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Paying the ultimate price

Sunday, October 5, 2014

“Looking ahead, higher public spending through the expansionary 2014/2015 budget is likely to add to already elevated liquidity levels (currently around $7 billion), and potentially push up inflation in the coming year. Core inflation, which has remained low and stable for some time, could also accelerate as a result of sustained and strong growth in consumer loan and real estate mortgages…”
—Central Bank’s Monetary Policy Announcement of September 26, 2014.

Here is one comment on the 2014/2015 budget that you probably will not be hearing in any of the government advertisements now doing heavy rotation on the radio and television stations. During the ongoing (up to last Thursday) budget debate, government ministers in both the House of Representatives and the Senate have been busy selectively quoting from laudatory reports and pronouncements on the budget.

The Central Bank announcement means that the $500 promised to mothers in the 2015 budget is now worth $462.5 and the increase in the minimum wage to $15 per hour is now worth $13.88 per hour, since the inflation rate has shot up from 3.0 per cent in June to 7.5 per cent in August. 

In fact, according to the Central Bank announcement, the 2014/2015 budget is very bad news for the population, since it not only drives up inflation but has increased interest rates (as the public is likely to soon discover), as the Central Bank has been forced to increase its repo rate to deal with the inflationary pressures caused by the budget largesse.

That means that apart from the increases in old age pensions and baby grants being eaten up by inflation, for those with loans in the bank, the balance is likely to be consumed by higher interest payments, including those on mortgages.

While the Central Bank has sent a warning, one suspects that the population still has not worked this out and the budget hyperbole being proclaimed in the ad is intended to keep the good feelings going until people have a chance to check the grocery or their bank balance. The good feeling is not likely to last too long. 

And there is good reason for concern, since the Government’s own polling tells us that inflation is a major concern for the population. At least 29 per cent of the respondents to a government-commissioned Mori poll in May this year found prices/inflation to be among the most important issues facing the Government.

That was, however, when the inflation rate was three per cent. With the budget and the inflationary pressures the Central Bank is seeing, we are likely to return to the high levels of inflation of the gas-boom years.

To be fair, the Government has tried several initiatives to stem inflation, particularly food inflation. The problem is that none of them was sustainable or made economic sense. We have had the decision to lower prices on National Flour Mills products by executive fiat in a move to reduce the cost of household staples.

This was followed by a zero-rating of a wide range of food items that, while they were good public relations, did nothing to stem the underlying problems. The Guardian’s market survey published a couple weeks ago shows that notwithstanding the zero-rating and reduction in VAT, the prices of the same commodities have already gone up.

But, as was noted by supermarket owner Anand Ramnarinesingh last week, local agricultural production cannot substitute for the increase in imported food prices. “What we produce, the quality is poor and the volume is not sufficient. Our production does not have much to do with the food prices in Trinidad,” he was quoted as telling the Express.

While we did manage inflation before, we cannot even give tribute to the Government or the Central Bank for keeping the figures down to three per cent, since, according to the International Monetary Fund’s Article IV consultation, the low inflation figures were more a result of statistical changes to the way inflation was calculated than any real changes to the inflation rate itself.

 According to the IMF’s June report on its consultations last May: “Headline inflation dropped to 5.6 per cent in 2013, partly due to a change in methodology that eliminated a significant upward bias to food price inflation as of April 2013. Core inflation has remained within a narrow range of two to three per cent.” 

That has changed quickly as the Government ramps up a spending spree funded by growing budget deficits, as energy-sector output continues to decline along with the country’s reserves of oil and natural gas. The People’s Partnership (PP) administration, based on its advertising programme, clearly sees the budget as its trump card heading into the next general election. 

As has been the case with the Proportional Representation Bill and the runoff proposal, the PP is too clever by half and its solutions to its political problems usually backfire. The rising inflation rate will be aggravated by the 2014/2015 budget and will likely lead to another National Flour Mills concession seeking to lower the prices of staples for Divali and Christmas. 

It will be harder to disguise the increases in interest rates, other food prices and mortgages that are sure to follow. But as sure as Carnival follows Christmas, one can expect that the Government will engineer yet another distraction.
And the advertisements will continue to announce this was the best budget ever.


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