Monday, January 22, 2018

Invest for production

While it has become something of a tradition for retailers and business groups to complain that their Christmas sales have been slow, anecdotal evidence indicates that this year the merchants and their representatives may finally be telling the truth.

That retail sales would significantly decline this year can be explained by the fact that T&T is entering the fourth year of its worst economic downturn in three decades. Government spending—a significant driver of household spending in this small, open energy-dependent economy—is 20 per cent less for the 2018 fiscal year at $50 billion than the $62.8 billion spent in 2014.

That reduction has meant a loss of jobs for those on public service contracts and those employed with entities that have been closed, such as Caroni Green, Government Information Services and the Tourism Development Company.

But for a much larger group of people, the reduction in Government spending has meant higher transportation costs, as a result of the phased elimination of the fuel subsidy, and the means-testing of people who entered tertiary education for the first time in September.
The slowdown in Government spending also means that, generally, salaries have not been adjusted upwards in either the public or the private sectors since 2015.

With static incomes, it is inevitable that higher transportation costs—along with higher food prices as a result of the widening of the VAT net and the higher cost of foreign exchange on the black market—would be more keenly felt.

These factors have made many people much more cautious about spending and that is what is contributing to the slowdown that retailers have been reporting. The reason the spending slowdown is negative for the economy is because 19.4 per cent of T&T’s labour force, some 124,200 people, is employed in the sector, comprising the wholesale and retail trades, restaurants and hotels.

A general slowdown in household spending will eventually mean business owners reducing staff. That is likely to result, over time, in an increase in the unemployment rate and more people getting drawn into the informal sector, which will have both social and tax collection consequences. It is simply not possible for the Government to increase its spending now—given its dire fiscal limitations up to and including having to borrow money from banks to pay the salaries of public servants for several months this year.

What should be possible would be for the Government to focus its capital expenditure on projects that have the largest economic impact in terms of employment numbers and the income flowing back into the economy. What should also be possible would be for the Government to continue its conversations with the private sector to find out what is needed to attract investments in the country’s productive sectors.

New shops and malls are all about consumption, but what T&T needs now more than ever is new money going into making things or providing services where the country has both comparative and competitive advantages.