Friday, January 19, 2018

Taming the monster


Mark Fraser

Recently, Finance Minister Larry Howai dared to raise, albeit in muted terms, a subject which must be the stuff of nightmares for anyone who understands our economy and is thinking about ways to improve “its growth potential”.

Mr Howai stated, “something must be done to address the country’s high transfers and subsidies”. However he immediately went on to say, “it is an area that you can’t significantly change. While you might want to do so almost at the stroke of a pen, there is dislocation that takes place (and) as a result of that we need to manage it”.

I do not know how many citizens appreciate the magnitude of the problem Mr Howai addresses so delicately. The fact is “Transfers and Subsidies” (T&S) currently and for the past few years, have accounted for more than 50 per cent of national budgeted expenditures.

But to really understand the nature of the monster in our midst we need first to appreciate that T&S constitute absolutely non-productive expenditures. For those huge sums the economy gets nothing in return, and for every dollar spent on T&S a dollar is taken away from possible productive or infrastructural development.

But there is more. Expenditure on T&S has been so massive for such a long time that it now accounts for a substantial proportion of economic activity. We would better understand this if we were to look, in some more detail, at the structure of T&S spending.

Some of the programmes involved are well known. We have GATE and CDAP and the fuel subsidies which generate a lot of talk. There are also numerous social welfare programmes involving housing subsidies, emergency housing repairs, school supplies, uniforms, clothing, the emergency cases fund, funeral grants, hardship relief, house rent subsidies, Legal Aid, medical equipment, conditional cash transfers, disability assistance, special child grants and many more which together account for substantial sums.

In addition there are the employment programmes such as URP and CEPEP. Then there are the transfers to hundreds of quasi State enterprises and special purpose enterprises which feature principally as employment agencies (usually for political friends and supporters) and conduits for “non-transparent and non-accountable” transactions.

When we look at the scale and scope of these programmes it is not difficult to understand that the employment, the standard of living, the economic prospects and the very sustenance of most of the population, rich and poor alike, depend on the T&S expenditures.

And since all this economic activity does not generate any actual production or new revenues, the only way it could survive is for the Government to continually feed it by maintaining the levels of T&S spending. In other words the Government must continue to feed the monster or face potentially massive economic contraction.

This is the core of the problem. This T&S monster did not emerge overnight. It was constructed and fattened over the last decade at least, by successive administrations flush with oil and gas revenues. But the fact is that the windfalls are no more and revenues from the energy sector will be subject to continuous decline in the coming years.

Such decline would be the result of the steady decline in oil production, stagnated gas production and, barring temporary spikes in prices occasioned by political events, a long-term trend towards lower prices of oil and gas. This is what the IMF sees when it warns the Government that the economy is vulnerable to declines in energy prices and there is need for structural reforms to diversify the economy.

But we have known this for years and nothing has been done. Indeed, the dependence of the so-called non-energy sector on the energy sector is greater now than it has ever been. So we are going to continue to talk about diversification, and innovation and entrepreneurship and growth poles, but it will continue to be just talk until and unless we are prepared to cut the monster down to size.

The reason is simple. Diversification and growth, however envisaged and defined, require massive investments in productive enterprises. The only place we are going to find money for such investments is to take it from the bloated T&S budget.

So the choice we face is stark. Either we seize the moment and begin to tame the monster or we continue to let it grow to the point in time when our revenues can no longer feed it and, starved of its expected sustenance, it goes on a destructive rampage and tears the economy and the society to shreds.