October 26, 2006

A surplus of half-truths

Katy says: Venezuela's Finance Minister unveiled the government's budget for fiscal year 2007 recently. Venezuelan consultancy Veneconomy recently published an op-ed piece, for subscribers only, that sheds some light on what the document contains.

One of the main features of the budget is that both income and expenses are under-estimated, as is usual in Venezuelan budgets. But Veneconomy argues that the Chávez administration is grossly under-estimating earnings for next year with the sole purpose of lowering their obligations to state and local governments through Constitutional Allocations.

In Venezuela, state and local governments have very few tools to tax the population. Instead, they are automatically entitled to a percentage of the government's "ordinary income" as defined in each year's budget. This proportion is distributed among the different governments according to their population.

The 2007 budget assumes the price of oil will be $29. It also assumes inflation will be around 10-12%, contrary to Veneconomy's estimates of 17-19%. Finally, the budget assumes the exchange rate will remain at 2,150 Bs/$. Veneconomy thinks it is unlikely the exchange rate will remain in that range, predicting that it will have to change to 2,400 Bs/$ before 2007 is out.

The outcome of all this is that income and expenses are under-estimated. For example, any oil income stemming from a price of oil higher than US$29 would be considered "extraordinary income" and would therefore not be part of Constitutional Allocations. Any extra income from a depreciation of the exchange rate is also considered "extraordinary income" and would not be part of the allocations to state and local governments either.

Expenses are also under-estimated. The budget assumes, according to Veneconomy, that both income and expenses will remain constant relative to this year's budget. This implies that, in real terms (i.e., after taking into account an inflation of more than 15%), budgeted real spending and budgeted real income would be lower next year than this year. Likewise, if inflation leaps above 10-12%, state and local governments would not be entitled to compensation to cover the higher costs of the public goods they wish to provide.

The true story behind this, according to Veneconomy, is that both income and expenses are under-estimated in the budget because every year, a higher portion of both is going to special accounts in PDVSA and Fonden, which are handled outside normal budgetary rules. This allows spending to be more discretional and for there to be much less oversight.

Although the National Assembly has become a mere formality due to the total absence of forces contrary to the government, the formality of budget discussions still left room for independent economists and the press to exercise a bit of oversight. This task becomes practically impossible when up to 25% of government spending and income, according to Veneconomy, are not included in the budget but rather in obscure accounts that the Executive manipulates at will and with little to no scrutiny.

Budgets are important because they reflect a government's priorities. Without a formal budgetary discussion, politicians cannot be held accountable by the citizens whose money they are spending. The more obscure the budget becomes, the more discretionary its allocations, the less oversight we will have. In the end, it's democracy that suffers.