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The Belize TiMeS
Sunday, March 14, 2010
BALANCiNG BUDGETS: iNCREASED TAXATiON NOT AN OPTiON
The nation waits with bated breath for the economy to recover from the current recession. We know that the pace of our recovery is hinged on the action or lack of positive intervention undertaken by government in order to spur growth. Government therefore cannot get away with excuses anymore and frankly the nation is fed up and tired of excuses. The people of Belize demand and expect results. People all across this nation are suffering and many are going hungry - many not able to say where their next meal will come from so the business of governing is no joking matter. This government puts itself forward as having the skill and care to deliver for all the people of Belize and with this they are tasked then with having to provide goods and services, meaningful infrastructural development and an enabling environment for businesses to prosper. As we near the end of the current fiscal period, the budget for FY 2010/11 presented by this Government will be the budget that defines them as a caring people and business sensitive government or one devoid of vision and compassion. It is crucial to look at how the budget will be balanced, given the current economic climate. One should pay keen attention, not to the usual verbosity of the presenters, and the usual ranting and raving but to the substance of what will be presented to the people by the Prime Minister. The budget will impact all citizens for better or worse. The lives of many Belizeans will be defined by this budget for years to come. Basic economic theory confirms that when an economy is in a recession, governments’ main objective is to stimulate growth and recovery through increased demand. This increase in demand is a necessary condition for increased output and consequently economic growth. This essay will provide an overview of what are some possible policy options that are at the disposal of government in the quest to be able to provide goods and services to the people of Belize. A quick review of the demand function would highlight that aggregate demand in an open economy is the sum of consumption, investment, government spending, plus exports minus imports. In this function, what will be reviewed is how government spending ought to operate when an economy is in recession. For small economies like Belize, government is the largest employer of labour and provides essential services such as basic health care, education, national security and infrastructure. In FY 2009/10 government’s expenditure on goods and services was estimated at $262,677,513 or 31% of total expenditures, with personal emoluments accounting for another 32%. Therefore, in a recession the policy options available to governments are either spending cuts or tax increases, especially when a budget deficit would prevail. However, in states where government spending is an integral component of the functioning of the economy, the policy options are counter-productive in a recession. Therefore, governments must make the policy choices that are the best fit for their particular circumstances. From
to taxes such as GST would increase government’s reliance on a tax rate that would then make it difficult for any reduction in the future to be realized. Instead, government must focus policy on supporting the development of emerging sectors within the economy so that those areas are able to generate economic activity and thereby provide increase tax revenue to the state. The development of a striving film industry
FY 2008/09 to 2009/10 government’s total spending increased by 9% however, such a miniscule increase surely did not reflect a stimulus package of any substance and that is because most of those funds indentified as stimulus funds, were already earmarked for projects and grant funds approved and undisbursed at the time. Therefore, there is little evidence to suggest that government would reduce its spending in an effort to bridge the financial gap that would exist; therefore the alternative option that must be reviewed is increased taxation. Increasing taxes when an economy is in a recession is counter-productive since it exacerbates the economic slowdown that already exists. This is the case, as increasing taxes would depress consumer and business spending within the economy. In Belize, history has shown that the tax most easily adjusted or varied as a response to government’s fiscal policy change, would be specific taxes or ad valorem taxes on goods and services. We were introduced to the Value Added Tax (VAT) in the mid 1990’s which was later repealed and replaced with a General Sales Tax (GST). Irrespective of the type of tax, the effect is that such taxes are regressive in nature; in that low-income consumers who have a high propensity to consume bear the tax burden. Currently GST is levied on utilities such as telephone, water, electricity and cable; in addition to consumable goods and other professional services. With the application of this tax, many goods and food items have been zero-rated or exempted. Therefore, any possible increase in GST from its current rate of 10% would be devastating to consumers who are not realizing any salary increases. It goes without saying that if there is any proposal for a tax increase it must be accompanied by reduced spending in areas such as administrative expenses. How can government perform for less without cutting people and providing better value for money expended? Any increased adjustment
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is one such option. Consequently, tax adjustments during a recession must be undertaken with great caution, as the consequences could prove to exacerbate an already depressed situation. Without vision the people perish, leadership is required to steer us to safety and so far we are languishing. Gwyneth Sydney Nah Send comments to GwynethNah@ gmail.com