Gov’t should use oil revenues to offset taxes, not give handouts
-investment fund manager
The Government of Guyana should pursue reducing income and corporate taxes as opposed to giving handouts from expected oil revenues, according to Investment Fund Manager David Pollard.
During a public lecture on Wednesday night at the Georgetown Club, Pollard said if the government has the capacity to fund its capital and other works with the additional revenues, then there would be no need for there to be high income or corporate taxes, or for them to even exist at all.
With such a move, he noted, every worker stands to benefit and would be able to get their “piece of the pie.” A move like that, he added, would result in the beneficiaries not being incentivised to avoid work and an increase in corporate efficiency, which would be as a result of lower wage and corporate costs.
Pollard explained that while the Guyana Revenue Authority (GRA) collected $199 billion in revenue in 2018, revenues from oil will exceed that figure by 2023, which also includes all income and corporate taxes collected by the GRA.
“I even like the idea that it will benefit workers because some of the other things we have talked about are things about just handouts to everyone but there is a danger that that encourages recklessness. You don’t have to work. Why work?” Pollard explained.
He said handouts are very dangerous as they can create a sense of entitlement that can damage the local workforce. “I prefer you run into zero taxes than just handouts because handouts can have a damaging long-term effect on the ability of the local workforce to deal with problems that may come,” he added.
The lecture was the sixth in a series that Pollard has done and was organised by the Guyana Association of Securities Companies and Intermediaries Inc. (GASCI) and the Guyana Securities Council (GSC).
The presentation focussed on the impact of oil revenues on the country and featured discussions on their effects on the exchange rate, inflation, debt and what to do with additional revenues that the country would be garnering.
While at the beginning of 2020 the nonoil sectors of the country will still dominate the contributions to the country’s Gross Domestic Product (GDP), by 2025, when ExxonMobil’s Liza Phase 1 and Phase 2 are both fully operational, Pollard predicts that they will still contribute more to the GDP while the contributions from the oil revenues should rise significantly and contribute about 49% to the total GDP.
Even after Exxon is repaid for exploration and development costs, the country still stands to gain almost US$3 billion in revenues from 2025, a stark increase from approximately US$300 million at the beginning of 2020.
Pollard also emphasised that going forward, the GDP should be considered in two components – the non-oil component and the oil component.
Considering that last year the GDP stood at $805.7 billion, with a growth rate of 4.1%, and with a projected growth rate this year of 4.4%, he said that he assumes that growth from 2020 will be 6%.
Pollard added that he considered the effect of profit oil on the GDP, which shows the size of the economy significantly increasing over the years. With first oil for Liza Phase 1 expected at the end of the first quarter next year, he said that there will be a growth spurt of about 16%, and it will remain relatively stable without any significant increases until Liza Phase Two starts production, where there will be another big growth spurt of between 20% and 30%.
All of this, he said, will have a serious effect on the value of the dollar and while its appreciation would spell good news, it could have negative effects on certain parts of the economy, especially as it relates to businesses that export.
However, he noted that the Bank of Guyana (BoG) has a role to play in controlling the flow of foreign currency out of its vaults into the general economy. “They need, even as they do now, to have a direct and clear exchange rate policy driving how they do that,” he said.
He also highlighted that the Sovereign Wealth Fund (SWF) can play a role by being a reservoir for the oil revenues, rather than keeping them “locked up in vaults.”
As a result, the BoG would be able to control the gradual appreciation of the Guyanese dollar over an extended period of time in order to not put pressure on the competiveness of the non-oil sectors.
“It is a problem if we let oil dominate and we must work hard to preserve the non-oil sectors. When we think of GDP, our economists must start getting accustomed to thinking of it as two parts – the oil sector and the non-oil sector – so that you can take care of it. And we need to look at trying to find appropriate policies to support the non-oil sector and that can be done successfully,” Pollard added, while citing the development of Dubai, which now earns large revenues from its aviation and tourism sectors.
He said not focussing on the non-oil sectors and having the oil sector dominate
could replicate the Dutch Disease in Guyana and lead to the danger of increased concentration of the economy in one sector.
As a result, people in the non-oil sectors would want jobs in the oil sector, which can lead to a complete deresourcing in “very sensible parts of our economy.”
However, he noted that it is not all bad news given that oil exploration and production are not a labour intensive industry, especially with activities currently being concentrated offshore Guyana. He said that it would not affect the economy negatively unless keen attention is not paid to the non-oil sectors and their development when oil revenues begin flowing.
Pollard also touched on debt and borrowing and explained that capital expenditure should be funded from oil revenues and while the country should consider paying off most of the national, external and domestic debts, there are positives in having some debt, but not in the form of loans.
He said the government should pursue getting bonds at different maturities to establish Sovereign Yield Curve, which establishes market driven interest rate levels that are likely to be much lower than bank determined loan rates.
Moves like these, he said, would lower corporate costs and therefore increase corporate efficiency.
Pollard also noted that there is no reason why the normal governmental procedures for planning, prioritising and spending through the budget process should change with the arrival of oil, but key focus should be placed on education, especially adult education; health; the Green State Development Strategy (GSDS); and infrastructural developments.