Benchmark crude was priced at more than US$88/barrel at the start of day on Friday. That is US$23 more than the US$65 that petroleum revenue was based on in the 2010/2011 budget. It should be noted that while T&T is indeed a gas-based (as opposed to oil-based) economy, when oil prices rise, gas prices also trend upwards (as do the prices of methanol, ammonia and urea) and, as a result, the price of oil is a good indicator of what the country's revenue is likely to be.
Considering therefore that the current budget is once again, a deficit budget but that, like during the previous fiscal year, actual income is quite likely to exceed budgeted income, some thought must be given to how this "extra income" should be used. This conversation is especially relevant since, subsequent to the budget presentation, the government engaged in more borrowing via a US$1.3b loan from the IDB, thereby taking the debt to GDP ratio to more than 50 per cent.
Nevertheless, the country's credit rating remains good and interest rates for borrowing are relatively low. What this means is that T&T will still find it relatively easy to borrow more money but that the more the country borrows, the greater the chance of weakening the credit rating. However, as economists have pointed out in analysing the decision to borrow from the IDB, since interest rates are so low, if one must borrow, now is a very good time to do so. Against this background, assuming that oil prices either hold or, as many analysts are predicting, rise even further and the country receives more income than was budgeted for, should the Government continue to fund its plans on borrowed money (and save the excess revenue) or should they use the additional revenue to reduce the debt?
The crux of the matter in either scenario is whether or not government expenditure will contribute to stimulation of economic activity. If the government is able to direct its spending to improvements in efficiency and creating a climate which encourages significant foreign investments and indigenous re-investments which are sustainable and contribute to the economy, in a fundamental way either approach will be fine.
The problems will arise if domestic economic activity either remains flat or contracts. In such a case, government revenue outside the petroleum sector will fall and this will have a negative impact on employment and therefore, require more expenditure on social security and poverty alleviation.
Fiscal responsibility
When in Opposition, the parties of the People's Partnership made it clear that they supported fiscal responsibility, in the present, since long-term economic stability must always trump short-term political gain. In this context they were vehemently against the merging of the Heritage and Stabilisation Funds into a single account. In their first year in office, in a situation where revenue may be significantly higher than expected, and with a special majority in the Parliament, they are in a position to separate the fund into two, as the previous UNC government had done when they set it up.
The fundamental principle involved in that regard is that it would be wrong for the natural resources of the country to benefit only those citizens who happen to be alive when those resources are being exploited. Therefore, some of the revenue derived from the exploitation of those natural resources should be put into a heritage or legacy fund which would be invested in such a way as to preserve its value and provide income for use in the future.
On the other hand, instead of saving the revenue and using it as a sovereign wealth fund which is invested in foreign ventures there is some merit in the argument that investing the money in the domestic economy (including on infrastructure and improvements in the public service) in ways that either create or stimulate sustainable economic activity, and therefore provide opportunities and income for future generations, is at least an equally attractive proposition.
While in reality neither option guarantees security for future generations, the second is riskier, though more politically attractive, since it will require the government to spend money now, than the first. In the present scenario, the basic principle of spreading one's risk should be observed. The government should split the HSF fund into two separate funds and determine what percentage of total income (as opposed to surplus income) from the exploitation of natural resources should be put into each.
The Stabilisation fund should be accessible under similar conditions as it is now (two thirds majority of Parliament and limits on what percentage can be withdrawn in a fiscal year). The Heritage or Legacy fund though, should be structured in such a way that it can be accessed only through both a special majority of Parliament and a majority vote of the population via a national referendum.
Part of the income derived from the Legacy fund can be used to support the proposed National Innovation System through the institution which is set up to fund new business ventures in particular. Simultaneously, some of the surplus should be used in the short term to pay the debts incurred by the state over the past few years. Concurrently, new infrastructure projects which have been announced should be started. This will assist in rebuilding confidence in the economy.