You are here
Is now the time to cut fuel subsidy?
In tabling the 2013 Finance Bill in the Senate two weeks ago, Finance Minister Larry Howai said he was seeking the Senate’s approval to supplement the 2012 budget by adding $1.56 billion “to fund urgent and critical recurrent expenditure to September 30, 2012.” He also sought the Senate’s approval to vary the 2012 budget by $2 billion.
As a result of these additions and changes that are the purpose of this legislation, the Minister said the 2012 fiscal deficit was $3.1 billion or 2.02 per cent of GDP compared with the original budget that projected a deficit of $7.6 billion or 4.5 per cent of GDP.
The Minister then said, and it is important that he be quoted at length:
“Honourable Senators may recall that at the time of the presentation of the 2012 Budget in October 2011, the oil revenue was projected using an oil price of US$75 and a gas price of US$2.75 per mmcf.
“Based on these assumptions, among others, the total revenue projected for fiscal 2012 was $46.9 billion. Correspondingly, the forecast for expenditure was $54.6 billion, resulting in an anticipated deficit of $7.6 billion for fiscal 2012.
“In September 2012, at the time of the preparation of the 2013 Budget, a final projection for fiscal 2012 was prepared for inclusion in the Draft Estimates 2013. The revised revenue was projected at $47.7 billion and revised expenditure at $54.4 billion, yielding an anticipated deficit of $6.6 billion. This revised position was laid and presented to the Parliament at the time of the delivery of the 2013 Budget in October 2012.
“The fiscal data for 2012 has been substantially finalized and the provisional outturn in Central Government Fiscal Operations for fiscal 2012 is now a deficit of $3.1 billion. This is $3.5 billion less than the final revised projections. The variance was mainly as a result of higher than projected revenues of $1.2 billion, the effect of which was complemented by a lower than projected expenditure of $2.3 billion.”
Mr Howai said the increased total revenue picture was due to the Government receiving $1.7 billion more from energy companies than originally anticipated. This was primarily because actual oil and gas prices were higher than those assumed for the last quarter of fiscal 2012.
He said the Government was also able to reduce expenditure by $2.3 billion to $52 billion as a result of the fact that goods and services expenditure was lower by $887.9 million and that interest payments were less than projected by $577.4 million.
“The lower expenditure is attributed to the issuance of fewer Treasury Notes and Treasury Bills (Open Market Operations) than were anticipated in the revised projections. In addition, no new loans were negotiated and repayments on some loans were less than projected because of favourable interest rates,” the minister said.
According to Mr Howai, development programme expenditure was $629.4 million lower than projected. Expenditure was lower under the Consolidated Fund by $192.3 million and under the Infrastructure Development Fund (IDF) by $437.1 million. This means that the Government did not get around to executing its 2012 capital expenditure programme, which has serious implications for its commitment to stimulate the economy.
While much of the reduced deficit was as a result of factors outside the control of the T&T—such as higher oil and natural gas prices than projected and lower interest payments on floating-rate bonds—the fact that the Government was able to reduce the fiscal deficit from 4.5 per cent to 2.02 per cent of GDP is an outstanding achievement at a time when governments around the world are getting into trouble for higher deficits than budgeted.
It may be argued that higher revenue than anticipated and lower expenditure than planned make this the right time for the Government to implement the necessary measures to eliminate budget deficits from T&T’s financial lexicon.
There are two measures that can be implemented almost immediately that will ensure the country would be able to balance its expenditure and revenue in the foreseeable future.
The two measures are the elimination of the fuel subsidies and the introduction of the property tax regime.
The elimination of the fuel subsidies will cut billions from T&T’s annual expenditure, while the introduction of a property tax regime will add billions in revenue.
It should be obvious that these measures would be easier to implement when the economy is stable, as it is now, as opposed to waiting until the economy is in decline to cut the subsidy and increase the tax.
On the issue of the fuel subsidies, Mr Howai allocated $4.45 billion of the country's total expenditure to fund the 2013 “shortfall in the subsidy re sale of petroleum products,” according to the budget document 2013 Draft Estimates of Recurrent Expenditure.
What that means is that the allocation for the fuel subsidy in the current fiscal year exceeds the total budget deficit for the last fiscal year.
It also means that the Government is spending more money subsidising petroleum products than it is funding the Ministry of Education (with an allocation of $4.28 billion) or the Ministry of Health (due to receive $4.36 billion).
And that fuel subsidy represents 58 per cent of the 2013 total estimated fiscal deficit of $7.67 billion.
It is also clear that the amount of money that the country is spending on the fuel subsidy is growing over time.
It must be noted that the estimate for the fuel subsidy in 2013 alone is three times the revised estimate for 2012, when the country spent $1.5 billion to ensure price stability for transportation.
In the 2008 budget, former Prime Minister Patrick Manning, presenting his last budget as the Minister of Finance, estimated that the subsidy on petroleum products to keep down the cost of gasoline amounted to $3.9 billion between 2002 and the 2007 financial year.
In presenting the 2009 budget, Karen Tesheira, who served as Finance Minister between November 2007 and May 2010, advocated the conversion to CNG from gasoline and diesel. She noted that the fuel subsidy had cost the Government an estimated $2.4 billion during the period October 1 2008 to September 30, 2009.
That budget presentation was important because it came at the end of a long period of growth and prosperity for the country and it was clear then that the country could no longer afford the fuel subsidy.
In all the budgets since 2009, every Finance Minister has advocated the conversion to CNG as a means of reducing the amount of money spent on the fuel subsidy.
In the 2009 budget, Mrs Tesheira said: “The Government is in the process of expanding the distribution of Compressed Natural Gas (CNG) as we move to a cheaper, economically efficient and environmental friendly fuel system. As a consequence, we propose to remove the Customs Duty and Value added Tax on the Conversion Kits for modifying from Gas to CNG. Mr. Speaker, further to this measure the Government proposes to convert all public service vehicles to CNG usage. The Government will also put measures in place to increase the number of service stations and geographic distribution of these stations offering CNG.”
In the 2010 budget she said: “It is our intention to increase the number of service stations retailing CNG throughout the country before the end of the new fiscal year, as we promote an environmentally friendly, cleaner and cheaper fuel which will also reduce transportation costs to the benefit of commuters and the national economy.”
In the 2011 budget, former Finance Minister, Winston Dookeran proposed a number of fiscal measures aimed at encouraging drivers and fleet owners to convert their vehicles to CNG.
In the 2012 budget presentation, Mr Dookeran said: “Government will embark on an ambitious
programme for expanding the use of Compressed Natural Gas as an alternative vehicular fuel. This is part of our overall strategy to reduce the use of petroleum products and so reduce the size of the fuel subsidy. We are also implementing special measures to encourage the construction of multi-fuel stations to dispense gasoline, diesel and natural gas.” He also said that seven new sites had been approved for the construction of multi-fuel stations, which would be in addition to the existing nine CNG stations that are in operation.
Although tax benefits have been granted to those who convert to CNG, it has had only a minimal impact on CNG usage.
My view is that on the issue of transportation, T&T citizens are less moved by taxation benefits than by the price of the product. It is also clear that unless there is a firm deadline, the implementation of the conversion to CNG is going to take much longer than the country can afford.
Therefore, in terms of how the conversion to CNG should take place, my suggestion is that the country should be told that fuel subsidies will come to an end in two years and that they would be gradually reduced every six months until elimination.
This will give fleet owners, the Government and owners of cars enough time to make the switch to CNG.
If they don't make the switch, they will simply have to pay more for transport fuel.
User comments posted on this website are the sole views and opinions of the comment writer and are not representative of Guardian Media Limited or its staff. Guardian Media Limited accepts no liability and will not be held accountable for user comments.
Please help us keep out site clean from inappropriate comments by using the flag option.
Guardian Media Limited reserves the right to remove, to edit or to censor any comments. Any content which is considered unsuitable, unlawful or offensive, includes personal details, advertises or promotes products, services or websites or repeats previous comments will be removed.