The Budget and the secular decline of public sector financial management

Introduction
So far in assessing the challenges posed by the National Budget 2012 for the medium-term outlook and macroeconomic stability of the Guyana economy I have treated with four considerations.  These are 1) concerns over the size of government spending in the economy       (reminding readers that this expenditure does not come out of thin air, but is financed mainly by taxation, borrowing, sale of public assets and grants which have first to be taken out of the economic system before these are spent).  Sale of public assets and external grants are projected at eight per cent of total public expenditure for 2012; 2) concerns over the disincentive effects of high marginal tax rates on labour, savers, investors, etc; 3) concerns over government borrowing to finance its spending; and 4) concerns over the continued concentration of economic activities in a state which has limited capabilities for their management

In order to complete this part of the discussion I refer readers briefly to other considerations dealt with in the next section.

Other considerations
Following Independence, Guyana’s public sector entered a long secular decline in the effectiveness of its financial controls, oversight, monitoring, and regulatory reporting.  All informed or authorized evaluations of the state’s financial administration since Independence underscore the deliberate, persistent and systemic reproduction of financial abuse, along with systematic administrative lawlessness.  Thus regular  reports of such public bodies as the Auditor General, Economic Services and Public Accounts Committees  of the National Assembly,  indicate disturbing financial features, which are well below acceptable norms in Caricom.
Evidence of the above is seen in the following brief sampling of reported financial improprieties:

1)  Public resources kept as slush funds for the administration
2)  Deliberate mis-specification of public expenditure
3)  Non-recording of public monies and absence of proper paper trails
4)  Prevalent illegal virement
5)  Widespread resort to unauthorized public expenditure
6)  The practice of keeping hidden, unrecorded or improperly recorded public financial accounts

In the presence of these weaknesses and defects, annual national budgets have rarely sought to address them.  Proposed institutions that might help to tackle these weaknesses either languish in the interstices of decision-making (the Procurement Commission) or are outright ignored as being too “far-reaching” (the National Assembly Budget Office).  Fortunately, both these have become standard reform measures adopted by the main international financial institutions (IFIs), thereby giving hope to a possible path to their institutionalization.

Sovereign indebtedness
At this point, I shift to the next area of focus in discussing the challenges the Budget poses for the economic outlook and medium-term macroeconomic stability.  That area is the performance of the economy and the growth of sovereign indebtedness – both domestic and external.

Judging from readers’ queries, there is little appreciation of what the terms domestic and external debt mean; the difference between them; and the way in which sovereign indebtedness is best indicated.  This is not surprising and to aid the public understanding of these economic terms, international organizations have produced definitions to ensure universal conformity.

While most readers have the belief that Guyana’s domestic debt is debt held in Guyana dollars, and for external debt, it is debt held in foreign currency, in truth the economic distinction is not made in terms of currency, but instead in terms of place of residency. Thus the domestic debt of the Guyana government is that debt it issues which is taken up by persons resident in Guyana.  Its external debt is the debt it issues, that is taken up by residents of other countries.  This definition is universal.  Thus when resident Guyanese hold United States dollars or bank accounts, these constitute part of the United States foreign debt (even though it is held in United States dollars).

Specifically, the World Debt Tables define total public sector debt so as to include all domestic and external obligations of the Guyana government.  These include obligations of 1) the central government and all its agencies; 2) subsidiary governmental bodies (and their sub-divisions); 3) autonomous public bodies; 4) state enterprises and any other enterprises in which they have a controlling interest; 5) obligations of all these public bodies given out to private bodies with an explicit or implicit guarantee as regards repayment.  This means private sector debt that carries some form of explicit or implicit guarantee is an obligation and hence debt of the public sector.

One further concept requires a brief reference or illustration at this point.  This is what analysts mean when they refer to the overall balance of indebtedness of the Guyana public sector.

Simply put, the overall balance is the difference between the sum of revenue receipts (current and capital) and grants received by the public sector less public sector expenditure (current and capital) and net lending.  Like the public debt this is most meaningfully expressed as a proportion of GDP.

In general, other things being held equal, an economic argument can be made that when this balance is negative (or the government is operating with a deficit) it tends towards being expansionary and even inflationary.  Of course the reverse is expected to occur.  That is, when the balance is positive (or the government is in surplus) the economic effect is contractionary.

I do not need to explain to perceptive readers that, in practice, this does not always obtain, even though it would be fair to assert that these tendencies are there.  In real time, other things rarely, if ever, remain the same.  This observation, however, does not lessen the important truth in the observation that the behaviour of the deficit/surplus when expressed as a ratio of GDP is very informative in shaping the response of economic agents in their appraisal of the medium-term outlook for macroeconomic stability in Guyana.

Next week I shall indicate the challenging pattern of performance of Guyana’s sovereign indebtedness that has emerged during the 2000s. And, after that, I shall conclude with a brief indication of what effective management of Guyana’s public debt requires of the national budgetary authorities.