where exporting is more costly than importing goods and where customs procedures are more cumbersome than elsewhere, more Government expenditure is not synonymous with economic growth. The nature of the expenditure matters.
Furthermore, where Government spending may put legitimate enterprises out of business or at a disadvantage relative to illegal ones or where corruption channels business in the direction of corrupt and less efficient enterprises, the country would be better off with less Government spending.
Simply spending more money than was spent last year is not the same as economic growth!
Carl Greenidge

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