Fiscally prudent or reckless?

It is clear that two of the major themes in the budget that Finance Minister Larry Howai is due to deliver in 11 days will be kickstarting the growth of the economy by ensuring improving the implementation of projects outlined in the 2013 budget and in previous presentations. The fear that anyone who has studied or is studying the Trinidad and Tobago must have is that Mr Howai will increase capital expenditure without attempting to adjust downwards recurrent expenditure. Despite his statement last month about the introduction of austerity measures in the 2013 budget, the Minister of Finance has already signalled his intention by making it clear that the Government is planning to run fiscal deficits for the next three budgets. In my view, any Minister of Finance in the current global scenario—in which countries (left, right and centre) are getting into trouble for running fiscal deficits (which, it is important to note, contribute to a country’s debt stock)—who increases a country’s capital expenditure without making the required reductions in the recurrent spending, would be guilty of fiscal recklessness.

 

 

This would be particularly true in a small, open economy that depends for the majority of its fiscal revenues on global energy prices, which are extremely volatile and are likely to decline in the future, especially if the major world economies creep back into recessions. This is a problem that the International Monetary Fund (IMF) recognises. In a statement issued after a high-level forum to discuss the challenges of low growth and high debt facing the Caribbean, held on September 4 and 5, the IMF stated: “Countries with high debt ratios would benefit from pursuing fiscal adjustment steadfastly. “Fiscal adjustment in the context of weak growth can be difficult to sustain, yet the cost of pursuing unbalanced policies can be more disruptive economically and socially than gradual and credible adjustments.”  “In many countries, fiscal consolidation has been initiated and a further deepening may be warranted. Such consolidation could be enhanced by: improving the medium-term frameworks for fiscal policy; lowering current spending to make room for capital expenditure; reducing the level of tax waivers and concessions; and enhancing debt management.”

 

 

Note the prescriptions outlined by the IMF, especially the call by the institution for lowering current spending to make room for capital expenditure and reducing tax waivers and concessions. While this may be cookie-cutter advice, as it were, it is focused on bringing a country’s fiscal accounts into balance in the medium term, which is three to five years. While it may seem that this aligns with the Government’s thinking that there would be fiscal deficits for the next three years, it does not. 

The expectation of most sensible people would be that there would be some attempt by the Government to reduce the fiscal deficit over time; and it would be especially useful if the Government announced that reductions in a public way, such as in a national budget. In other words, the Government could say that it is targeting a five per cent budget deficit in year one, a three per cent deficit in year two and a balanced budget in year three. This prudent budgeting process would only be achieved if the Government starts in the 2013 budget by capping the amount of money coming from the Treasury for the fuel subsidy.

 

 

Instead, there is little evidence that the Government has any plan to bring the country’s fiscal accounts into balance in the medium term, which coincidentally brings the country right up to the next general election cycle. Maybe it is just wishing that energy prices will remain at their current high levels for the next three years. While that is possible, any prudent government would conduct some scenario planning based on various realistic contingencies, such as the collapse of world oil prices to US$45 a barrel and a sharp reduction in the price that the country is able to fetch for its main revenue earner, which is LNG.

The big challenge is whether Mr Howai will be fiscally prudent or fiscally reckless. Observing him for a number of years, I would say that he definitely tends towards prudence. One of the big mysteries of the whole budget process is the issue of how the Government goes about financing the budget. In the Review of the Economy 2011, the Government reported a fiscal deficit of 7,948 million. 

 

 

According to the Review of the Economy: “Domestic net financing was $7,568.80 million, consequent upon an increase in domestic borrowings of $401.70 million, and a charge of $4,051.8 million on the Infrastructure Development fund (IDf). Sinking fund contributions and domestic capital repayments were recorded at $1,956.40 million and $1,006.30 million, respectively.” This means that exactly 50.9 per cent of the 2012 budget was financed from the Infrastructure Development Fund, which is the deepest, darkest hole of unaccountability and lack of transparency that it is possible to imagine. Instead of running down the country’s TT dollar savings during a period of relative economic stability, the Government should be subjecting itself more to the rigours of the local and international capital markets. It’s interesting that in the 2012 budget, gross public sector debt was projected to “increase by 2.1 per cent to $52,183.90 million by the end of the current fiscal year. As a percentage of GDP, however, gross public sector debt is expected to decrease from 38.5 per cent of GDP in fiscal 2010 to 36.3 per cent in fiscal 2011.”