Walking The Tightrope of Budget 2011

Will The Dream Team Deliver?

By GREGORY McGUIRE

The wait is all but over. On Wednesday Sept 08, 2010, the Dream Team of key sectoral partners assembled under the People’s Partnership Government delivers the financial plan that will reveal its blueprint for breaking with the past and laying the framework for the promised future.
Unlike many of the years of the last Manning regime, Budget 2011 faces serious revenue constraints, which, as the old adage goes, offers opportunity for real invention on the basis of necessity. For these old colonies of the Caribbean, the courage to invent is the only route to transformation, economic and otherwise. On Wednesday, when Minister Dookeran delivers his budget, we will know whether the Persad-Bissessar administration has the required courage to finally face the challenge of transformation head-on or whether it will settle at the political line of least resistance.

THE ECONOMIC CONTEXT
The current economic context does not portend good news for fiscal 2011. While oil prices have remained in the mid 70-dollar range, gas has barely moved beyond $4.50/mmbtu. Moreover, crude oil production is at its lowest level in fifty years and continues to slip further away. The decision to halt work on the Aluminum smelter means that no new plants are under construction or on the horizon. The Central Bank’s recently published index suggests that the manufacturing sector was operating at only 63 per cent capacity for the first quarter of 2010. These trends have contributed to lower export earnings resulting in a current account deficit in the last three quarters of 2009, the first for over a decade. The Central Bank forecasts economic growth of one per cent in 2010 improving in 2011. However, the policy inertia and ambiguity experienced since May 25th may have served to further weaken business confidence along with prospects for an early recovery. In the context of the short term economic outlook, it is unlikely that the government will be able to raise more revenue than it did in the last fiscal year. It is perhaps the most powerful sign yet that a brand new approach to economic management is the imperative of the times.

ECONOMY AS A COMPLEX SYSTEM
Government’s economic planning and budgeting must recognize the economy as a complex and whole economic system Under the PNM, the economy was viewed as a simple system in which the energy sector (offshore) attracted investment and generated rents for redistribution onshore. New capital investments generated onshore were incidental and a bonus. This approach has led to the re-inforcement of our energy dependency and a loss of competitiveness in other sectors. However, it is equally inappropriate to think about the economy system as being exclusively onshore, leaving the energy sector to fend for itself. One gets the sense that the current occupiers of the Finance tower are glued to the view that “the longer term solution is to restructure the onshore economy”, with the energy sector not warranting attention and support.
Both approaches are extreme and deficient because they fail to recognize the economy as a complex and integrated system. The energy bias of the PNM resulted in an adhoc approach to all else and lip-service to a wide range of production possibilities as manifested in a predilection for quick fixes. Serious problems were avoided by simply voting more money to appease discontent or establishing parallel agencies and institutions in a strategy that could only be described as expensive avoidance.
This approach by the Manning administration led us into the financial black hole of special purpose companies such as NIDCO, RDC, CISL, EFDC, to name a few, almost all of which were dreamed up as overnight solutions to the problem of non-delivery in the Public Service. Having failed to achieve the much-touted Public Service Reform and Transformation on which so many hundreds of millions of dollars were spent by successive regimes, Manning opted to avoid the challenges altogether by creating a parallel system answerable to only himself, thereby laying the groundwork for the charges of corruption and waste that threw him out of office. Perhaps now,  having been rescued from the pressures of having to perform and deliver, he can better appreciate the dangers of such tempting and expedient shortcuts.
It’s a lesson that should temper the instincts of  the Persad-Bissessar administration which is already devising shortcuts of its own to intractable problems that require structural and systemic solutions. As popular as he may be, the hangman won’t solve crime and as soothing as it sounds, the Children’s Life Fund is not a solution to a snarled health system that costs lives, including the lives of children.
Going back to the onshore sector- it would, however, be a mistake for the PP government to counter the Manning strategy of over-reliance on energy by an over-emphasis on the onshore sector at the expense of the energy sector. To do so would be to throw away the valuable competitive strengths built up over a century of hydrocarbon development and to sacrifice the quickest option we have for boosting revenue.
What is required is a way of looking at the economy in all its complexity and relationships so that the impact of fiscal decisions can be traced throughout the system. A systems approach to budgeting would provide a useful means for prioritizing expenditure by determining the sectors, programmes, projects and initiatives with the greatest economic and social value-added per dollar of expenditure. For example, capital expenditure on an irrigation project in Diego Martin is likely to yield less benefits per dollar spent than a similar project in Caparo.
Mr  Dookeran has had the benefit of three months to  design his budget. Commendably, he engaged the national community in the process through a series of stakeholder meetings. Notwithstanding the puzzling last-minute meetings that occurred after the PM’s return from New York, one hopes that he has been able to distill the broad range of public inputs and hopes into the budget that can lay the framework for fundamental transformation of the economy. For the future, one hopes he will take the lead in weaning the population off the last-minute wish list through a more permanent, ongoing and structured form of public participation. 

BUDGET IMPERATIVES 2011
When the systems approach is applied to the budgetary process it becomes evident that the system is out of balance. The nation’s productive capacity and capability is misaligned with its patterns of consumption and requirements for foreign exchange. The over-arching Budget strategy, therefore, should be one of targeting fiscal measures towards boosting output across a range of productive sectors of the economy. The emphasis should be on stimulating production rather than subsidizing consumption. Building productive capacity generates new jobs, incomes, foreign exchange and a better quality of life for all. Given the high probability of lower revenue, it is imperative that the Minister looks at widening the tax net and improving the efficiency of tax collection.
Within recent years the C-efficiency ratio i.e. the measure of VAT revenue to consumption, has been falling due in part to the inclusion of new items on the zero-rated list as well as the non inclusion of the major sector of the economy in VAT. Improvement in tax collection by more efficient administration can contribute to improvement in the overall non-energy tax take. In seeking to meet the objective of increased efficiency of the taxation system, the Government may have to revisit its position on tax administration. The following key initiatives stand out in the main productive sectors of the economy:

ENERGY SECTOR
The most pressing issues in the energy sector are to stem and/or reverse the decline in oil production and to boost natural gas reserves. The obvious solution is to stimulate exploratory and development drilling, both onshore and offshore. This calls for a revision of the Petroleum Taxes Act to provide a system of targeted incentives to promote the desired change in investments. In this regard, resuscitating mature land fields is perhaps more important than stimulating deep water exploration. Moreover, land operations provide greater opportunities for local companies than offshore. With respect to gas, the situation is a little more complex. The most powerful incentive for new exploration activity in a gas province is availability of new markets. Unlike oil which can readily be produced and traded in the international market, the harsh reality is that gas requires the existence of new markets. The goal of boosting reserves must be complemented with an open market-oriented approach to new gas-based development. Therefore, the Government will have to articulate an unambiguous policy position on energy sector expansion. This, more than any other provision, is what will determine the appetite of prospective investors upstream and downstream.

PETROLEUM FUELS SUBSIDY
While the energy sector has contributed most to the economic prosperity of Trinidad and Tobago for over a century, it has also been the source of pain. The petroleum fuels subsidy has escalated to over $1.5 billion. As oil prices climb higher, this subsidy absorbs a greater proportion of the national pie. The government therefore needs to place a limit on its commitment to the petroleum fuels subsidy. One mechanism for doing so is to freeze the subsidy at US$ 80/bbl price level. When oil prices go above that level the burden should be borne by the motoring public. Ultimately, the government needs to move expeditiously to implement a comprehensive CNG policy, the framework for which has already been designed under the Manning administration.

AGRICULTURE
There is a compelling case for the Budget to place heavy priority on Agriculture. Apart from the obvious desirability of feeding ourselves, food prices have been the largest single contributor to inflation over the last six years. In addition, agriculture and food production offer tremendous linkage effects on tourism, food processing industries, health and education. Policy initiatives in this sector should pay particular attention to resolving age-old problems of inadequate irrigation, praedial larceny, access roads and farm subsidies. However, in keeping with the overall strategy of increasing production, special effort is required to support farmers in upgrading to modern farming practices.
The PSC Nitrogen Model farm reports yields of 5 to 8 times more than is produced by traditional methods. The application of these methods by farmers could help boost production. Like gas, agriculture strives best when a secure market exists for the farming output. New policy initiatives should be implemented to boost demand for local farm produce. In this regard the School Feeding Programme and the work of the Trinidad and Tobago Agri-Business Association (TTABA) offer great starting points for re-fashioning this sector. 
Greater effort is required to cement the linkages between agriculture and other sectors including the commercial food sector- hotel, restaurants and fast foods subsector-; education; trade etc. Equally important is a local content policy for Agriculture. Indeed, the government would do well to consider what guidelines might be borrowed from the energy sector to boost the development of Agricultural and other sectors.

MANUFACTURING SECTOR
The local non-energy manufacturing sector is one of the pillars of the onshore economy. At 62 percent capacity utilization, there is room for more growth. But its principal markets in Caricom are depressed and unlikely to recover in the immediate future. At this stage of our development, this sector’s long term development and viability is a function of business expansion, innovation and market penetration. The fiscal policy mix therefore needs to place emphasis on these three broad strategies. The Manning administration had targeted several new sectors for expansion including Film, Entertainment, Seafoods, Ship Building and Repair, Yachting, Plastics Paper and Packaging. The rationale for the selection of some of these sectors have been questioned in some quarters primarily because of the poor resource capacity and capability that currently exists. An alternative approach to identifying sectors for expansion is to examine what currently exists on the ground to match the projected needs of target markets. Our greatest hope seems to lie in the capacity to create unique products. This requires, from the start, the identification of the multiplicity of small and micro enterprises – what Lloyd Best called the maroon firms, companies that are currently doing good business but which lack the capital and/or know-how to expand. Who they are? Where there are? What do they produce? What are the limitations to their growth? These are some critical questions that must be answered in formulating fiscal policy to support the growth of this key sector.
A culture of innovation is necessary for long term sustainability at the level of the firm or country. This has been a favourite theme of Planning Minister Mary King on the question of economic development. Here now is her chance to put her ideas on the national innovation system into action. Consideration, however, needs to be given to promoting innovation first and foremost at the level of the firm and in research institutions. One aspect of market penetration requires systematic approach involving trade missions, private sector bodies and trade agreements. But the tendency to blame the government has become endemic with Business complacency with the returns to be made within the local and Caricom markets.

TOURISM AND CULTURE
Many are convinced that the combination of Tourism and Culture presents Trinidad and Tobago with a potent formula for economic development and expansion. Yet every government has failed to grasp the opportunity. This mix of sectors brings together our most abundant natural resources and talents; inputs are largely indigenous while outputs have a proven demand in both the local and foreign markets. The potential for net foreign exchange earnings, revenue and employment are attractive. Harnessing the resources and building these industries require a conscious and deliberate policy direction similar to that used in building the energy sector. This suggests the need for enabling legislation, seed capital, institutional and infrastructure development- and the strength to resist the easy tokenism that has marked government policy to this day.

INFRASTRUCTURE
The development of national infrastructure is one of the ongoing imperatives for a nation in rapid development mode like Trinidad and Tobago. It is obvious that infrastructure development has lagged behind requirements in several areas: highways, roads, bridges, and institutions. It might also be the case that priorities were skewed. One example is the concentration of Government in the capital city and the implications for traffic in and out of Port of Spain on a daily basis.
A serious commitment to decentralization in Budget 2011 will set the stage for a re-design of the national grid that will re-channel capital expenditure and human energy towards a more productive use of our resources, both financial and human. In such a scenario, expensive solutions to the self-inflicted problems of bad policy- such as the rapid rail project- will simply render themselves redundant.
Budget 2011 will also need to pay attention to satisfying basic human needs. It is in these areas that the Government faces the sternest test from the electorate. Conscious effort must continue with respect to meeting the demand for water and housing. In the provision of social services of health , education and sport, we need to see how the root causes of poor administration and misalignment with the broader goals of national development, are to be tackled.
And then there is the hot potato that’s boiling over on the front burner: Crime.
The evidence so far is that it remains a political football with huge energy now being expended on building a political base around the hangman’s noose.  Hopefully, in last week’s retreat, sanity returned to suggest that the PPG should resist the lure of the easy headline and get down to the task of constructing the integrated national framework on which real security of person, property and State can be built on some enduring basis. Anything else is mere distraction.

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