At best a budget is a statement of a government's plans to manage the economy. At the very least, it is simply a statement of revenue and expenditure for the year. In reality, the capacity-creating effects of government expenditure are severely limited in the short run.
In his budget speech Finance Minister Larry Howai says that his "focus in this budget will be to provide a strong stimulus boost to the economy, aimed at accelerating the growth momentum". But he also says that "the current condition of the global economy requires us to be measured and watchful" and that "the situation requires a judicious mix of measures". These juxtapositions create policy conflicts which the minister did not rationalise and which we identify as policy contradictions.
The first contradiction is the revenue projection. The minister is clearly on the horns of a dilemma. He correctly makes the adjustment to the Supplemental Petroleum Tax legislation. This has the effect of reducing tax revenue in the short run. Similarly he also identifies the clear threat posed by shale gas and oil to Trinidad and Tobago as an exporter. Yet he projects that revenue will continue to increase in 2013. Whilst we have done well in the last two years to expand revenues it is not clear that this is sustainable in the future.
The real issue is we have done well to maintain our revenues above the $45 billion mark, but it is very unclear that we will be able to continue to do so beyond 2013. The fact that he has introduced nuisance taxes on motorcycles and other motor vehicles indicates the pickings are slim and that there is some measure of desperation. This is exemplified by the return to the Property Tax (in a new form?) and other revenue enhancements (read as the Revenue Authority).
The second contradiction is that of managing the expenditure. Given the revenue challenges, deficit budgeting is clearly unsustainable. Indeed, if he were to be judged as "judicious and watchful", there would have been no growth in gross expenditure.
Prior to the speech, Minister Howai was careful to signal the reductions in subsidies could be expected. So much so that the measure actually announced was not merely an anticlimax, it was a fudge. By creating such a disparity between the prices of diesel, super and premium, Mr Howai has created a perverse incentive which will have the unintended consequence of increasing the subsidy by encouraging the use of the more heavily subsidised fuels.
The third contradiction is that of stimulating growth. Construction cannot become an engine of growth in itself. For that to occur, it requires sustainable long-term growth in the economy and confidence in the future. Both of these conditions are absent. These incentives have been used before to good effect. But they worked because they were introduced before the first oil boom which gave them momentum. And they remained in position for a considerable period of time. The time limit on the construction incentives in the speech is far too short and will help only those projects that are currently underway.
In addition, if a $6.7 billion deficit cannot move the economy into positive growth in 2012, why will a $7.7 billion deficit make a difference in 2013? The reality is that we are critically dependent on the energy sector and the changes in the external market pose great risks that must be addressed in a meaningful way. We will do well to achieve .5 per cent growth in 2012 and substantially less than the 2.5 per cent projected for 2013.
The fourth contradiction is that of increasing agricultural output. The minister proposes to reduce the food import bill "by 50 per cent or just over two billion per year by 2015". A brave objective that is immediately ridiculed by all the current evidence provided in the Review of the Economy which accompanied the speech. Notwithstanding either the additional land of Caroni Limited brought into new food crop production, or the existing 14 pages of tax incentives for farmers, food output has declined or stagnated in 2011-12 and now accounts for less than 1 per cent of GDP. T&T was never strong in food production and has a long history of importing the majority of its food, as does the rest of the region.
In addition, the areas in which there has been success since Independence (pork and poultry) rely on imported inputs (wheat, corn, soya and pharmaceuticals) which are a substantial part of our food import bill. And unless there is a substantial change in our diets away from bread, roti, biscuits and rice that will not change by 2015.
Neither are any of the initiatives currently on the agenda of the Ministry of Food Production sufficient to change food output or deal with the demographic that the farmers are older and educating their children away from farming.
The announcement that VAT on food will be reduced is an error at best. So was the announcement about the two-year removal of duty on light manufacturing equipment for a two-year period; that is already in existence.
The budget speech is as much about politics as it is about economics. But there is an old saying that politics trumps economics in the short run but economics wins in the long run.
If true, it is unlikely that any of the laudable economic objectives set out in the speech will be achieved and certainly not in the lifetime of this administration.
* Mariano Browne served as a PNM