Two Tuesdays ago at a meeting in Mt D’or, Minister of Finance Colm Imbert boasted that there were only two people who knew the contents of the budget, the Prime Minister and himself.
The subsequent applause for this revelation is symptomatic of the nature of our state. We are accepting of the budget being held in a back pocket like an elusive election date.
The time spent speculating could be better spent in dialogue, which would make the Parliamentary process a formality yet, at the same time, ensure a Budget that should better reflect the kind of participatory process that a nation celebrating 40 years as a republic should be striving toward.
Before I begin my own comments, let me make it clear that I am not an economist. But then again neither is the Minister of Finance.
The Minister indicated that “In these difficult times, it cannot be business as usual”. I am inclined to agree with his conclusion but not with the strategy adopted to address the situation.
The Minister presented the result of a bookkeeping exercise focused on ensuring that the expenditure was more aligned with current revenue. The focus was to stabilise the economy. This was not “a blueprint for transformation and growth”.
I want to argue that, notwithstanding the mismanagement of the economy by the previous administration, it is to our own detriment to ignore those issues, which lie in the very nature of our economy. Stabilisation without transformation will only prolong the inevitable.
The fact of the matter is that we have an economy in which we sell oil and gas to generate foreign exchange to buy everything else.
The drop in oil prices has reduced our overall revenue and ability to meet domestic and international expenditure. The tag line used to address this issue has been “diversification of the economy”. But this is nearly impossible with reduced revenue to pump into alternative areas and, as has been the norm over the years, will probably amount to no more than lip service.
On this issue, the Minister outlined the challenges to diversification rather than pointing to any real program to set us on that path. The real challenge of reduced forex earnings is, first, consumption. There is a definitive need to have measures which would slow down the rate for consumption.
Imbert stated that: “with effect from October 20, 2016, [there will be] a 7 percent charge on purchases that arrive in Trinidad and Tobago through the courier companies or are brought in directly by individuals via air freight.” This is expected to yield 70 Million in additional revenue.
This revenue will probably have to be collected the same way that VAT is currently collected and we know now that the expectant increase in VAT revenue was not collected.
The same BIR which has all these challenges is now expected to oversee the collection of this new tax in addition to several other new taxes announced in the budget.
The Minister was clearly cognisant of this predicament as he intimated that the passage of the Revenue Authority would solve this but it needed the support of the Opposition. So, if it fails, we know why.
That aside however, this assumes an import bill of 1 Billion TTD or 150 Million USD. In December of 2014, then Central Bank Governor, Jwala Rambarran, said that our retail and distribution sector is the “most voracious consumer of foreign exchange”.
In fact, Rambarran suggested the sector consumed on average 1.5 Billion USD per year or 100 times the consumption of online purchasers. To put it in ever clearer context, the report identified PriceSmart as consuming almost 170 Million USD per annum.
What this means is that one company consumed more USD than the entire online shopping population.
So the question is, what measures have been put in place to directly impact the demand for forex by this retail and distribution sector? Because, with the current measure, it is easy to speculate that the real intent is to push online shoppers back to the stores.
Let us be clear, the real issue is access to forex. It is also noteworthy that the tax applies only to air freight and not sea freight where the majority of imports enter the country, some of which are online purchases.
There has to be a question as well about the failure to tax food importers to help reduce the demand on forex and, at the same time, create an environment for local produce.
Before I address the core issue of the energy sector, I just want to say a few words on some of the more prominent measures. It is laudable to introduce a progressive tax. That is a tax system where those who earn more pay more. This is what currently happens with NIS payments.
The issue now is one of avoidance and that will be a major bugbear in the realisation of the expected revenue as outlined by the Minister.
I have said my piece on GATE before and my position has not changed. It is a regressive step and one devoid of any supporting data to discriminate against persons over 50.
In an ageing population, you are going to need persons to work longer as is already happening. The current working population will not make enough contributions to support pension funds and pension payments will not meet the cost of living.
There is a real ongoing conversation about increasing the retirement age and many companies are already rehiring retirees on contract. Denying older workers equal access to educational opportunities means robbing them of a chance to remain competitive. Furthermore a later retirement age means less stress on pension plans.
The fact that there was also an attempt to engage in capital expenditure is important. However the avenues for this expenditure are critical. A highway was not in and of itself a developmental project under the last regime and multiple highways will not be either.
Conversely it is an insult to suggest that a competition—like “Shark Tank”—is a progressive mechanism to approach the question of innovation. More so investing TT$5 Million will not yield any benefits.
How do we know this? The last Government’s proposal was TT$10 Million and it was a disaster. Where are the innovators who benefited from that expenditure?
There would also be serious questions about how much of the TT$1 Million ‘prize money’ would actually go to the innovator rather than to Government technocrats who manage the startup of the idea.
So onto the oil price. It is unprecedented for the Budget to be pegged to a range. It is my view that US$48-$50 is also high and it should have been closer to US$45. No doubt this higher range is deliberately set to serve a political purpose. This way, it understates the projected deficit, which is estimated at 6 Billion.
We have heard time and time again that we are trying to avoid the IMF, yet several decisions are predicated on IMF directives. The removal of another 15% on the diesel subsidy places the most vulnerable in the society at the mercy of an unregulated environment. It should be obvious that any increases in transport fees will result in overall increases in commodity prices.
Dangerous opportunity looms for us. As stated in the Budget presentation: “Changes in the fiscal regime for the energy sector—which came into effect in 2014 and allowed for the write off of 100 percent of capital expenditure on exploration in the first year, among other concessions—and declining predictions, the revenues from petroleum dropped to just $1.7 billion. This represents a decrease between 2014 and 2016 in annual revenues from petroleum of $17.6 billion or 92 percent.”
It is dangerous for us to stay on this path. There are three reasons for the overall loss in revenue. The reduction in prices, the reduction in production and, as stated in the paragraph above, the poorly conceived regime implemented by the last Government.
That the previous Government has to bear some responsibility for the current financial situation is not debatable. However had oil prices still been at US$100 a Barrel, we would probably be hearing about the excellent fiscal policy of the PNM over the last year.
Fundamentally our issue remains our dependence on oil and gas and international pricing which we have no control over.
However we do have an opportunity to address transfer pricing and the SPT regime. Both of these were mentioned in the budget to the credit of the Minister.
BPTT has already sent signals as to its intent to the Government. It is left to be seen how the Government negotiates the balance between incentivising investments and capitalising on the potential earning capacity of our patronage.
Most of our major contracts with multinationals in the oil and gas sector come to an end in the next two to three years. It will require extreme vigilance from citizens to monitor these negotiations. And it would be naive to think that BPTT would seek anything other than its own interest.
There are many other issues which can be addressed and which I will address in the coming week, such as the privatisation of the people’s assets and rationalisation of Special Purpose Companies and State Owned Enterprises.
There is work to be done. The economic challenges are real but there needs to be a much more creative approach to the crisis and our annual side-stepping of the real problem of our economy, which will catch up to us one way or another.