Budget Review 2016 - Trinidad & Tobago
The Trinidad & Tobago Budget Statement 2016 titled “Restoring Confidence and Rebuilding Trust: Let us do this together” was presented by the Honourable Colm Imbert, Minister of Finance on 5th October 2015 and outlines inter alia, the government’s fiscal plans for the 2015/2016 period.
The statement in itself took the form of a measured political position aimed at showcasing the differing policy direction of the current administration and its impact on the state of the economy in direct contrast to methods and measures adopted by the previous administration.
A budget is usually a statement of expected revenues and expenditures based on the prevailing market conditions at any point in time. As such, policies implemented by the previous administration may have been relevant based on the particular circumstances then but may no longer be applicable given the position in which the country now finds itself.
Trinidad and Tobago is largely dependent on oil and gas for its revenue earnings and as such fluctuations in global energy pricing based on external market determinants does in fact impact upon the country’s revenue earning capacity. It therefore impacts upon government spending and thusly the filter of economic beneficial distributions to citizens.
The Minister identified that the country has been experiencing declining revenues due to energy exports having moved from an average high of US$12.4B in 2010-2014 to an estimated close in 2015 of US$7.5B, a 40% decline. The Minister attributed this decline to falling oil production wherein there was a 20% decline in barrels produced (and sold) per day. Notwithstanding that the country also suffered from revenue shortfalls as a result of declining global energy prices.
In the current economic climate, a budget aimed at decreasing expenditure was a necessity. More particularly in a situation where a lack of diversification has allowed for no new revenue streams and in instances whereby no new taxes were introduced during the last several years, the country ought to have indeed taken a firm undertaking towards reducing the size of its ballooning expenditures. Increased government spending also places inflationary pressures on the economy.
The budget is predicated on an oil price per barrel of US$45 and is a budget deficit estimated at $2.8B or 1.7 percent of GDP. In comparison the 2015 revised budget deficit was estimated at $7B or 4.2 percent of GDP and based on an oil price per barrel of oil of US$80 (before revision to US$45.).
The deficit was larger than what was initially projected by the 2015 budget and was as a result of government spending not being curtailed sufficiently in light of the declining revenues.
The Minister also announced the government’s intention to reduce the deficit-gap further and anticipates a balance of revenues and expenditure by 2018.
The IMF have always advocated for developing countries to reduce its reliance on subsidies and transfers. A citizen may argue however that Trinidad and Tobago ought to be able to benefit from its own resources in the form of the subsidy arrangements relative to fuel prices in particular.
That point of view does not consider the cost savings to be had should the subsidies be reduced or eliminated thereby allowing for the funding to be channelled elsewhere in the economy, eg. Transportation development, Housing, Social Programmes etc.
Gas subsidies fluctuated from $4B during the period since 2010 and now stands at some $1.5B in 2015, no doubt being affected (though beneficially) by the fluctuations in global energy prices.
In a move by the government to combat the high subsidy, Super and Diesel fuel were both increased by 15% per litre with immediate effect. The previous increase experienced within in the last few years was Premium fuel at some 43%.
The Minister advocated the need for diversification of the economy and suggested that the Maritime economy in the form of the re-establishment of the once thriving Ship Repair & Rebuilding Industry may offer certain benefit. Given Trinidad & Tobago’s location in the globe the Minister was of the opinion that we are ideally situated to achieve success in this industry.
Notwithstanding that, for the past several years’ successive governments have entertained the idea of re-establishing a Ship Repair & Rebuilding Industry in Trinidad and Tobago without any such idea being brought into fruition. We therefore await to see the deployment of the current administration’s plans.
Revenue Authority & Property Taxes
The Minister identified certain loopholes in the current tax administration system that allowed for lower government revenues being achieved in this area. The government proposes the merger of the Customs & Excise Division with that of the Board of Inland Revenue giving birth to a new entity tentatively called the Revenue Authority as a solution to this problem.
An additional revenue stream estimated at 5% of GDP or $8.0B is expected to be realized from this initiative.
The property taxes are to be implemented at the old rates pre-2010. This is not a new measure implemented by the current administration but one that was set to be automatically reinstituted on account of the expiration of the waiver enacted by the previous administration. Property tax rates are to be reviewed going forward.
The Minister estimates that the country was without the benefit of an estimated $1B in revenue earnings over the last 5 years as a consequence of the Property Tax waiver over the last 5 years.
Foreign Exchange Distribution System
The current administration intends to reinstate the foreign exchange distribution system that existed pre-2014 in an effort to combat against the foreign exchange crisis being experienced. Given other budgetary measures and with the Minister having identified that the declining value of exports are leading to a balance of payments deficit (thereby also limiting the amount of foreign exchange earned), we await to see the effect of this approach.
Much incentive has been directed towards the agricultural sector with a view towards reducing the country’s food import bill. These include the exemption from all duties and taxes of inputs into the agricultural sector, including approved chemicals, pest control, approved vehicles and fishing vessels and is expected to become effective on 1st January 2016. The impact of this measure may lead to an eventual reduction in the country’s food import bill.
A move towards bringing the government’s finances into balance i.e. revenue being equal to expenditure is welcomed. The rippling effects of much larger economies eg. China experiencing economic slowdown and declining growth may have a significant impact on a global scale that will also be experienced locally. Measures must be put in place to cushion these effects at the earliest opportunity.
International Financial Markets have also experienced significant declines and have resulted in the United States’ Federal Reserve toying with the idea of an interest rate hike, which many experts anticipate to be announced in late December 2015.
A prudent approach to the country’s budgeting would be to consider all of these factors.
The government ought not to continue to stimulate development by way of government spending that is not supported nor matched by adequate revenues. This will lead to further borrowing and with future revenue uncertainties, repayments must be a cause for concern.
As such a move towards diversification, reducing the food import bill as a consequence of the agricultural stimulus package and more particularly a move towards the decreasing of the deficit gap between budgets and returning the country to a budget surplus if not near to breakeven, are all positive and welcomed measures.
Other welcomed initiatives includes the financial autonomy of the judiciary, the Private/Public Sector participating initiative and the numerous instances of proposed consultations to be held over the next 6 months. This suggests participatory type intentions towards budgeting and will be welcomed by all sectors.
Probable Effects of Budgetary Items
The increase in the business and green fund levies remains barely minimal and ought not to have a significant impact on business and has previously remained unaffected for well over 10 years. The combined levy still remains below 1% of gross receipts of sales and largely affects businesses.
Citizens may be concerned about the increase in super and diesel fuels which may result in inflationary type effects including increased transportation costs and subsequent increase in the cost of goods and services. To cushion the effect however the Minister has proposed an increase in the personal allowance to $72,000 from $60,000.
Citizens will also benefit from a reduced Value Added Tax now at 12.5% down from 15%. We await certain details relative to the zero-rated items as indicated by the Minister.
We expect that a move to control government expenditure will lead to decreasing inflationary pressures to some extent. Major capital development projects may therefore need to be delayed until such time as the country’s revenue streams can allow for those undertakings.
Citizens must also be aware of the global push towards green energy and must accept the uncertainties in revenues and exports as it relates to oil and gas in the future.
Future Requirements for Budgetary Reporting and Oversight
The reliance on debt financing over the past several years is a cause for concern. The Minister estimated that in 2010 the public sector debt stood at 32.2% of GDP. At the close of 2014 the public sector debt ratio rose sharply to 40.2% and has continued to increase. As at September 2015 the public sector debt ratio stood at 46.3%.
The Minister also disclosed that the balances held at the Treasury moved from a Surplus of $6.5B in May 2010 and now stands in deficit at some -$8.5B in mid-September 2015, a negative movement of some 230.76%. Additionally, the Minister disclosed that drawdowns were unable to be accessed from the Green Fund or Unemployment Fund as a consequence of these funds being pledged against the country’s overdraft and which he estimated stood at negative 98% in 2015.
There has been much public criticism regarding the statistics disclosed by the Minister with members of the Opposition advocating that the numbers “did not add up” and many citizens suggesting that the figures were political and simply “made-up”.
Our Political Climate has allowed for the trust that ought to be held in an institution such as the Central Bank and even the Parliament to be significantly eroded. As such one may need to look at other reports that may shed some light into the state of the economy. The recent Moody’s Report that resulted in a downgrade of the country’s bond rating is one such report.
It may be an ideal opportunity for a review of the reporting mechanisms of the Central Bank. For instance the country ought to have up-to-date and frequent reports regarding Unemployment, Total Debt, Inflation, Interest Rates, Economy Growth, Reserve Balances, Overdraft and/or Cash Positioning and other such indicators of fiscal performance and financial standing.
Whilst Public sector debt can be easily calculated, one cannot discount the total value of indebtedness of the country particularly wherein state-owned companies (with the Ministry of Finance being the Corporation Sole) are the borrowers. Entities such as the National Insurance Property Development Company Limited, National Infrastructure Development Company Limited the Education Facilities Corporation Limited and the numerous other state companies charged with the responsibility of discharging the government’s capital developmental plans also undertake debt financing separate and apart from traditional government borrowings and may not necessarily be publicly known. As such the value of the country’s indebtedness may be even greater than what has been reported.
There ought to be a reporting mechanism that pools all of this information together for the benefit of informing the population of the true state of affairs of the country. The Central Bank’s reporting must therefore be expanded to include all of these areas and mirror the reporting practices of say the United States’ Federal Reserve.
Should steps be taken to ensure this occurs, it is almost certain confidence will be restored in the Central Bank and wherein the citizens may be able to trust the information disclosed rather than doubt its authenticity on the basis of political bias.
We shall revisit the budget in March 2016 to assess the performance of the various fiscal measures announced by the current administration.