The newly appointed Minister of Finance and the Economy, Senator the Honorable Larry Howai will have a tough task at hand come September, when the 2012/2013 fiscal budget is expected to be read in Parliament. Currently, consultations are being held with various stakeholders for input into the budget and these are expected to be completed by 31 July. However, Mr Howai has hinted that next year will see another deficit budget, which will mark the fifth consecutive year for Trinidad and Tobago. This year is proving to be a challenging one as the global economy has been overshadowed by uncertainty, with renewed consensus of further global slowdown as evidenced by recent International Monetary Fund (IMF) statements.
A deficit budget is one where the planned revenue exceeds the planned expenditure for a given year. Usually to finance this increased expenditure, additional debt is required, be it locally or internationally or through funding by multilateral organizations. Over the past three years, a recurring budget deficit was incurred (see Table 1) with a same expectation this year, as the local economy experienced economic declines over the said period. Recurrent revenue remained fairly flat over the three years, while the level of recurrent expenditure steadily increased, mainly as the government maintained and in some cases expanded its social programs and other initiatives aimed at spurring economic activity. However, as both the local and international economies continue to face challenges, a persistent budget deficit can prove to be a burden for the T&T economy. To tackle this, an approach can be taken to either increase revenue or reduce expenditure.
The most common measure of revenue generation for any government is taxation and to this end, the contentious issue of property tax has resurfaced. The Minister of Finance and the Economy has been fairly vocal on this and has announced the intent of reintroducing this measure, due to an estimated TT$82 million (2007 tax collected) loss of revenue incurred in the absence of the tax. The last administration, prior to its exit, proposed the introduction of a new Property Tax aimed at replacing the existing land and building tax. However, the current administration promised a repeal of the Property Tax Act of 2009 in its manifesto.
Given that premise, Mr. Howai will have a tricky situation to navigate and it seems like a debate between economics and politics. On one end, property tax has the potential to provide a steady source of revenue to the government;however, since January 2010 no revenue has been collected from the tax. The other end is the pressure on the government from the public to deliver on its promise to repeal the tax Act, which was a key aspect of its election campaign. However, a bridge can be reached, through proper consultation with various stakeholders to incorporate the views and concerns of the public. The trouble with this is to avoid political suicide while implementing an important measure which can help narrow the fiscal deficit. It is apparent that additional revenue is needed, especially with depressed natural gas prices and volatile crude oil prices.
In terms of reducing expenditure, another contentious issue has tobe addressed - the fuel subsidy. It is estimated that this subsidy costs the government TT$4 billion annually. The challenge will be removing or at least easing the subsidy during the upcoming fiscal year. This subsidy is a significant burden and sustaining it in times of zero growth is likely to become onerous. However, removing such a subsidy is likely to impact almost all sectors of society. Fuel is used for transport, which is an input cost in most basic items. Food is one such area that will be affected and food inflation is already high at28.3% as at the end of May 2012. Commuters will also feel the effects, ranging from private car owners to the travelling public. The government, if choosing the route of reducing the subsidy will need to be mindful of the impact this will have and must seek to mitigate the effects.
Indeed the decision to reduce the subsidy is an important one, particularly given the slow pace of growth and the weaker outlook for the fiscal accounts given the state of the global economy and the global commodity markets. Energy prices have been lower over the last two years, which furthers detracts from justifying the maintenance of the fuel subsidy. However, there are some that say the presence of the subsidy is justified as a means of society directly benefiting from its natural resources. The fuel subsidy therefore should be addressed as it is a means of reducing the deficit level.
As the 2011/2012 fiscal year comes to a close, the Minister of Finance and the Economy will be faced with some tough decisions - curtail expenditure, increase taxes or combine a mix of the two. Two topical issues, namely property taxes and the fuel subsidy should be addressed and it seems that they will be given the public statements of Mr. Howai since his appointment. The T&T economy has recorded negative growth for the last three years and the energy sector, a key driver of growth continues to be challenged by various factors. Given this backdrop, the government will be the one charged with stimulating growth, either directly through its investment programs or indirectly through the facilitation of growth in other sectors. One thing for sure is that there will be another deficit budget in the next fiscal year. However, with this being the fifth consecutive year of budgetary shortfalls, measures should be put in place to minimize the fiscal imbalances because a persistent and growing one will only pose problems in years to come, especially with the uncertainty of the global markets.
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