The next government will have to prepare the country to live on budgets that are based on lower oil prices. That is the advice of energy economist Gregory McGuire who has argued that the country has to take a more conservative approach and ensure that there is fiscal responsibility.
In an emailed response on Tuesday to questions on the turbulence in global currency, commodity and stock markets and the implications of lower commodity prices on the T&T economy, McGuire pointed to four things that have to be done:
�2 Improve in the efficiency of tax collection; particularly corporate taxes and VAT
�2 Reduce waste and inefficiencies in government spending
�2 ?Review social transfers and subsidies to ensure that such spending is based on needs rather than universally applied.
�2 Prepare the country to live with a budget based on conservative long term price of oil and gas.
From 2010 until mid-2014, world oil prices were fairly stable, at between US$90 and US$110 a barrel. But since June this year, the price of oil has declined substantially.
The reasons for this change are twofold: weak demand in many countries due to insipid economic growth, coupled with surging US production. With the deal on Iran's nuclear programme and the significant slowdown in the world's second economy there has been almost panic in global financial markets which have fallen and which have taken with it commodity prices, not just oil and gas.
Added to this is the fact that the oil cartel OPEC is determined not to cut production as a way to prop up prices. From June in what must now be considered the highs of US$63, a barrel of West Texas Intermediate to US$38.83 at close of trading on Tuesday.
McGuire told the Business Guardian that the government in a small, resource-based economy like T&T should always practise fiscal responsibility. He said it should not wait for the price of the resource, in our case oil and gas, to fall to begin to ask the question about what we will do.?
"The Vision 2020 report laid out in very precise terms the rules of fiscal responsibility. These were supported by the international agencies. However, in the last five years, we have witnessed an unprecedented level of fiscal irresponsibility. A government that had accused the Manning administration of being profligate in spending, proceeded to outspend Manning in every department.
"Most significantly is in the area of transfer and subsidies. The problem is that emoluments and transfers and subsidies are the most difficult type of expenditure to reduce. So going into the future, immediately, I think three kinds of adjustments are necessary," McGuire.
On the question of whether the next government should draw down on the Heritage and Stabilisation Fund, McGuire said the HSF was designed for that purpose. He said the existing legislation defines the rules of withdrawal and those rules should be observed.
The energy economist acknowledged that one way to offset the present fall in commodity prices was to increase production but said that was not available in the medium term although it may be possible to have some incremental increase by awarding more farmouts and lease operatorship.
"Production cannot be magically increased. It requires conscious policy that must include efforts to expand the exploration efforts on land as well as new offshore acreage. But perhaps we can have some early wins by expanding the farmout and leases on Petrotrin acreage, which would open up areas and old wells that are deemed uneconomic for Petrotrin to produce."
On the question on whether more fiscal incentives should be offered to the oil and gas companies to increase production, McGuire said there was limited room for more tax breaks. He said there may be a some room for incentives for marginal field and secondary recovery particularly on land but enough has been done recently, particularly with respect to offshore?.
McGuire also posits that the fuel subsidy is less of a problem when oil prices are low and that at current oil price levels motorists in T&T are paying well above market prices for premium gasoline. ?
"The way the subsidy works is that it automatically get less as oil prices fall. In fact, lower oil prices provide an opportunity to make the change, if government allows consumers to bear part of the burden of prices increases when the oil market recovers."
McGuire explained that diesel will still carry a subsidy at US$40/bbl.