In August of last year, I wrote a couple articles with the title, My Budget Wish List. As we go into another cycle for the preparation of the national budget, I have decided to address the issue a bit earlier this year in order to first of all compare what was suggested to the reality of the day and, secondly, to the extent that it is possible influence the discussion for the coming presentation. In setting the international context for the 2011 budget, I am amazed to find that one year later the exact words apply to the point where they require no editing. For this year, all that is required is to change 2011 to 2012 in the following quote. "Unusual uncertainty" is the backdrop against which planning for the 2011 budget is taking place and it does present a challenge.
"Globally, there is a split between those who expect some European countries to default on their debt and thus trigger another crisis and those who think we are now in the clear. There is a split amongst advocates for austerity and advocates for more stimulus. Half the crowd thinks the United States will go back into recession the other half thinks the current slow down is just a "soft patch." Today, the stock market goes up, tomorrow it can just as easily go down by the same amount." "Given this environment it is likely that in planning for the 2011 budget and even in setting out our medium-term plans, we are going to get some things right and some things wrong. The trick is to ensure that we keep enough "dry powder" to allow us to get out of any mistakes made."
Given the fragility of the global economic recovery the approach this fiscal year of keeping some "dry powder" as opposed to plunging into further deficit spending is prudent if not popular. We boast of "fiscal space" and "economic wiggle room," but that only last if we are judicious in the utilisation of existing resources and, if we are not careful, another global flashpoint can leave us wanting. At that time, we will be less able to deal with the situation and it will take far longer to turn around. The above quotes from last year's article emphasises that the global situation today is largely the same as last year.
Tax collection
One of the main items on my budget wish list for 2011 was the issue of tax collections. This was addressed to some extent with the tax amnesty that lasted for much of this fiscal year. The problem is that I am not sure what infrastructure has been put in place to address the collection of taxes when they are due going forward. The problem with an amnesty is the issue of moral hazard.
Those who have benefited from a tax amnesty would have been, all other things being equal, delinquent in the paying of their taxes when due. Without the enforcement mechanism to collect current taxes the delinquent behaviour continues resulting in loss revenues to the State or, at best, a delay in collecting until another amnesty is announced.
Last year the debate of over the T&T Revenue Authority was a political hot potato. My point then, as it is now, is that regardless of the mechanism that is put in place: "ensuring that all taxes that are supposed to be collected are, in fact, done goes a long way to rebuilding the revenue base and for the majority of citizens who were properly contributing to pay for the goods and services provided by the State this represents a fairly painless exercise." The collection of VAT, the activities of the self-employed, professionals, small and micro enterprises and, of course, corporate T&T should be better policed from a tax perspective in order to improve the level of receipts. Just look at Greece, a country noted for tax evasion on the part of its citizens, but also one whose citizens are dependent on high levels of benefits, transfers and subsidies from the State.
It is estimated that austerity measures implemented last year resulted in a 30 per cent reduction in income for the average Greek citizen, and with a new austerity package on the table, that is set to fall again this year. Consider how your life will be affected if you take a 30 per cent pay cut? Looking forward the issue of improved tax collection is even more important if as is being suggested measures are being sought to improve the contribution of small business to the local economy. A lack of infrastructure to collect what is due as these entities mature and flourish means that the country does not get its just return. It is the citizenry that loses in the long run.
Reverse cycle
Improving the level of confidence in the economy should be another key element of the 2012 budget.
The issue of confidence was addressed in detail last week but in this context in T&T we have billions of dollars of capital basically sitting idle serving no return objective. The owners of this capital are seeking to hold onto their resources in very short-term instruments because they are uncertain about the future. They are seeking out instruments that are as far as possible risk free. Wherever this capital accumulates, whether it is bank deposits, mutual funds or government-issued bills and bonds, the accumulators of these capital resources are themselves unable to deploy the funds into anything with risk because they, too, are risk averse. It is a process that has progressively lead to a state of stagnation.
Appreciate that the holding of cash is a form of self-insurance and insurance is in demand when the environment is perceived to be risky. In the past you may have been prepared to hold cash and borrow against that cash because you felt confident that you would be able to repay. The lender was also willing to lend because they were also confident of your ability to repay. As those relationships break down, people are more inclined to hold cash to cater for emergencies and the unforeseen because emergency financing may otherwise not be available. It is a cycle that has to be broken.
Generating income growth
In the absence of confidence people will continue to self insure by holding onto cash resulting in the State having to carry an even bigger burden in generating economic growth. For example, there has consistently been a lot of talk about the gas and diesel subsidies and whether it will be altered. This is placing a significant burden on the fiscal resources of the State and, with oil prices moving higher and higher, it will continue to create problems. However, once we go down that that path of "will he or won't he," it will remain a point of uncertainty that lacks transparency and impacts the way investors think going forward.
This is a repeat from last year but I make the call again-unless we introduce some market price volatility to gas prices, we would be failing to address the issue. It is not sufficient to simply offer a tax credit to convert to compressed natural gas. We have to allow for gas prices to move within a price band, depending on the underlying level of oil prices, for it is only then that the public will fully appreciate the fact that prices can change.
Market-based economy
Further, these are the types of measures that will move us to a more market-based economy and reduce the reliance on transfers and subsidies and, most importantly, with a level of transparency that transcends partisanship or politics. A continued reliance on Government spending will increase the risks of a "hard landing" down the road. The following equation should make this concept very easy to understand. Gross domestic product (GDP) is equal to the sum of consumption (C), investment (I), government spending on goods and services (G), and net exports (E). If consumption declines because of uncertainty, and there are inadequate incentives for the free flow of capital, then investment activity will decline.
Our net exports are dependent on global energy demand. This has been our lifeline in the past and has provided the catalyst for government spending, which, in turn, drove consumption, which then drove investment. Now we have to engineer the reverse cycle. That is to influence final demand (consumption) and increase investment activity, both of which will generate greater revenues for the Government to spend and investment spending in the energy sector will shore up our reserve position and lead to an increase in net exports. It is quite a challenge.
Ian Narine is a broker registered
with the Securities and Exchange Commission.