Yet Another Chance For Change

    BUDGET 2011-12


With the State of Emergency and its ramifications uppermost in the minds of citizens, it is easy to forget that, among other things, September is Budget month . Unlike that of 2010, this year’s Budget comes after this Government has had a full year in office, representing ample time in which to prepare a comprehensive and cogent statement on how it plans to harvest and utilize resources in the pursuance of development goals. Mr. Dookeran’s task may be simplified into four elements: a review fiscal performance in the last year; a cogent assessment of the economic context, outline of development plans and initiatives for the coming year and a statement of the revenue and expenditure projections for the coming year , along with underlying assumptions.
Candid disclosures of fiscal performance have not been a feature of budget presentation in Trinidad and Tobago. While summary data are always published in the Budget documents, the citizenry is not informed about the outturn on critical determinants of Government performance. The PPG has not shown any inclination to buck this trend. Throughout the fiscal year there have been mixed signals coming from the Government about the state of the economy in general and Government fiscal position in particular. In the final analysis, Government seems likely to realize a surplus or small deficit for fiscal 2010-11, a far cry from the $8 billion deficit projected as recent as April 2011.
Three factors seem to account for the improved fiscal position. The first is higher than anticipated energy sector revenues because of relatively higher prices of oil and gas. While oil production slipped below 100 thousand b/d, higher prices may have outweighed the fall in output and fully mitigated the potential loss in revenue.
With respect to natural gas, market intelligence suggests that there was significant diversion of LNG cargoes away from the depressed US market to Europe and South America where prices are linked to oil and therefore much higher. As a result the average netback price of LNG exports is estimated to be around US$3.50 /mmbtu, compared with a budgeted gas price of US$2.75/mmbtu. Given the importance of these variables in the overall Government revenue position the Finance Minister should be obliged to disclose the true final picture.
The second factor is the unanticipated revenue garnered from the income tax amnesty, which, by the Minister’s own estimate, yielded an additional $1.7 billion. The third cause is lower than planned Government capital expenditure. The phenomenon of under spending on the capital programme is not uncommon. It speaks in part to administrative bottlenecks, deficiencies in planning and project management and to capacity constraints.
As a result, many initiatives announced in the Budget remain stillborn. Here again, the Finance Minister has not been inclined to provide any information to the public on same.
The imposition of the curfew and state of emergency would have squashed any hope of a return to positive economic growth in 2011 following on two years of decline. However, some key trends in the economic landscape are indicative of overall economic performance. As indicated above, oil production continued to fall while gas production remained flat, with no new plants coming on stream. The economy would have benefited from the first full year of operation of the AUM plant in Point Lisas. This particular project has held out hope for a possible expansion into downstream products. Meanwhile, the Central Bank has reported that the manufacturing sector is operating below 65 per cent capacity utilization. There were some bright spots in agriculture, as expansion of domestic production helped to control food price inflation and the Ministry accomplished openings of facilities across the country.
In short there have been no significant changes in economic activity during the last year and there is nothing that one can point to signal a change in direction or even a change in position.
To his credit the Minister has consulted with several interest groups in formulation of the budget for2012, but this is not new. Typically, the Budget that emerges is a wish list of projects some of which are announced only for political mileage. Classic examples of this include the new airport in Central or the highway to Point Fortin which has been a political football since Budget 1962. One would hope that Mr. Dookeran does not fit the mould.

In order to be a meaningful policy instrument, the annual Budget should be placed within a broader longer term context of a development plan. The in-year budget and its related initiatives would represent those necessary steps towards the broader national development goals. After 15 months in power, the PPG is yet to put meaning to the nine pillars of sustainable development identified in the party’s election manifesto. In the circumstances, it is evident that immediate short run problems will continue to dominate the Government’s choice of initiatives and allocation of resources.
Budget 2012 should focus on three imperatives: restoring fiscal balance, addressing social dislocation and fostering sustainable economic transformation. If Finance Minister Dookeran is to achieve the self-proclaimed goal of fiscal sustainability then some tough decisions are necessary in order to raise non-oil revenue and reduce outflows. More specifically, Government will have to address three key areas: taxation, the issue of subsidies, and corruption.
By their own estimates, Government has forgone some $300 million in taxes by its failure to collect land and building taxes for 2010 and 2011. A return to the land and building taxes, under whatever name, is therefore unavoidable. The historical evidence suggests that growth in VAT collections has been less that the increases in consumption, even when allowances are made for zero weighted items. The implication is that there is a high incidence of VAT avoidance, or even VAT fraud- Government can improve the performance of VAT by strengthening its compliance unit as well as imposing a substantial increase in penalties for VAT and tax fraud, including customs duties. As the economy grows, considerable wealth is accumulated through real estate. A capital gains tax on profits earned from sale of real estate and a tax on rental incomes seem logical and fair.
Over the last ten years, transfers and subsidies have been the fastest growing element of Government recurrent expenditure, moving from 25.1 per cent in 2001 to 56.3 per cent in 2011. The time has come for Government to re-examine the widespread use of consumer subsidies, more particularly the subsidies on petroleum fuels and electricity. In general, energy subsidies are defended on the grounds that they are a just and equitable way of sharing the natural resource wealth of the nation with all citizens.
However, if equity is indeed the goal then subsidies are not the most efficient or effective way of accomplishing it. Subsidized energy prices tend to benefit the rich more than the poor because of their larger consumption and easier access. Witness who has the largest gas/ diesel guzzling SUVs? Or in whose houses air-conditioning units are left running all day and night? How many businesses or Government departments in T&T have an active energy conservation programme in place? For those who remain unconvinced about the need to reduce and eventually eliminate the subsidies, consider the following: If T&T were blessed with gold instead of oil would our position be the same? With gold trading at US$1,700 per ounce, would Government be distributing pieces of gold to each citizen in accordance with their wealth on an ongoing basis?
As oil prices increase, the petroleum fuels subsidy becomes a larger burden on the state. Potential windfall revenues which should go into heritage savings or investments for future generations are channeled to supporting greater current consumption. Our depleting natural resources which should be conserved for the future are being wasted away. Moreover, as the impact of price distortion intensifies we are deluding ourselves about the competitiveness of Trinidad and Tobago. As an initial step in bringing this issue under control, Government should cap the fuels subsidy at the targeted budget price . In other words, if the Budget price for oil is $75/bbl, all increases above that threshold would be transmitted directly to the pump. Fiscal incentives to encourage use of alternative fuels, whether it is CNG vehicles or solar water heaters, would remain fruitless unless and until the prices of petroleum-based fuels and power are increased. There are alternative ways to help the poor, indigent and differently-abled, through the direct relief payments in cash or kind, improvement in tax incentives for private sector support to charitable NGO’s.

Government must also take steps to reduce the level of transfers to non-essential unviable state enterprises. There seems to be no economic or social rational for the continued involvement of the state in companies like MTS, National Flour Mills, CNMG, Airports Authority, Plipdeco, and NP to name a few. The divestment of these enterprises to the private sector under a deliberate programme of widespread share ownership would bring greater efficiency to the public but would also relieve the state from the financial burden.
The quest for fiscal balance cannot be accomplished without the elimination of patronage and corruption in the public procurement process. The public procurement legislation has been on the table now for several years. Successive governments have been pussyfooting around with this legislation seemingly in defence of their respective vested interests. Mr. Dookeran now has the opportunity to demonstrate, in a very tangible way, his Government’s commitment to eliminating the scourge of corruption in public procurement.
The industrial relations stand-off between the Government and the trade unions is by no means over. The other round of negotiations with public servants for the period 2011-13, was due to begin in August. The attempt by Governments, past and current, to place the burden of adjustment on the backs of public servants is both unjust and counter-productive. The cry that Government cannot afford more than the magical 5%, rings hollow in the context of the inefficiency, waste and corruption that pervades the fiscal space. Disenchanted, poorly-paid public servants will not deliver the type of service necessary to move this economy and society forward. Government needs to embrace the philosophy that quality service and productivity are closely correlated to the quality of resources and conditions of work. If Government is indeed desirous of giving the public value for money then it must provide public servants with competitive salaries and proper working conditions. On the other hand, steps must be taken to ensure that the public service delivers value for money. The introduction of an effective performance management system as part of the overall public sector reform and modernization strategy would support this goal.
The opportunity therefore exists for parties to move away from acrimonious bargaining to negotiations based on mutual gains. It requires trust and maturity on both sides. If there is willingness from both parties to divulge relevant information and surrender the traditional notions of power, then the outcomes can benefit union members, the state and the nation.
The imperative of economic transformation is more intractable and require longer term, more strategic solutions. There is broad agreement on the need for diversification of the economy away from oil and gas. However, casting the problem in this manner, runs the risk of seeing the energy sector as the generator of cash for redistribution to the rest of the economy. Our choice of policy options would be very different if we perceive the challenge as one of transformation based on our indigenous resources, human, natural and financial. The success story of Point Lisas is one of taking our resources, natural and state financial capital, and supplementing it with foreign technology and markets to produce a winning combination. The challenge now is to ask in which sector(s), is there nascent activity and what are the gaps to be filled to create new winning combinations.
Following this approach, the Government’s strategy to meeting the transformation challenge in the coming years should be placed on the following:

1. Support for maroon firms. We refer to the small and micro domestic firms who run successful businesses, utilize largely domestic resources and are currently earning or have the potential to become net earners of foreign exchange. These firms represent our best prospects for transformation, starting at the mass level. But their needs are varied. The standard practice of industry-wide incentives have not adequately addressed the needs of this sector. We do not know from them the constraints they face in moving from micro to medium to large. Such incentives may include: access to factory shells, equipment leasing, management support, Venture Capital Funding – still grossly underutilized in T&T.

2.Maximizing Tourism Potential: Trinidad and Tobago has paid only lip service to Tourism. There are perhaps three key elements requiring some capital injection: increase and improve the hotel stock through a combination of direct investment and fiscal incentives; enhance the product mix to facilitate a more diverse and memorable Tourism experience; and sustained target destination promotion. We have spoken for years of several niche products including – Health, Sport, Eco, Festival and Business tourism, but no conscious and systematic attempt has even been made to develop these products. We have barely begun to explore the recreational potential of the sea.

3. Cultural / Creative Industries. Closely associated with the above, T&T has also failed to maximize the potential of its cultural industries- broadly defined to include all the food music, arts, fashion, film, drama etc associated with who we are. Our tendency in this country is to try to copy what we see others do. In so doing we forsake our best chance of finding our place in the world. The late Dr. Pat Bishop, to whom we pay tribute in this issue of the T&T Review, literally died trying to convince us about the power of our art and culture as a means of social and economic transformation. For example, while we continue to boast that Carnival is the greatest show on earth, it is inconceivable that 150 plus years after its birth there is no Carnival Museum in T&T. Properly designed such a facility can be a bankable project, employing hundreds of people and earning foreign exchange. Walt Disney created Disney World from nothing, while T&T continues to allow our natural asset- our creativity- to decay. This is the opportune time to build it as a monument to the great Pat Bishop.

4. Increasing Expenditure multiplier. Keynesian economics suggests that increases in Government expenditure would lead to an expansion of growth through the multiplier effect. However, the Keynesian formulation breaks down in T&T because of the high import content of our consumption. One means of increasing the impact of Government expenditure is to give priority to projects and initiatives that yield the highest value of local content. Best example, of course, is strengthening the linkage of the domestic food production to the school feeding programme and the hotels and restaurants subsector . There is currently no system in place to improve local content of these programmes resulting in an increasing foreign component in the meals. The impact of expenditure on social expenditure on CEPEP and URP can be enhanced if such efforts are channeled away from menial work into more productive activity- e.g. Food Production. Relatedly, the distribution of expenditure under the umbrella of CEPEP and URP needs to be based on community needs, one indicator of which is the level of unemployment, rather than political affiliation as publicly and shamefully advocated by a Government Minister.

5.Improve the investment Climate. Government needs to reduce the bureaucracy and or improve the efficiency of the processes related to setting up business in T&T. This applies to both local and foreign private interests. Political uncertainty, archaic laws, poor service quality, unsupportive institutions and unreasonable financing terms all militate against new business start-ups in the country at a time when it is most needed.
The fiscal and macro-economic agenda described above requires a Government prepared to abandon orthodoxy and pursue independent thought fuelled by confidence in our own capabilities. It also requires the courage to sacrifice narrow political ends for national imperatives. If however politics continues to take precedence over economics, the 50th Independence anniversary would meet us in the same place as we are today. Running fast to get nowhere.

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