Government subsidies in a changing world

Twenty nine years after a People’s National Movement Government began subsidising gasolene and related prices “as a means of holding down the cost of transportation”, as late Prime Minister and Minister of Finance, Dr. Eric Williams put it in his 1979 Budget Speech, any attempt to reduce the subsidy is immediately exploited by conventional and maxi taxi operators, who use it as an excuse to increase their fares.

What is argued by the operators, and perhaps to some extent understandably so, is not that Government has reduced the subsidy, but rather that it has increased the price of gasolene. So that when Prime Minister and Minister of Finance Patrick Manning announced in his Budget Speech on October 6 of increases in gasolene prices, taxi operators trumped and followed suit. They understood clearly that their passengers would more readily accept a fare rise based on this rather than one in which an increase in spares and repairs had been offered as the reason. Most Trinidadians and Tobagonians are seemingly unaware both that Government subsidises gasolene and diesel prices, among others, and what it in effect did in the last Budget was to reduce those subsidies, which after all all come out of their taxes. It is a failure of communication. In turn, it may have been better had the Minister of Finance dealt with the question of gasolene outside of the Budget.

The subsidies today cost the taxpayers hundreds of millions of dollars a year - a far cry from the year 1974, when they were introduced. The cost then was $16.86 million, and by four years later, in 1978, when Williams presented his 1979 Budget, this had more than tripled to $51.7 million, to reach an accumulated five-year total of $168 million. However, because the purists may wish to have their day, I should point out that although the full subsidies had amounted to $326 million, the cost to the taxpayer was halved because of the formula employed by Government. Under the 1974 formula the gasolene used in the domestic market is sold by the refineries to the National Petroleum Marketing Company Limited “at the international price”. It is then resold on the domestic market at prices controlled by Government.  NP is reimbursed by Government. Let me quote Dr. Williams on the 1974 formula. “Government....bills the cost of the subsidy to the oil producing companies. The latter are, however, permitted to offset the amount as a production cost in computing their tax liability. The Government, therefore, by foregoing the revenue, which would have accrued, shares the cost of the subsidy with the oil producing companies.”

Williams had employed the subsidy process to keep down the cost of living [including the cost of transportation], and gasolene subsidies had formed but a part of this. Others had included food subsidies, the subsidy on cement, which had been introduced to keep down the cost of housing generally; subsidies contained within National Housing Authority mortgages used to reduce the cost of lower and middle income housing; free bus transport for the aged; the School Bus Service and Income Tax rebates on first time housing. In addition, there had been current transfers in the case say, of the Public Transport Service Corporation, which was another way to describe subsidies. The several subsidies meant that indirectly the business and industrial sectors were being subsidised. In turn, it followed that any later abolition of subsidies would trigger increases in the cost of housing and, generally speaking, the cost of living as well as greater salary and wage demands by trade unions for the workers they represented.

 Meanwhile, Government subsidies and current transfers would, with the drop in international crude prices to below US$9 a barrel in the mid 1980s, and the horrific slide in oil production in Trinidad from an all time high of 83,777,503 barrels of crude in 1978 to 58,344,396 in 1983, along with recurring negative growth and an adverse balance of payments position, would place the country in a precarious position. In combination they would lead the Government of Trinidad and Tobago in 1988 for the first time in its history to seek assistance from the International Monerary Fund [IMF], under its Compensatory Financing Facility, and  Structural Adjustment Loans from the International Bank for Reconstruction and Development [IBRD].
 
The level of subsidies and transfers, indeed the whole ‘she bang’, had become a nightmare. The President of the IBRD [popularly known as the World Bank] would point out in a confidential Report of November 21, 1989 to Executive Directors of the Bank that “....Government subsidies and current transfers grew from 3 per cent of GDP in 1977 to 16 per cent of GDP by 1983 [US$110 million to US$1,285 million]! Both the IMF and the IBRD, particularly the IMF, imposed conditionalities on the Government of Trinidad and Tobago. The International Monetary Fund because it had gained the “power of the purse”, dictated to Government policy positions on a wide range of issues, including the slashing of public sector salaries by ten per cent and the abolishing of COLA.  Both would later be restored.

But there were other negatives in which Government transfers, along with subsidies on gasolene, diesel and what have you, would play a not insubstantial part.  In the late 1980s, the United States, with its steel industry reeling from new and vastly improved steel production methods in the [then] European Economic Community and Trinidad and Tobago, imposed countervailing duties on steel imports from the EEC and TT. The US Government insisted that the subsidies, many of them hidden, meant that steel exports from this country, among others, were able to land in the US at prices lower than US production costs.  In the mean time, subsidies which impact favourably on production costs in Trinidad and Tobago are expected to go in a handful of years when the World Trade Organisation applies in full its many punitive rules and regulations. Dr. Williams’ introduction of subsidies in 1973 was the way to go then. But the world has changed.