Tuesday, January 23, 2018

The 2014 budget outlook

The 2014 budget exercise should now be well underway. This consists of a general circular which is issued to all ministries requesting their expenditure plans for the next year and an update on the state of current programmes and initiatives. This gives the Ministry of Finance six months to determine what is desired as distinct from what is possible.

This methodology allows ministries to identify key initiatives to achieve their (read the government’s) key objectives.

Invariably, these initiatives would have already been approved by Cabinet and including them in the budget process brings them one step closer to fulfillment.

In the time leading up to the October speech, budget submissions are collated by the Ministry of Finance thereby determining the size and direction of the expenditure plans. Then begin the “discussions” between the Ministry of Finance and other ministries and ministers to defend or to execute their plans.

Usually, the initial submissions are always more than what can be afforded as more is always requested in the hope, if not expectation, that the resulting bargaining process will give the desired result.

This depends not only on the strength of the projects themselves, but also on the individual minister’s influence, and ultimately, what the Prime Minister wants.

This sounds simple. The reality is quite different.

It is easy to determine what you want to spend and how. The real limitation is the size of the revenue projection.

What must also be considered is the strength of economy, the underlying inflationary trends, the money-supply position, the need to diversify the economy and the signals to be sent to the various national economic groupings.

The current international economic situation is of considerable importance, as is the health of major trading partners and our current fiscal position.

The current economic climate is epitomised in one word: uncertainty. Europe is in the midst of a mild recession, while the UK is about to dip into recession for the third time in five years.

Contrary to the assumption by the Minister of Finance, the US has not found a way to deal with either sequestration (legally mandated automatic reduction in government revenues) or the increase in payroll taxes.

The effect of both measures is estimated to reduce already weak US growth of below two per cent, by 0.5 to 0.8 per cent. And the debt ceiling issues have been deferred to May.

World economic growth is likely to be positive largely as a result of economic growth in the Far East and Africa. With the exception of Suriname and Guyana, Caricom has no or slow growth, with large deficits and debt issues.

Trinidad and Tobago has experienced decline or very slow growth (less than one per cent) in the last four years and continuing deficits.

Notwithstanding the absence of any clear data in the fourth quarter of 2012, Minister Howai has adopted a prudent stance enunciating the following fiscal guidelines:

1. Return to balanced budget by 2016.

2. Moderating the rate of growth of transfers and subsidies.

3. Attracting foreign investment.

4. Adopting a more value-driven approach for the use of energy revenues, focusing on local content, economic diversification and the creation of new industries.

Attracting foreign investment is indeed important. However, this can only come in the medium term with serious concessions to the energy sector. This will cost revenue and act as a brake on current expenditures, and limit the ability to facilitate diversification.

To illustrate, since 2007 revenues have grown from $40.7 billion to a projected $50.7 billion in 2013, a growth rate of over 25 per cent. Expenditure on the other hand has grown from $31.1 to $58.7 billion, or by 68 per cent.

Transfers and subsidies have grown from 40 per cent of GDP to 47 per cent. In short, we are experiencing a persistent structural deficit as reflected by the growth in the debt to GDP ratio. In short, we are borrowing to finance current expenditure.

In 2010, the national debt was $50.2 billion and rose to $71.6 billion at September 30, 2012.

As a percentage of GDP, the debt has risen from 39.7 per cent to 47 per cent over the same period.

Since then, the Minister of Planning has celebrated the largest loan from the Inter-American Development Bank (IDB) in the sum of $1.5 billion; the projected deficit of $7.6 billion is to be financed by borrowing and the advances to Clico policyholders were financed by borrowing.

Allowing for debt service (repayment of capital), the national debt should amount to roughly 61 per cent of GDP by September 2013.

It is generally accepted by various international agencies that a debt to GDP ratio in the range of 60 to 70 per cent represents a danger zone unless the economy is growing. And the T&T economy is not growing.

In addition, the rate of inflation is high and therefore increasing the cost of doing business (even if there are no new initiatives) and the recent salary settlements are in excess of the “targeted” figure of five per cent, inflating recurrent payroll expenditures.

All this is occurring at a time when our preferential position in the international gas market is being eroded by growing competition from new market entrants and those who are gearing up to enter the market, not the least of which is the USA.

The outlook is, at best, weak and 2015 is an election year. It is doubtful then that Minister Howai will be able to moderate the growth in transfers and subsidies.

We should remember Peter Drucker’s comment that “The greatest danger in times of turbulence is to act with yesterday’s logic.”

Mariano Browne is a former government minister.