No to Expensive, Frivolous Purchases

 

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Category: Trinidad Economy 11 Oct 15
 

‘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 from oil.

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 money.

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.

 

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All Articles Copyright Ira Mathur