The issue of budget deficits has been a hot topic of debate in the business, academic and international financial community for some time now. The debate has revolved around whether or not governments should be carrying budget surpluses or at least operating on a balanced budget. At the other extreme are the views that deficits are necessary from time to time. The debate is not a new one as the recent high-profile debate in the USA about the “fiscal cliff” reminds us. Studies have shown that the debate has been raging from the time governments started raising revenue through taxes. While there is no open debate on the issue of budget deficits in Guyana, the management of the public finances is still of concern as pointed out in a series of articles on the subject of deficits and debt by Prof. Clive Thomas. As the Government of Guyana collects taxes to finance its activities and deficits, the question remains who should be footing the bill and calling the tune? The answer will extend beyond this article.
Not a sterile one
As an attempt is made to answer the question, it must be kept in mind that the debate about deficits or surplus is not a sterile one, especially since Guyana has entered its new budget season. The discourse about deficits and surplus contains active ingredients like unexpected floods and the mishandling of public protests that can change the operating environment rapidly and unpredictably. These unexpected developments along with other unavoidable commitments, like protecting the vulnerable and poor and undertaking massive public works, often contribute to governments having to borrow money to finance their deficits. In Guyana’s case, as with other countries, borrowing is done both locally and overseas. Deficits frequently lead to higher interest rates for everyone, and result in other imbalances such as exchange rate instability, inflation and slower growth. None of these are obvious issues in Guyana today, but remain macroeconomic variables that cannot be ignored. The lending rates of commercial banks have been declining, and so have been their rates on savings deposittes. The exchange rate has been relatively stable and the statistical offices reported a monthly inflation rate of less than one per cent as at September last year.
Major chunk of government revenue
Turning to the issue of who should call the tune, one answer would be those who earn enough to pay taxes. Under its tax structure, income taxes are responsible for a major chunk of government revenue and are essentially paid by businesses and employed individuals. The intake from income taxes averaged 42 per cent of total revenue from 2001 to 2006. Starting in 2004, the taxes paid by businesses consistently accounted for a higher share of the income taxes, about 57 per cent, to 42 per cent for individuals. Tax rates on business income declined in 2011, but taxes paid by businesses remain the greater share of income taxes. Prior to the use of the current proportional tax rate on individual income, the formula for determining taxable income and tax liabilities relied on a graduated system or progressive tax system with the marginal rate being as high as 40 percent in the nineteen nineties. Under that system, higher amounts of personal income beyond certain thresholds resulted in higher tax liabilities. Even though the marginal rate has fallen to 33 per cent under the proportional system, taxes on individual and business incomes are still the peeve of Guyanese taxpayers.
Tax Avoidance and Tax Evasion
The gap between stated income and take-home pay or disposable income is obvious and often frustrating since the gap is easily decipherable and understandable. The constant movement of the exemption threshold under the current tax structure does not seem to help. Some commentators with expertise in the field of tax accounting argue that tax avoidance and tax evasion are rampant among the taxpaying population. Tax avoidance is not a crime, but it can slow the rate of tax collection since it uses various types of legal loopholes to reduce the amount of income exposed to taxes in a given fiscal period. It is therefore not as detrimental to the public purse as tax evasion which seeks to keep money out of the hands of the tax collector altogether. Tax evasion is easier to accomplish under an income tax system than under a consumption tax system. In its third quarter review of the economy in 2012, the Bank of Guyana reported that tax receipts from personal income declined by 2.5 per cent even though employment costs rose in excess of G$2 billion by the end of the reporting period.
Concerns about Equity and Fairness
The payment of income taxes has always triggered concerns about equity and fairness. As a result, issues of budget surpluses or deficits are connected to whether or not taxpayers see value in the public expenditure of their funds. The discussions of this matter are connected also to whether the vision of public expenditure is merely about the financial bottom line or if it is about balancing the entire Guyana economy. To the extent that the latter view prevails, budget deficits might be seen not only as tolerable, but acceptable policy, especially if they contribute to public goods with potential for stimulating economic investment.
Irrespective of the objective, at least one group of taxpayers that seems to be able to benefit from public expenditure is the private sector. In addition to paying a higher proportion of income taxes as a result of higher incomes and higher rates, it has been a part of budget discussions with the administration for all the years that they have been paying the greater portion of income taxes. Through the Private Sector Commission and trade organizations like the Chamber of Commerce and Manufacturing and Services Association, they get to speak directly with the administration about their concerns and to influence the preparation of the national budget. In contrast, the rest of the taxpaying public has had to depend on the administration to speak for it. Without an independent lobby, their benefits were, in effect, determined by the interests of the administration and not necessarily by what were in their best interest. (To be continued)