Development Dookeran Style

Winston Dookeran

Populist Politics Trumps Economics of Transformation

By GREGORY McGUIRE

One of the distinguishing features of politics in this country over the last forty years has been the tendency for political parties to quickly dispense with the lofty ideals expressed in their manifestos once they get into Government. The People’s Partnership Government promised “new politics”, but the evidence before us calls that into question. One year into its term, the evidence suggests a widening gap between manifesto promises and Government initiatives. In particular, the recent decision by Finance Minister Winston Dookeran to seek parliamentary approval to spend an addition $2.7 billion in fiscal 2010-11 seems at odds with the fiscal policy tenets, i.e. Balancing Spending; Diversification; Research and Innovation, Economic Planning and reforming the institutional arrangements pertinent to the Heritage and Stabilization Fund (HSF), as laid out in the PP’s manifesto.
The Supplemental Appropriations Bill, passed in the House on June 1st, authorized a Budget increase of $2.7 billion for fiscal 2011. The increase, along with the proposed transfer of $445 million to the HSF and the use of $131 million from the unused resources of the Infrastructural Development Fund (IDF) as at the end of 2011, would increase expenditure by $3.3 billion. This brings total planned expenditure to over $52 billion – the highest on record, even if the provision to the HSF is excluded. The resulting fiscal shortfall is estimated at almost $9 billion, i.e. over 6% of GDP and more than a billion more than the budgeted deficit. It would seem that the increased expenditure will be financed primarily from incremental tax revenue associated with the recent tax amnesty. The resulting increased compliance has yielded the Government $1.8 billion in tax revenue.
While spending allocations span a wide range of ministries and agencies, the lion’s share is commanded by the Ministries of the People and Social Development; Finance; Works & Transport ; Education; Health; and Public Utilities. The Finance Minister asserts that the increased allocations are “to fund urgent and critical capital expenditure”. Obvious questions arise: didn’t this Government speak of the so-called “squandermania” of the Manning regime? How much of the new spending can actually be classified as developmental? In response to questioning from the Opposition bench on the matter of increased spending, the Minister bantered, ostensibly ignoring the aforementioned deficit, “they seem to be a bit jealous that we are able to spend more money and still balance the books.”
Figure 1 gives an idea of how the funds are apportioned amongst ministries. Remarkably, the Ministry of the People and Social Development receives approximately 17% of the supplement. Put another way, this ministry is due to receive about as much as thirty (30) other ministries and agencies combined. This is arguably in line with the campaign stance that the needs of the poor and disadvantaged would take priority, but the question of balance remains unaddressed. Under the Manning administration, subsidies and transfers already accounted for a very significant portion of recurrent spending. Rather than rationalise the redistribution system, the PP government seems to be beating its opponents at their own game and simply increasing allotments instead. At the same time, the Minister talks of stabilising the economy so that a programme of economic growth can be vigorously pursued. Yet allotments to the Ministry of Trade and Industry, the Ministry of Planning, Economic and Social Restructuring and the Ministry of Labour, Small and Micro-Enterprise Development—the ministries tasked with economic transformation, innovation development and nurturing entrepreneurship – collectively receive less than 1.5% of the supplement.
Bewilderingly, the Minister has also chosen to lift the price of oil on which the Budget is based. As far as I recall it is the first time that a Finance Minister in T&T would have actually increased the price of oil in a fiscal year. By increasing the budgeted price of oil to $75 from his original $65/bbl the Minister has raised the threshold level of revenue beyond which deposits to the HSF become mandatory, effectively reducing allocations to the Fund.

This seemingly innocuous action has serious implications in a resource-based economy like ours. It sets a dangerous precedent that can make a complete mockery of the provisions of the HSF Act. It represents a continuation of the fiscal approach set by Manning which says in a nutshell—“have money, will spend”.
Sharp increases in Government revenue over the period 2004-2008 on account of both price and volume increases in the energy sector were matched by equivalent jump in Government expenditure. Though critical of Government’s fiscal stance at that time Mr. Dookeran is now just as guilty.
Mr. Dookeran hardly needs a reminder of the purpose of the HSF. It is meant to capture unplanned windfall revenue arising from higher than expected export prices of oil and gas. The revenue so saved is to be used for (1) supplementing Government income in times of lower than expected prices, i.e. stabilization and (2) providing a potential source of revenue for future generations, i.e. heritage purposes. Hydrocarbon resources are a national patrimony and belong to this and future generations. It is therefore incumbent on today’s managers of the public purse to allocate part of today’s earnings—regardless of price – to future generations.
Norway and, more recently Chile, have successfully grown their HSFs to the point where they not only provide pensions to current retirees, they also generate more income than current oil wealth. A country would be hard-pressed to fulfill such noble purposes if the sitting Minister of Finance can arbitrarily come to Parliament and adjust the price of oil/gas to meet his current expenditure. At a time when prices are more than 50% above budgeted, the HSF should be receiving a sizeable windfall, notwithstanding the 10% decline in oil production.
Further, when the Finance Minister grabs for additional revenue, it is really tantamount to stealing the wealth of future generations. The actions of the current Finance Minister are all the more surprising when viewed in the context of his party’s manifesto promises:
“We would revisit the legislation establishing the HSF with a view to delinking the two Funds [i.e. heritage purposes vs. revenue stabilization]. Mechanisms for contribution and withdrawals will be established for transparency and clarity”
“We would seek to balance between consumption and saving. Consumption satisfies present needs while savings provides for the needs of future generations. We must cater to both support a thriving economy as well as achieve sustainable development”
Does the action of the Finance Minister in any way support these promises? Did he buckle under the populist pressures within the Cabinet? Was he lured into the trap of political expedience at a time when little else seems to be happening? Once this precedent has been set, can we have any hope that the Finance Minister will ever seek to meet the ideals expressed in his party’s manifesto?
A closer examination of the proposed additional expenditure is necessary to assess the extent to which the Finance Minister is striving for “balance between consumption and savings” as stated in the PP manifesto or, more appropriately, balance between consumption and investment. Table 1 below, derived from the Minister’s parliamentary remarks, may help to shed some light. Though it hardly paints a complete picture, it is illustrative. Of the $2.7 billion in planned additional expenditure, there are infrastructural development projects such as the road upgrade programme and the construction of new schools.
However, a large chunk is consumption expenditure – the largest portion going to the Ministry of the People and Social Development.
No one would deny the need for more poverty alleviation measures in Trinidad and Tobago. But, there is need to redefine our approach to it. Simply dishing out dollars and increasing the size of transfers and subsidies is clearly unsustainable. Increased social transfers do not create jobs, rather they support an unsustainable lifestyle, although they may help keep the ruling party in power. And this appears to be the ultimate determinant of what gets done by this PP Government, as indeed its predecessors. What they seem unable to grasp is that with proper planning such spending can be twinned with building infrastructure and innovative capacity in the economy.
The general fiscal stance of the Finance Minister is also at odds with other manifesto commitments:

Economic Planning
“The focus will be on sustainable development, competitiveness, integration and synergy, diversification, strengthening existing sectors and clusters and creating new ones and linking research to wealth creation, innovation and competitiveness.”

Diversification
“We will develop innovative strategies to achieve sustainable growth and diversification of the Economy in order to reduce dependence on energy, create new jobs, and generate new sources of wealth creation
It would seem that little besides lip service has been paid to the objectives as spelled out above. The articulated emphasis of the Finance Minister thus far has been to stabilize the economy by reversing the trend of negative growth and solidifying the financial landscape by tackling the CLICO fiasco and issuing letters of comfort to commercial banks. However, the strategies for creating sustainable development and competitive non-energy industries are sparse and piecemeal. For the most part, the diversification strategy of the Ministry of Trade and Industry seems to be following the direction set by the PNM. The targeted sectors for diversification remain unchanged as is the core strategy of luring direct foreign investment.
The absence of a properly formulated long tern development plan may be at the root of Mr. Dookeran’s challenges . A well structured development plan facilitates the prioritizing and sequencing of projects in a manner consistent with available resources and absorptive capacity. On the other hand failure to plan will result in repeated incidents of supplemental budgets, misdirected spending on adhoc projects and white elephants of limited socio-economic value. The nation awaits news from new Minister of Planning, Bhoe Tewarie, on whether he intends to proceed with the initiatives of his predecessor Mary King, or revert to Vision 2020 or define his own path.
At a time when the economy is crying out for new direction, when the private sector is seeking signals that would strengthen their confidence, when foreign investment is waning and domestic investment is desperately needed to take up the slack, the Finance Minister has been less than inspiring. The order of the day has been more of the same policies which were lambasted on the 2010 campaign trail. As the PP government enters what it anticipates to be a phase of economic growth (1-2% of GDP according to the latest Central Bank estimates) one wonders if a shift in priorities is anywhere in sight.

—With additional reporting by CECILE PEMBERTON

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