‘You never let a serious crisis go to
waste. And what I mean by that it's an opportunity to do things you
think you could not do before.’ —Rahm Emanuel, Mayor of Chicago
On October 5, the Minister of Finance,
Colm Imbert, delivered his first budget in Parliament. The new PNM
Government stepped into a tight spot. No one is yet using the word, but
T&T is officially in a recession (defined by six months of falling GDP).
After discussing the budget with an
economist, here is my first impression. T&T is moderately wealthy with a
GDP per person of US$19,500 (similar to a low-middle income European
country). We remain an oil-and gas- based economy as we have failed to
diversify. In 2012 when the Government’s income from oil and gas was
$20.5 billion (TT), the split was 65 per cent from gas and 35 per cent
But in 2012 the price of oil was US$100.
Then from July 2014 it started its slide down by more than half to its
current rate of US$45. Note that price of gas moves roughly in tandem
with that of oil. The income from oil and gas for the 2015-2016
financial year is projected to be $3.26 billion (TT), a drop of about
$17 billion (TT) from 2012. The Government’s annual budget is $62
billion (TT), so that the shortfall in income is about 25 per cent.
Standard economic principles suggest
that a reasonable and rational government would spend its income
“counter cyclically.” So when income is high and the economy is growing
it should restrain spending and save what it can. Conversely, when GDP
falls (in a recession) it should draw down on its savings and/or borrow
money to increase its spending to maintain the GDP.
The correct course for governments does
not apply to personal households. In fact, it’s the opposite. That makes
sense since in a crisis if every household reduces its spending, the
Government does the same. The GDP will fall even faster making both the
country and the households in it poorer. So we need the Government to
counteract the actions of households in T&T by increasing its spending.
Unfortunately we have not had a
reasonable and rational government in T&T for the last 20 years, as each
government spent wildly from higher oil and gas prices as the economy
grew. (The Government budget in 2001 was $14 billion (TT). In 2015 it’s
$62 billion (TT)—a 425 per cent increase in 14 years). Mr Imbert was in
the position trying to do the sensible thing of keeping spending going
with no real savings to fall back on. So he is going to have to borrow
Where households and governments are
similar is that we all have to look at our expenditure to ensure that we
spend properly. That is, we are getting the best “bang for our buck,”
especially when we are borrowing money to do so. But as I have always
said, a society is judged by the manner in which it treats it most
vulnerable—expenditure on health, education, public safety, and a safety
net for our elderly and our poor is not negotiable that we demand
greater efficiency in their delivery.
So how does Mr. Imbert’s budget stand
up? Let’s look at income first—in light of the shortfall in oil and gas
income the other main sources of government income are VAT income,
company taxes and personal income tax.
The minister has reduced VAT from the 15
per cent, the rate at which it was established, to 12.5 per cent. This
was presumably based on a rather rash campaign pledge and is difficult
to justify from an economic point of view.
In fact, most countries in the world are
increasing their VAT. Why? Because it is one of the easiest taxes to
collect and because it is one of the fairer taxes, especially since here
in T&T most food items do not have VAT placed on them. While it was
positioned as a means to help the poor, the ones who will benefit the
most are those who spend the most. Those expensive cars are going to be
cheaper! No economist in T&T thought this was a good idea.
There was no change in company taxes
that tally with countries with GDPs similar to ours. The annual income
at which personal income tax became due was raised from $60,000 (TT) to
$72,000 (TT). This will benefit many people whose wages were pushed over
the old personal allowance limit (given the two increases in minimum
wage over the last five years).
Governments have a personal allowance
for three main reasons— it does not deter those who work for lower wages
from seeking work; it keeps all the income of lower paid workers in
their own hands; and it greatly reduces government paper work.
So this increase has benefited a lot of
people and reduced the government workload. A good idea. Over the next
two weeks and more conversations with economists, I will look at
government expenditure and attempts at increasing government efficiency.
But I need to say it
again. We are in the midst of a recession and while the Government may
need to spend, households too need to get smarter on how they spend—yes
to investment in our health, education, housing and retirement planning,
and “no” to expensive, frivolous purchases.