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Is cutting transfers mandatory?

Thursday, May 25, 2017
Customers at a NP service Station in Port-of-Spain

The commentaries in this space last week and the week before achieved their aim in starting a national dialogue about the standard of living in this country and the extent to which government's income tax and expenditure policies impact on the quality of life enjoyed by a majority of T&T residents.

Among the more interesting responses to those two commenaries was this one from a retired accountant: "...the low marginal tax rate, the absence of graduated corporation and personal tax rates, the VAT rate (until recently in a politically motivated fudge) remained unchallenged. To add to the above, and in no way to detract from your report, dividends from private companies remained untaxed, the taxation of capital gains is effectively non-existent and the, dare I whisper the words, taxation of estates is not debated."

And this one from a former government minister: "Of course it was well understood that government tax was largely dependent on LNG. Manning understood that clearly. And expressly set about making the state the most powerful agency in TT. That's why he created a plethora of state companies and set out on an expansionary construction programme...."

Also, this one from a columnist with another newspaper: "These polices were reckless and unsustainable-a fact which is being felt now. Subsides harm our economy and industry. They are also really difficult to remove once implemented. These polices did not as you say 'raise our living standard' -they merely created an illusion of prosperity. An illusion that is now crashing down."

In my view, it is very important that the current administration join in this dialogue because of the possibility, or the likelihood, that the government may be required, sometime down the road, to pick and choose those transfers and subsidies it can afford to keep and those that it cannot afford to maintain.

I think both Prime Minister Keith Rowley and Finance Minister Colm Imbert understand that they may be required to have a national dialogue on transfers and subsidies sooner rather than later.

In responding to some questions from the Sunday Guardian, Prime Minister Rowley said: “Unpleasant as it is, we are forced, at this time, to cut our size to fit our cloth,” which appears to be a more serious and direct message than that given by Mr Imbert in concluding his mid-year budget review: "As a responsible government, in these challenging times, we must cut our coat to suit our cloth."

But it is noteworthy that in the very same concluding paragraph of the mid-year budget review, Mr Imbert said: "Barring unforeseen circumstances, we are on course to achieve our fiscal consilidation targets for 2017."

The first clause in that sentence is disturbing because one is not quite sure what our minister of finance means when he speaks about "barring unforeseen circumstances."

Given the fact that, in the first quarter of 2016, oil prices went below US$30 a barrel and the Henry Hub price for natural gas went below US$1.50 per million BTUs, it ought not to be an unforeseen circumstance if the price of T&T's main oil, natural gas and gas-derived exports were to descend to the lows of last year.

In fact, one might argue that prudence should dictate that T&T should be basing its fiscal modeling on the assumption that our export prices could test last year's lows. Or at least the fiscal scenario planning should assume a sharp decline in revenues from the offshore sector, which could cause a further decline in economic activity onshore.

In other words, if the price of our onshore exports were to experience a quite predictable decline from their current levels—the West Text Intermediate and Henry Hub benchmarks averaged US$51 and US$3.10 per mmbtu last month—it is hoped that the Ministry of Finance would have a plan, based on a tested scenario, for dealing with the decline in the country's revenue and foreign exchange inflows.

Part of the scenario planning, one assumes, ought to be interrogating the 2017, or 2018, budget estimates of expenditure with a view to determining which are the transfers and subsidies that may be reduced or eliminated and which are going to be pruned.

An exercise based on the 2017 Estimates of Expenditure would reveal that the government's $56.57 billion in expenditure was allocated as follows:

• Personnel expenditure............................$10.31 bn

• Goods and Services................................$5.71 bn

• Current transfers/subsidies.....................$22.92 bn

• Current transfers to state bodies...............$6.86 bn

• Debt servicing.......................................$8.17 bn

• Development programme........................$2.47 bn

Analysis of T&T's original estimates of expenditure indicate that transfers and subsidies total $29.78 billion, or about 53 per cent of the $56.57 billion it was originally estimated that T&T would spend during the current fiscal year, which ends on September 30.

Earlier in his mid-year review presentation, Mr Imbert said: "It is worth repeating that as a country, we have lost $20 billion in annual revenue since 2014 and US$2.5 billion in annual foreign exchange inflows...This is the reality we now face–how to run an economy accustomed to $57 billion in expenditure on $37 billion in tax revenue!"

If the current administration is serious about cutting the government's size to fit its cloth, the extent of the transfers and subsidies would dictate that that is the category of spending that it should start.

It would seem to be an exercise in prudence for the government to begin communicating to the population that the expectation that transfers and subsidies can continue at close to $30 billion a year has become unrealistic. They cannot.

It is also unrealistic to expect that as a country T&T can get back to a situation where the government collects $58 billion in tax revenues.

Why are we continuing to operate as though this revenue decline is temporary, when rationality dictates that it is not?

If we realised that we now have to work to earn our living—and not just depend on rents from energy—we would do what's necessary now and not wait until our reserves are down to US$3 billion.

The longer we delay the pain, the more difficult it becomes to adjust to it.

So the question becomes: What does the government need to cut to reduce the allocation for transfers and subsidies by $10 billion from $29.7 billion to $19.7 billion. Cutting $10 billion from transfers and subsidies would reduce the country's total expenditure from $56 to $46 billion, which presents a much easier target for financing if the government is going to continue raising $37 billion in tax revenue.


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