Public option theory and financial delusion

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Tuesday 01 February 2022

Public option theory and financial delusion

A flash in the behavior of the Iraqi public finances

 

https://annabaa.org/arabic/referenceshirazi/30005

 

1. Preliminary theory:

A- Professor of Economics - James M. Buchanan is considered in the history of public finance the economic father in developing (public choice theory), which is the theory that tests the relationship between economic sciences and political science. At the same time, it is one of the methods of economic policy analysis based on the motives of the political forces and the bureaucratic forces associated with them regarding public budgets, which Buchanan framed in his famous book in the year 1977, entitled: Democracy in a deficit:

Democracy in Deficit.The Political Legacy of Lord Keynes.NY Academic Press.1977

Buchanan and Wagner RE argue that Keynesian macroeconomic policy is based on the premise that decision makers act in the public interest rather than their personal interests. (Buchanan) believes that as long as the (political) decision-makers are human, they will act like other people, especially in maximizing the function of their personal benefit, instead of adopting the principle of self-denial or altruism on themselves towards their compliance with the law and optimal policies that provide the best for the whole nation.

Where you find that most of the political elites who adhere to electoral re-candidacy in Western democracies and emerging democracies today often seek to continue to preserve their legislative positions instead of presenting the requirements of prosperity to their electoral districts. As the majority of politicians tend to jobs and businesses that generate high revenues for them and lead to the improvement of their personal well-being, as (Buchanan) says, at the expense of the public budget by virtue of their legislative powers. This is what leads over time to widening the scope of the general budget as long as they constantly need to be re-elected. As those politicians go to provide government jobs to their supporters and expand the scope and diversity of government jobs to provide job opportunities for them to win their electoral votes in subsequent sessions and maintain their political weight. Thus, the government financial system is biased towards the principle of a large budget in allocations and trading activities, which puts governments in front of complex difficulties in making financial decisions, and what requires more experts to delve into intractable public finance problems. Thus (Buchanan) called Keynesian economics, calling it "disease", or rather ("Chinese disease"), which leads to ends that undoubtedly require a limitation of the scope of the irresponsible behavior of politicians, as Buchanan himself calls it. and restrict them to act in a disciplined financially responsible manner.

Buchanan believes that the Keynesian school is what made politicians far from the principle of balanced budget and immersed in fiscal deficits. As Buchanan departs with his idea of antagonizing the political dimensions of the school (post-Kenaziism) through what was presented in the wide volume issued in 1986 with a group of book and marked

"Bias in post Keynesian: Budgetery politics: The Erosion and potential Replacement of Fiscal Norm" in Deficits, ed James Buchanan, Charles Rowley and Robert Tollison. Oxford 1986,

A- (Buchanan) notes that future generations will bear the budget deficit, which requires them to pay more taxes and bear more tax burdens in a way that the interest returns granted on government bonds under which they lent to governments are not compensated by what is called the Ricardian parity. equivalence.

b- Buchanan called for constitutional reform or called it (within the theory of public choice) the constitution revolution: which required a change in the role of government. Buchanan sees in the science of constitutional economics that leaving governments without constitutional restrictions will excessive financial behavior and become trespassing on public money, and comes at the forefront of those demands in the constitutional restrictions that Buchanan called for the adoption of the principle: a balanced budget, on the basis of which public finances restore its health Its purity and integrity.

The writer raises within the scope of constitutional economics, that simple majority governments have dangerous behavior that leads to the imposition of taxes is one of the issues that follow their electoral campaigns because it is an opportunity that increases their benefits in enjoying the revenues of the public budget. Therefore, Buchanan stresses that any tax amendment, when enacted in the House of Representatives, obtains a two-thirds majority of the members of the House and not a simple majority.

We cannot miss the contribution of the great economist Gordon Tullock, a professor at the Faculty of Law at George Mason University in the United States, through his work with Buchanan at the Center for Studies on Public Choice Theory. Public economics and its applications in economics in general and public finance in particular, which presented his ideas with what he called (the mathematics of legislative elections) and topics in which game theory was used to measure economic efficiency and economic welfare theories within a broad framework called public economics.

2. School public finance models in the balance of political power.

A- fiscal illusion theory

First: The doctrinal conflict between the Kenesian school and its financial behavior, which indicated involvement in the applications of the theory of financial delusion, through the broad role of the state in the economy or the so-called intervention state, or the broad state interfering in economic life in encouraging additional exchange forces in the economy and nurturing effective demand to ensure Economic growth and stability through the strengthening of demand or aggregate spending and the general effective demand and the promotion of the welfare state on the one hand, and between the neo-liberal currents that adopted the free market economy through the role of public choice theory as a methodology embodied in practice in the Washington Consensus since the late 1970s the past in order to apply the neoliberal economic approach that adopts government (small state assumption) in the economy to achieve growth and economic stability and promote competitiveness by unleashing free market forces in stability, growth and welfare.

Second, the economist Buchanan, in his theory, views a fiscal illusion as a failure to correct the accuracy of government expenditures. As the financial illusion is achieved when government revenues do not disclose their full perception of what taxpayers or taxpayers pay, and then the financial illusion is achieved that the cost of government operating expenses appears to be less than it really is.

As long as all or some of the taxpayers benefit from government expenditures, especially from those hidden revenues, the intensity of government spending will increase, which will motivate politicians to constantly expand government spending for the benefit of their electoral campaigns.

Third: The financial illusion is called idiomatically: Puviani's Fiscal Illusion.

The Italian economist Amilcare Puviani presented his book in 1903 under the title:

Teoria della illusione finanziari (Theory of Financial Illusion (not yet translated into English, but translated into German in 1960 under the title Die Illusionen in

der öffentlichen Finanzwirtschaft, Berlin: Dunker & Humblot, 1960).

As Puviani used the (financial illusion) to later offer the American financiers the term of the so-called: (fly paper effect), as those economists noted that often governments with a high administrative level provide financial grants to governments with a low or less administrative level. With these financial actions rather than seeking to reduce taxes and thus reduce the tax burden on taxpayers and enhance their direct benefit, the agencies receiving federal grants will increase spending opportunities in order to expand operational services in another way. As the fiscal illusion becomes an excuse that is invoked to make it clear at the local administrative levels or at least that they are not aware enough that the financial grant for the purpose of spending came to their towns from the higher administrative levels, which is mainly the source of the revenues of local governments..!!

Third: In a policy called by the neo-liberal American writers (starving the beast), which was presented by a member of the Council of Economic Advisers during the era of President Ronald Reagan, the economist William A. Niskanen, whose name is associated with the concept: Reaganomics, where he put the theory of public choice in President Reagan's program Economic. He promised it a strategy used by American conservatives to restrict government spending and free it from the phenomena of "the Keynesian fiscal delusion" within their neo-liberalism, by calling for tax cuts in order to reduce the pretext of spending as Niskanan defined it here as the monster in 2004, saying: It is the government of the United States that is insatiable with spending and spending and must be funded Government programs from direct tax sources, such as education, health and security programs and others. The same writer also found that there is a strong negative relationship between the levels between federal expenditures and federal revenue. Reducing taxes and deficit-financed spending makes the government's operating costs less expensive than any other model. Thus Niskanan used the strategy of starving the beast as a policy strategy of conservatives against hostile politicians in order to restrict government spending within Reagonomics, that is, to starve the government beast and prevent it from excessive spending for political reasons by reducing tax revenue and working within a government that is equal to the minimum Where expenditures with tax revenue. However, many see, on the other hand, that there is a lie that cannot be easily avoided, between tax cuts today, which may not lead to spending cuts and the removal of the fiscal illusion in the future. Thus Niskanan used the strategy of starving the beast as a policy strategy of conservatives against hostile politicians in order to restrict government spending within Reagonomics, that is, to starve the government beast and prevent it from excessive spending for political reasons by reducing tax revenue and working within a government that is equal to the minimum Where expenditures with tax revenue. However, many see, on the other hand, that there is a lie that cannot be easily avoided, between tax cuts today, which may not lead to spending cuts and the removal of the fiscal illusion in the future. Thus Niskanan used the strategy of starving the beast as a policy strategy of conservatives against hostile politicians in order to restrict government spending within Reagonomics, that is, to starve the government beast and prevent it from excessive spending for political reasons by reducing tax revenue and working within a government that is equal to the minimum Where expenditures with tax revenue. However, many see, on the other hand, that there is a lie that cannot be easily avoided, between tax cuts today, which may not lead to spending cuts and the removal of the fiscal illusion in the future.

B - Measuring the international financial delusion.

Economist Paulo Reis Mourao presented in 2008 an international standard for determining the degree of financial delusion based on the theory of the former Italian writer Amilcare Puviani in his tagged study:

Mourao, Paulo (2008). Towards a Puviani's Fiscal Illusion Index. Hacienda Publica Espanola. 4:187187, 49–86

The Index of Fiscal Illusion reached nearly 68 countries during the period from 1960 to 2006. The writer studied the theory of financial delusion as far as it relates to (misperceptions) in the general budgets of governments from the point of view of voters in legislative elections and taxpayers of taxpayers. In designing his measure of financial illusion, the author relied on a consistent methodology for the purposes of the calculation.

The results showed that the fiscal illusion varies from country to country around the world. Countries such as Mali, Pakistan, Russia and Sri Lanka obtained high average financial delusions over the research period. While countries such as New Zealand, Luxembourg and the Netherlands have a low average on the financial illusion scale. The writer asserts, when considering the time dimension between 1980 and 1995 during the period of application of the neoliberal approach to small state assumption and application of the Washington Consensus, Maurao notes that the overall indicators of the application of the financial illusion scale registered a significant decline during the above period. And that there is stability in the financial illusion averages, which have decreased since 1995 and thereafter for most countries of the world.

3- Financial illusion in the balance of political power in Iraq.

The Iraqi political class, with its ethno-sectarian formations, believes that there is a phenomenon that has accompanied public finances over the past two decades, which is the predominance of rentier public revenues over public expenditures in the budget's financial records, which calls for the annual cumulative expansion of public spending. Thus, a yearly fiscal illusion is formed, which is a progressive tax on estimates of rising oil revenues, as long as the advances withdrawn for spending purposes, which are not shown in the final accounts for ten years and are postponed for settlement as actual spending (which exceeded $100 billion) do not constitute any Guaranteed match between revenues and public expenditures in Iraq. It is as if the annual general budget begins (with a virtual deficit) and ends (with a real surplus) being transferred as an opening balance in the budget of the subsequent fiscal year, which is in fact a fiscal illusion justified by two things:

The first: the evolution of annual oil revenues, whose averages have increased by about five times during the past two decades in light of the continuation of conservative annual pricing for the purposes of calculating oil revenues in the general budget, which constitutes about 93% of the total annual revenues in it, which justifies continuously withdrawing the rent surplus achieved in advances It is difficult to settle, and it was not counted as final spending in light of the faltering final accounts of the government, which are the basis of the Iraqi financial delusion.

The second: converting the above hypothetical deficit into an actual deficit that is financed by borrowing immediately and according to what is planned in the annual budgets in the event that oil revenues fall below their rates in the single annual budget, while continuing to maintain the increased spending capacity approved by politicians annually and on an escalating basis without a decline or contraction in Fixed current expenses such as compensation for workers. The (financial delusion) in Iraq is justified by the following:

A - The paradox of the small rentier state (fiscal policy and liberal confusion).

There are two trends in liberal thought that surrounded the financial policy of the state after 2003 and its connection to the market economy in Iraq:

The first tendency: the idea of the (component-state) within the solution of the impossible triad dilemma did not meet with neoliberalism in the issue of the small state assumption. On the contrary, the state of components, on the contrary, tries to increase the spending pressure towards highlighting the capacity of the component financially, especially by maximizing consumption expenditures or budgeting. Operational and the component behaves financially as if it is a potential or alternative context (for the nation-state).Despite this, this tendency, in its paradoxical nature, has facilitated a way out of the impasse of the impossible trinity, as seen by Dani Rodrik, professor of government policies at Harvard University in the United States (that is, the combination of the idea of the state—the nation, parliamentary democracy, and globalization in the peripheral countries of the capitalist system). Integration in the global market or globalization is seen in (state - components) as just (democratic federations, not state-nation) that move to perpetuate the overall paths of the global political economic system (state - market) and that these federations cannot be transformed among themselves into state building - The nation seeks to create a united people enjoying prosperity and economic freedom.

Thus, the financial risks, which are devoted to final consumption, not to development and their production orientations, come only to maximize a dangerous principle in international geopolitics, which is called (Bioregionalism), which means the dissolution of (the state - components) in the political regions and markets present to them ethnically or ideologically through Borders, which is something that globalization is looking for by transforming democratic entities (state-components) into (democratic federations) that are linked to globalization markets more strongly than the national association as seen by the nation-state!!

As for the second trend: he believes that consumer sovereignty towards the tendency to consume are two basic variables that direct the goals of the economic system and all its activities as desired by the liberal school in the Iraqi economy. And that the consumer is similar to the king today, as the owners of that school claim. Most of the economic policy objectives have become consumerist tendencies or nourish consumerism, at the very least. The liberal policies do not converge with the policies that tend towards the direct and productive employment of the labor force and the maximization of welfare through the intensity of material and human capital accumulation, and then achieving some optimization in real production, leading to consumer welfare.

The number of workers in the (component state) increased from 800,000 government employees at the end of 2003 to more than 4 million government employees at the end of the year 2021. There is justification in thought and action.

Fiscal policy has become its orientations more like a life insurance company (for three million government retirees or more) and for four million employees who are currently in service and receiving salaries with an average annual rate of about double the per capita share in the gross domestic product, which is estimated at present at $5,000 annually. As for the productive labor market, which has become devoid of regulation and social security, due to the strength of its unrestrained liberalism and the weakness of its organizational homogeneity in describing work rules and workers’ rights, the number of workers belonging to it, who number more than six million workers, are within the movement of private activity currently loose, and there is no effective social security except Two hundred and more than two hundred thousand of them actually work, or maybe even less. There is a similar number of retired workers, they are about 50,000 retired workers who receive a monthly salary in accordance with the Labor and Social Security Law, with small monthly amounts not exceeding $175 per retired worker, which have been increased in recent years to put it just above the poverty line by about $350 per month.

Here, (the state-components) is trying to exercise the function of (the nation-state) in terms of internal spending behavior and changing the paths of fiscal policy and directing it around the traditional public finance functions in a matrix of highly spent functions and activities and possesses liberal power derived from the impossibility of the Trinity impossibility, which made sovereign spending - Consumption of components is moving towards the extreme in waste and exchange. Each (component) tries to act as the nation-state that maximizes operational spending over the other component. This wasteful behavior is a catastrophe whose data has distorted oil revenues and allocated them towards the phenomenon of government consumption (operating spending) in the order of public finance priorities and in line with the structure of the state - the components and the liberal market, both of which are bound together by globalization and its external markets. Between the year 2004-2021, more than half a trillion dollars was spent on operational government spending, and the outcome is unfortunate in its results, as a country that enjoys the concept of an upper limit has become unproductive. The financial actions (of the state-components) were also reflected on the orientations of the monetary and trade policies, and they receive the negative variables that push the spending forces consuming (of the state-components) operating within the framework of what is termed the political quota. Lots of fiscal illusion problems which are at the same time unproductive operational consumption and behaving according to the logic of the state - the small nation dressed in the dress of the state - components. In spite of the operational ability of the federal budget to expand, but its non-productive consumer construction is the path that made (the state-components) linked to the global market through the channels of trade and international exchange.

Based on the foregoing, Article (106) of the Constitution of the Republic for the year 2005, which requires the formation of a general body to monitor the allocation of federal revenues in order to achieve the fair distribution of grants, aid and international loans according to the entitlements of the regions and governorates, and to verify the optimal use of federal financial resources and to ensure transparency and justice in allocation, is still suspended. Until its recent adoption from the year 2021, it has been constantly replaced by methods of support (direct and indirect) at a rate of 48% of the annual allocations to the federal budget and more than 15% of Iraq's gross domestic product. Whereas, tax revenues constituted only less than 4% of the country's total annual budget ceiling

B - The financial delusion paradox in Iraq: the general budget 2021 as a model.

Returning to the beginning, the fiscal policy in Iraq will focus on decisions that clarify whether the financial authority has spent less or more than what is available to it from the revenues received from fees, taxes and financial returns from the production and export of oil and various cash transfers.

In order to characterize the fiscal policy as embodying the reality of effective demand or spending to achieve the reality of the financial illusion, this policy has been practicing the idea of deficit and financing it through borrowing to bridge the deficit gap even instead of going to public finance rules and their natural ways in managing fees and tax estimates Or reducing some government expenditures to achieve a balanced budget, but the annual deficit remained a close and constraining focus for financial sustainability in Iraq, whose ongoing spending risks are magnified by actions or reactions stimulated by political forces for upcoming electoral gains. This made the public budget move through discretionary policy methods that illusion market decisions and the entire economic policy in favor of the forces (power-sharing).

In light of the foregoing, and in order to investigate the fiscal illusion paradox in the model of the federal general budget for the year 2021, there are two paradoxes:

The first: It perceives a deficit in public spending and a fictitious surplus.

As the Iraqi public financial data published in the year 2021 showed a decline in public expenditures and an increase in government revenues, which indicated an estimated surplus expected by Iraqi political circles, claiming that there is an estimated hypothetical deficit in the general budget for the year 2021, which constitutes approximately 29 trillion dinars. The aforementioned will undoubtedly end with a surplus of more than 6 trillion dinars. But the political center did not realize that the public finances had essentially borrowed more than 5 trillion dinars during the year 2021 to fill an increasing deficit in its expenditures, and that the advances withdrawn on the spending ceiling of 129 trillion dinars (which exceeded 15 trillion dinars) were not counted within the spending pockets because they are pending On the final settlement in the final accounts and according to the high-end financial analysis presented by the financial expert, Dr. Ahmed Abdul-Hussein in this regard. And the actual deficit at the end of the 2021 fiscal year is about 9 trillion dinars instead of a surplus estimated by politicians at about 6 trillion dinars in the context of delving into the Iraqi financial delusion and calling for spending correction after the oil barrel reached an average price of 5.68 dollars for the purposes of calculating budget revenues instead of From the default official price of $45. While the budget balance can be achieved with an average oil price of not less than 72 dollars per barrel, assuming the stability of non-oil revenues.

As for the second paradox: It relates to the customs fiscal illusion.

Although the non-oil revenues from fees, taxes and various cash transfers achieved only 50% of their originally estimated estimates of 20 trillion dinars in the 2021 budget, the indicators (the customs financial illusion) have also shown that the customs revenues that increased in 2021 to reach more than one A trillion dinars compared to 2020, which did not exceed 863 billion dinars, which is nothing but a financial delusion in the customs proceeds, and according to the sophisticated analysis presented by the economist Dr. 2020 the day global trade closed towards Iraq, and secondly, the difference in the increase in customs revenues was brought by the inflation tax due to the factor of reducing the Iraqi dinar against imported goods in dollars by 23%

4- The public choice and the new political constitutional guard in Iraq.

A- After the (national identity) retreated and turned into a second best preference during the constitutional period 2005-2021 due to the consensus of sub-ethnic-sectarian identities, which at that time became a first best preference, the current political process is trying to reach what can be called from a point of view The personal view ((the hybrid social contract)) which reconciles the first preference with the second preference for identities at a historical stage that began waiting for the birth of the Iraqi national identity to rise above all sub-identities and aspiration to establish the path of the future political well-being of the country through the principle of citizenship.

B - The recent Iraqi parliamentary elections ended the testing phase of rebuilding the social contract, the political complex (the new ethno-sectarian Iraq). It is a contract that was really born on the basis of the movement of political banners that came in contradictory directions at the point of departure of the country’s constitutional ship within the maps of the 10/10 parliamentary electoral boxes, which put the entire political system at a crossroads: either the birth of a cross-ethnic-sectarian political attraction and the march towards a national parliamentary majority or the restoration of Political dismantling towards interaction or dissonance with the strength of local, regional and international influences and trends, and its entry into a consensual problematic that determines the degree of transformation in the new complex social contract and one political national flag.

C- What is happening today in the constitutional movement is the birth of a banner that came as a result of the disintegration and cleavage of the larger banner and the re-glue of its parts between a hybrid of smaller banners to generate the idea of the unified national banner (that is, the new constitutional guard). The larger banner began to split gradually and harmoniously while retaining its supremacy in the national decision-making, and the smaller banners began to unite in a more integrated way to generate political equations that would help speed the integration of the segments of the fragmented compounds from sects and races to reach a (national hybrid political entity), which is the national majority. .

D- The hybrid entity will carry a degree of possibility of permanence that cannot be predicted in the long term, as it is left to the west to move with critical political practices on front axes in the ability to sow the seeds of its survival or generate reverse axes in moving the roots of its disintegration.

open effect:

First: the latent or (hammer) segments of the sect - the race that makes up the hybrid social contract itself, which these forces may seek to re-dismantle and reintegrate with their old cells and return to the equilibrium of political sects power sharing, i.e. (the policies of the old constitutional guard), which is what unites and divides oil rent and its earnings. Concerning government spending and its clientelistic forces seeking from the market forces chasing rent seekers on the one hand, and between:

Second: The (anvil) is the ability to cohesion among the segments within the same newly created political hybrid on the one hand. The sustainability of the new constitutional guard and its coherent success until reaching the next elections must firmly establish the supreme national interests within the game of balancing the political strata, under the influence of the issue of the two sides of the conflict between (the ethno-sectarian segment within the hybrid political entity) and (ethnic sectarianism outside the political component hybrid).

E- The cohesion of the new constitutional guard that carries a reform project for the country before it is a daunting task in running a non-hybrid public choice theory, between the intervention of wealthy state capitalism with the weight of its services in economic reform and the welfare of the citizen, and moving the weight of the public budget, which constitutes half GDP and liberating it from the possibility of achieving what might be called: the hybrid Iraqi fiscal illusion this time, which was clearly imposed by the political quota systems within the arrangements (the old constitutional guard) over the past two decades, and its tireless endeavor to drain the resources of the public budget To expand the government's operational role. It is estimated that what has been spent on the electricity and militarization sectors, for example, is about a quarter of a trillion dollars in less than two decades, of which 83 billion dollars is on the electricity sector, which is inefficient, and its results are still not proven in the welfare of the people on the ground.

Finally, after the general budget exercised the role of a life insurance company for the various races and sects affiliated with the political parties. Or the ability of its uniqueness and influence to generate idle or low-productive jobs within the quota system and the government harnessing the clientism of its supporters from the sects and ethnicities and in the form of continuous challenges vis-à-vis each other for the purpose of generating ethno-sectarian political cohesion for its politicians to secure the electoral vote for the beneficiaries of its partisans in the upcoming electoral cycles In local and parliamentary councils.

* Academic economic researcher and advisor to the Iraqi prime minister for financial affairs
** The article was published in the Iraqi Economists Network