The economic policy of increased taxation that, the A Partnership for National Unity/Alliance For Change (APNU/AFC) Government is engaging in, as a move to increase the revenue base of the country, would at this recessionary period of our economic growth, only lead to further stagnation and economic depression.
Instead, the Government should take a page from the United States (US), among other countries, during its times of recession, and engage in ‘pump priming’ to stimulate economic growth.
Not to be misconstrued, pump priming, as the name suggests is derived from the operation of older pumps whose valves had to be primed with liquid in order to function efficiently. However, the terminology was utilised by US Presidents Hoover and Roosevelt to describe the need for government polices geared towards lifting their economy from the Great Depression.
It was also utilised in the financial crisis of 2007/2008 to reduce interest rates, increase government spending, particularly in the areas of infrastructure, in addition to dolling out tax rebates to the masses.
Pump priming is grounded in the Keynesian economic theory, which states that “government intervention within the economy, aimed at increasing aggregate demand, can result in a positive shift within the economy. This is based on the cyclic nature of money within an economy, in which one person’s spending directly relates to another person’s earnings, and that increase in earnings leads to a subsequent increase in spending.”
The subsequent increase in spending would then lead to increased profitability within the private sector – which is stagnant in Guyana at the moment – providing the necessary impetus for accelerated economic growth.
With respect to Guyana’s current economic standing, the mid-year economic report from the Ministry of Finance highlighted that for the first half of 2016, Guyana registered an overall GDP growth of just two per cent. Prompting Finance Minister Winston Jordan to revise downward his projections for the country’s annual economic growth from five per cent to four per cent, respectively.
The only industry that is responsible for this registered level of growth is mining which has, in the last couple of months, registered increased production within the area of gold. The other industries according to the report are in the negative as far as production and growth are concerned.
The government has increased public taxes in the form of licence fees of which there are now 140 increased cases. There is also the removal of tax exemptions – traditionally used to attract Foreign Direct Investment (FDI) – for investors, as well as removing tax exemptions from all capital equipment in the major productive sectors such as agriculture, forestry and mining, even though most of these sectors, with the exception of mining, registered negative growth. A clear indication that they need to be helped, and not burdened.
The spin-off effects of these implementations would invariably contribute to the already colossal unemployment rate of 25 per cent, reduction in the levels of production in the manufacturing sectors, in addition to further decelerating the growth of the economy because consumers would not have disposable income to spend.
In cases like this, when the economy has slowed, the unemployment levels are up and consumer spending is down due to businesses not making substantial profits, the government from an economic perspective is supposed to ‘prime’ the economy by decreasing taxes across the field, and increasing government spending, particularly in infrastructure.
This in turn would give consumers more disposable income, while government spending – on infrastructural projects such as the Amaila Falls Hydro project – would create jobs. In the case of the Hydro project, cheaper electricity would make foreign investment more attractive as rates become competitive comparative to other countries.
This would invariably lead to a reduction in the unemployment levels on two fronts, the infrastructural aspect and with the setting up of manufacturing sectors via attracted FDI.
Government’s policy of increased taxation is best used when inflation is too high, above six per cent, as a tool to maintain the purchasing power of the currency and generate a broader tax revenue base since a high period of inflation would suggest that there is more money within the system than there is commodities to purchase.
Guyana’s inflation rate was recorded at 0.40 per cent in June of 2016. Essentially, a balance must be maintained between the increasing of taxes, to offset deficits, and the amount of money consumers have at their disposal.
