Budget 2010: A Balancing Act!

By Gregory McGuire

Today is budget day and all of Trinidad and Tobago will wait in anticipation for what has become the most important economic statement from the Government. By this time, most of the national stakeholders such as the private sector chambers, umbrella trade union bodies and other civil society institutions would have submitted their respective proposals to the Government for consideration. In keeping with the spirit of Budget season, it would be worthwhile to share my perspective on some of the essential elements of Budget 2009–10.
First, Government must acknowledge the true state of the economy, including a report on the realised hydrocarbon prices and revenue for the last fiscal year.  Government must recognise that while the economy is, indeed, stronger today than when it faced the post-boom recession of the 1980s , there can be no denying that it remains highly vulnerable to both fiscal and balance of payments dislocation. This is the nature of the beast, and despite the rapid expansion and diversification within the energy sector (offshore), the economy remains vulnerable.
The greatest risk, to both Government revenue and the external account lies in the condition of markets for our major resource based export commodities—oil, gas and petrochemicals. Crude oil prices have stabilised and, with the resumption of growth in the major consuming countries, coupled with sustained discipline on the part of OPEC, it is reasonable to expect some uplift over the next fiscal year. The markets for petrochemicals have also stabilised at closer to average long-run prices.
An entirely different picture emerges in the natural gas market. The outlook for natural gas prices particularly in the USA, remain dismal. In August, natural gas prices had slumped to below US 3.00 /mmbtu, its lowest level in seven years. The market has been hit by three negative forces: a dramatic decline in global industrial demand for natural gas and electricity; an expected surge in liquefied natural gas (LNG) supply, and an unexpected surge in North American unconventional gas supply. While the cyclical factors—demand destruction—will reverse, analysts are bearish on the prospects for an immediate balancing of the structural changes on the supply side. Moreover, the excess supply is likely to pull prices down in all markets—not just the USA. Market conditions suggest a conservative price peg of US$50/bbl (WTI) for oil and US$3.00 per Mcf (Henry Hub) for natural gas, which would yield effective fair-market values at well head of approximately US$ 40.00 for oil and US$ 1.60/mcf for gas .
Revenues from the energy sector, which constitute over 55 per cent of total Government revenue, will also be impacted negatively by a 5 percent decline in oil production, and the introduction of a new fiscal regime, with a lower Government take. Government can also expect lower non-energy revenues as a result of lower returns from significant contributors like NGC and reduced collections in VAT and Customs and Excise duties in light of the “deep economic slowdown”. In summary, the evidence suggests that Government would be hard pressed to obtain revenues in excess of TT$40 billion in the next fiscal year.
This means that for the first time in a decade Government expenditure is facing a revenue constraint. The Government has been the conduit through which energy sector revenues are pumped into the economy, thereby stimulating more broad based economic growth. Government expenditure skyrocketed from $15.3 billion in 2003 to $45.8 billion in 2008, an average increase of 24 percent per year, as Government took advantage of increased revenues to meet its social and economic objectives.
In the context of lower revenue projection, Government has two choices. It may seek to maintain expenditure at 2008–09 levels by drawing down savings and or borrowing to make up the deficit.
This was the approach taken at the end of the first oil boom in 1983, when the Government attempted to bring the economy to a “soft landing”. The result was a rapid drawdown on special funds until all were exhausted by 1986, to pave the way for the IMF in 1988. Alternatively, Government may choose the more difficult option to cut expenditure through a variety of carefully crafted strategies, aimed at striking the right balance among competing needs.

A more conservative approach to spending may yield several benefits. First, it permits a slowing of the economy to more manageable growth trajectory that is consistent with its absorptive capacity, thus reducing inflationary pressures.
Secondly it provides the opportunity for saving in the event that prices in commodity markets turn out better than budgeted. Thirdly, it compels Government to prioritise and sequence its expenditure programme, and sends the correct signal to the population.
The necessary prioritisation and rationalisation of expenditure should be informed by an unbiased assessment of our social conditions. It has become the norm in past budgets to trumpet the known successes such as rising GDP/capita, lower unemployment, free education from nursery to tertiary, free health care and medication for chronic ailments. These are often used as indicators of progress on the road to towards “developed country status”. But there are several other Human Development Indicators, which, when compared with comparator countries, show that Trinidad and Tobago may be now further removed from developed country status than when we started the Vision 2020 journey in 2003. The most obvious are with respect to crime, health and provision of public utilities, particularly water.
For instance, whereas Trinidad and Tobago outperformed Barbados in GDP/capita, the latter retained its Human Development Rank 31 while T&T slipped nine places to 59. In 2008, the infant mortality rate in Trinidad and Tobago was 23.59 deaths per 1000,000 live births, compared with 11.05 in Barbados and just 3.65 in Singapore. T&T growing reputation as a dangerous place to be is borne out by the data on homicides which shows the wide gap between this country and others. In 2007 our homicide rate climbed to 43 per 100,000, compared with 10 in Barbados and less than 1 in Singapore.

These are just a few indicators of the extent to which the human/services side of development has been sacrificed in the quest for economic growth. Inefficiencies in water distribution, transportation systems, air and sea bridge, drainage and health add to the frustrations experienced daily by citizens.
This situation demands a reordering of priorities so that greater emphasis and resources can be placed into addressing areas in which T&T lags behind.
The fiscal challenge for Government in 2009–10 is to strike the right balance between competing needs. Indeed this is not unique to the current fiscal year but remains standard practice for a hydrocarbon-dominated economy. In the traditional sense, a balance budget refers simply to the tailoring of expenditure to match the available revenues. A much broader concept of balance is advocated here. It comprises four dimensions: economic, social, geographic and inter-generational.
The economic balance requires the Finance Minister to take into consideration several imperatives. The primary consideration will have to be avoiding an escalation in the levels of unemployment while at the same time dodging inflation and preparing the economy for sustainable long term growth. Another consideration is the allocation of state resources between the energy sector and the non-energy sector.
If employment generation is its primary objective, it would be wise for Government to put its weight behind the latter i.e non-energy or the onshore economy. This may mean that Government will have to specifically target its expenditure and/or incentives package to stimulate output in sectors that (a) have a high local content and (b) boost domestic demand. Agriculture, tourism and construction are perhaps the likely candidates. This may well mean deferral and or cancellation of prestigious projects—rapid rail and the industrial island in the Gulf, both of which are of questionable economic import at this time.
On the revenue side of the equation, some short-term gains may be accomplished by simply increasing the efficiency of the tax collections. Reports suggest that the long awaited revised fiscal package for the energy sector will be introduced in the next Budget. It is hoped that this will yield increased activity in Exploration and Production, eventually boosting output and exports. Only time will tell the output elasticity of these measures.
The social balance refers to the quality and effectiveness of social services: education, health security, sport, culture and the arts. These areas have received generous levels of transfers over the last five years. The problem is that the outputs have been less than satisfactory. In the context of the projected revenue constraints of 2009–10 Government needs to (a) place greater emphasis on improving service delivery and (b) impose penalties for non compliance. For example, there is little doubt that the crime problem is aggravated by low detection and conviction rates. The data shows little evidence that the billions spent on sophisticated technological solutions (Blimp etc), have made an impact of the spiraling crime rate. A much less expensive option seems to be an increase in manpower levels in the police service and the magistracy, backed up by tougher legislation and swift justice for firearms offences.
Each year the Tobago House of Assembly puts forward an annual Budget laying its claim to the size of the pie. However, the question of geographic equity is hardly ever spoken about in Trinidad. Government expenditure in Trinidad and Tobago has had an urban bias historically. In the last, five years we have witnessed the greatest ever concentration of spending in the capital and urban Trinidad.
While the quest to build the most modern city in the Caribbean, such aspiration ought not to be at the expense of the rest of the country. The urban renewal thrust has been accompanied by increasing urbanisation with all its attendant ills—including distorted real estate prices, inflated rents, urban ghettoes, and urban crime.
In contrast, most rural communities are in a state of stagnation or slow deterioration, with century-old schools, limited water supply, poor roads and bridges, dilapidated community centres, and poor or nonexistent recreation facilities. These communities also have the highest levels of unemployment, although in the case of the South West and South East communities providing the country with a substantial amount of its wealth. This emerging trend will only intensify if a conscious effort is not made by Government to balance the geographic spread of its expenditure.
An important initiative in this regard will be the construction of major cross-country highways linking city to country and cutting travel time between extreme points to less than two hours. Such projects can yield multiple social and economic benefits. The shifting of certain Government Ministries—e.g. Agriculture; Labour; Education; Sport and Youth—from the capital city to other town centres will also assist in reducing congestion, promoting commercial activity and employment in other town centers.
Inter–generational balance addresses the issue of the distribution of natural resources wealth across generations.
Oil and gas are depleting resources. Each unit used today is unavailable to the people of tomorrow. In order to accomplish some degree of intergenerational balance, part of today’s output must be reserved for tomorrow, regardless of the level of prices.
As I have argued elsewhere, the concept of a single Heritage and Stabilization Fund (HSF) with two purposes but common rules of accrual and withdrawal is flawed.
Savings for heritage is very much like saving for pension. It is deliberate and happens regardless of the level of income (price). Savings for stabilisation is discretionary and dependant on hydrocarbon prices. The recent announcement of the Minister of Finance that no allocation will be made to the HSF for the fiscal year 2008–09 was not a surprise.
What is required is a amendment to the HSF Act that make savings for heritage a mandatory five per cent of annual energy income, irrespective of price. When buttressed by stringent rules of withdrawal, the heritage portion of the Fund will accumulate annually and over time will build up to serve the needs of the future.

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