Who will guard the guard?

Patrick Manning is using energy profits to drive change in the economy. Whether this will work is another matter

"Ensuring Our Future Prosperity: Addressing Basic Needs", was the theme of the 2005/2006 national budget presented by the Honourable Prime Minister and Minister of Finance to the fourth session of the eighth Parliament. It contained a rich mixture of fiscal measures that focused on the overall policy of social and economic transformation which, quite simply, is to be funded by a buoyant energy sector operating under a reformed tax regime.

Policy Direction

The macro-economic policy articulated by the Prime Minister is to "develop a diversified, competitive economy that occupies a more profitable position in the global value chain". This is indeed laudable and it represents the fundamental policy direction that must be consistently applied if we are to create a more diversified and sustainable economy.

The overall process is to successfully shift from a primary mode of production to the creation of higher value-added products and services in the energy and non-energy sectors. This will ensure greater revenue stability; it will support the sustainable exploitation of our non-renewable resources, and it brings us closer to the goal of higher retention of the value created in the energy sector.

This has to be an ongoing policy direction in order for it to be successful. As a nation, we must recognise the critical importance of macro-economic policy consistency which transcends partisan politics. Failing this, we will never achieve the standards of living to which we aspire.

By The Numbers

Some of the key highlights of the 2006 fiscal package are as follows:

*Proposed recurrent expenditure of TT$ 34.4 Billion representing an increase of 24% over the previous fiscal year .

*Proposed capital expenditure of TT$ 3.8 Billion accounting for 4.2% of GDP. In the previous fiscal year, capital expenditure was TT$ 2.85 Billion accounting for 3.6% of GDP. In nominal terms, this represents an increase of 33% in capital spending over last year. This is the highest level of the Public Sector Investment Programme since its inception in 1990. A significant proportion of this capital expenditure will be borrowed.

*The recurrent expenditure level reportedly includes an amount of TT$ 1.86 Billion to be transferred to the Revenue Stabilisation Fund.

*The beneficiaries of the largest increases in recurrent expenditure are the Ministry of Social Development (increase of TT$ 1.66 Billion), Ministry of Public Utilities and the Environment (increase of TT$ 1.02 Billion), the Ministry of Health (increase of TT$ 607 Million), the Ministry of Education (increase of TT$ 603 Million), and the Ministry of National Security (increase of TT$ 467 Million). If this can be used as a rough indicator of the Government’s intent to expand and improve the quality of the services offered to the public by these Ministries, then, it can be concluded that the Government’s approach is broadly in line with popular sentiment. The burning question that will have to be addressed in the coming months is how effective have these expenditures been in achieving the set objectives?

On the revenue side the following is pertinent:

*Total revenues (tax and non-tax) are estimated to be TT$ 35.46 billion which is 25% higher than the previous fiscal year. Revenues are based on an oil price of US$ 45 per barrel.

*Tax revenue is expected to increase by TT$ 4.84 Billion which is an increase of 20% over the previous year.

*The ONLY net contributor to the expected increase in tax revenue is Taxes on Incomes and Profits, which are expected to increase by TT$ 4.84 Billion and the ONLY net contributor to the increase in Taxes on Incomes and Profits is Taxes on Oil Companies.

*Non-tax revenue is projected to increase by approximately TT$ 600 Million.

*Therefore, the PRIMARY net contributor to the expected increase in tax revenue is taxes earned from the energy sector.

The Government of Trinidad and Tobago is financing the whole increase in the recurrent and part of the capital expenditure budgets with revenues primarily derived from the energy sector.

The articulated fiscal policies of the Prime Minister and Minister of Finance are clear: Trinidad and Tobago’s economy will be transformed over time through the growth of the private enterprise in the non-energy sector and the diversified energy sector. This growth will be partly financed by windfall revenues from the energy sector, with the public sector performing a pivotal supporting role, while maintaining social stability through transfers of wealth.

The implication of this approach is that:

*Fiscal policy will continue to be expansionary as long as revenues and borrowing capacity allow

*Any failure on the part of the public sector to deliver the requisite services will have dire consequences for Trinidad and Tobago.

Finally, in this Budget Series, we have argued that now more than ever, Trinidad and Tobago’s development agenda has to be well-designed and structured to transform the economy into a competitive, diversified and equitable one that is flexible and, therefore, capable of quickly adjusting to rapid changes in our external environment. This can only be achieved when we have the requisite funding to facilitate the people, infrastructural, and technological development which form the foundation of this transformation. That time is now. This period of elevated energy prices represents our single most important opportunity to transform this economy and create a better standard of living for all.