Based on data available from the CSO in September 2015, it was assumed that there would be virtually no economic growth in 2015, ie a flat economy, and there would be a decline of approximately 1.4% of GDP in 2016. While there are still no official estimates of GDP from the CSO for 2015, because of the dysfunctional condition that organisation was left in by our predecessors, it is clear that the actual economic performance in fiscal 2015 was much worse than originally anticipated.
Rather than zero growth, real GDP in 2015 is now estimated by the Central Bank to have declined by 2%. In fact, the latest data from the Central bank has indicated that there was a decline in economic growth in all four quarters of 2015, starting from January 2015. And for 2016, because of the inordinately long slump in oil prices, it is now estimated that there will be a further decline of 2% of GDP.
Fiscal Operations April-Sept 2016
To be safe, fiscal operations during the second half of the fiscal year will now be based on an oil price of US$35 per barrel and a gas price of $2.00 per mmbtu. This would imply another sizable shortfall in energy tax receipts, compared with the budget projections.
Collections of domestic taxes (including VAT) are still lagging behind budget projections due in large part to the economic slowdown, the depressed energy sector, and compliance issues. The Government therefore intends in the second half of this year to launch an aggressive effort to collect all tax arrears and to enforce compliance, and in particular, in respect of VAT and gaming taxes.
Regarding Clico, I have restored order and business common sense to this process, and we are now back on track in terms of recovering the $20 billion plus of public funds that has been pumped into Clico. Accordingly, I have requested the Central Bank, with whom I now meet regularly, to dispose, strictly in accordance with the shareholders' agreement, of the remaining MIHL shares owned by Clico, at the valuation price, which is in the vicinity of $2 billion, as well as Clico's traditional portfolio of insurance policies and other associated assets, valued at approximately $1 billion. We expect these asset sales to be completed during this fiscal year, since, as Max Senhouse used to say, "we need the money."
We must now find ways and means of creating new revenue streams. To bolster the revenue picture and support ongoing efforts to conserve foreign exchange, the Government intends to introduce the following measures, among others viz:
A levy of 7% on online purchases of goods and services through the Internet from retail companies resident overseas, that are not subject to taxation in Trinidad and Tobago, such as for example, Dell, Walmart, Staples and Amazon. This is not a new concept and there is well established precedent for a tax of this nature in countries such as the USA, UK and New Zealand. Online purchases are now a significant area of foreign exchange demand, which is putting a strain on our reserves, since credit card transactions are settled almost immediately. This tax is intended to help manage the increase in foreign exchange outflows from online purchases, reduce revenue leakage and assist local manufacturers and service companies to compete with overseas retailers. This measure is scheduled to take effect by September 2016 and it will require discussions with the banks and credit card companies to make it work.
An increase of 50% in customs duty and motor vehicle tax on luxury vehicles, starting with private motor vehicles with an engine size exceeding 1999cc. This measure will take effect immediately.
Better collections of taxes due from the gaming and gambling Industry under existing legislation.
Increased taxes on alcohol and tobacco products. This measure will take effect in May 2016 after the passage of the Finance Bill No 2.
However, with all these measures, including the new taxes and improvements in tax administration, total revenue receipts will not by themselves achieve the original Budget estimate, nor allow all of the planned expenditure, such as the full amounts of expenditure contemplated by these variations of appropriation.
The revised estimate for current revenue in fiscal 2016 is now $52.68 billion as compared to $60.28 billion in the original Budget estimates, a shortfall of $7.6 billion. The major shortfalls in revenue include taxes from oil companies, at an estimated $2.4 billion, other companies at $1 billion and VAT at $3 billion, due in no small measure to the downturn in the energy sector.
It is not widely known that the fuel subsidy has cost Trinidad and Tobago $31 billion over the last 10 years and as oil prices trended upwards in the 2009 to 2014 period, the subsidy averaged over $3.5 billion per year and exceeded 2% of GDP. It is also not widely understood that for years, we have imported expensive oil, processed it in our refinery and then sold petroleum products to the public at a loss. At one stage when the price of oil exceeded $100 per barrel, the fuel subsidy cost in excess of $6 billion per year.
Accordingly, to kickstart the process of national dialogue on this matter, the following prices will take immediate effect:
The price of super gasoline will be increased by 15% to $3.58 per litre, and the price of diesel will be similarly increased by 15% to $2.00 per litre.
This will mean that super gasoline will no longer be subsidised at current oil prices, whereas diesel will continue to be subsidized at this time by approximately $1 per litre.
Further, it is the Government's intention to introduce a new fuel pricing regime in this year 2016, that will result in price adjustments for fuel, up or down, based on changes in the price of oil and petroleum products, as obtains in most countries. We await the comments of the national community on this proposal.
On the flip side, Madam Speaker, as part of our energy policy and to help protect the environment, the Government will remove all taxes on CNG, electric and hybrid cars with engine sizes up to a maximum of 1999cc. The Government will also begin the process of converting all government vehicles as well as the fast ferries and water taxis to CNG and/or alternative power sources.
I had mentioned, Madam Speaker, the Government's intention to increase capital expenditure during the second half of this fiscal year. We have been working over the last 6 months and we now ready to go with a number of major development projects, including major public housing initiatives and road improvement projects, among other projects, such as schools, community and sporting facilities, which my colleagues will address in more detail during this debate.
However, I wish at this stage to advise this House and the national population of the Government's decision with regard to the proposed mass transit project. As we indicated during the 2015 election campaign, it was our intention upon assuming office to immediately request technical assistance from the Inter-American Development Bank to review the cost and feasibility of this project.
We have done so, and it has been determined by the experts at the IDB that the proposed mass transit project is expensive and not feasible at this time in the present environment of severely depressed oil and gas prices. If oil were still $100 per barrel, it would be a different story, but with oil at $37 per barrel, we simply cannot as a country afford to proceed with this project at this time.
Accordingly, we are shifting focus towards improving our road infrastructure in order to ease traffic congestion and to assist the travelling public, we will also put more public transportation vehicles on the road, thus facilitating public transport at subsidized prices. Some of the road improvement projects that we have identified for immediate implementation include the following:
The Wallerfield to Manzanilla Highway, which includes a ring road round Sangre Grande
The Curepe Interchange
The Valencia to Toco Freeway
Upgrade of the Moruga Road
Completion of the Pt Fortin Highway
The San Fernando to Princes Town Highway
A Medium Term Fiscal Strategy
The dramatic weakening of oil and gas prices during the first half of the year has prompted a reconsideration of the government's original target of achieving fiscal balance by 2018. Instead spreading the fiscal adjustment to 2019-2020 would seem to be a more realistic target.
This fiscal objective is predicated on the assumption that i) GDP growth will begin to recover in 2017, based on an expected rise in gas production, ii) a pick-up in public investment; and iii) an increase in private sector activity as consumer and business confidence strengthens and the private sector takes advantage of the fiscal incentives that we intend to develop and introduce to stimulate investment in manufacturing, construction and services. The medium term fiscal scenario also assumes a modest recovery in oil and gas prices which are projected to reach US$55 by 2018.
The Foreign Exchange Regime
Over the last 6 months, our exchange rate has moved 3.7%, from 6.37 TT dollars to 1 US dollar to 6.61 TT dollars to 1 US dollar. As Minister of Finance, I am of the view, after consideration of all relevant factors and after seeking the advice of experts, both here in Trinidad and overseas, that our exchange rate should not fluctuate at this time by more than 7% from the rate of exchange that prevailed in September 2015. Appropriate measures will therefore be taken to ensure that our exchange rate does not move by more than a further 3.3% from today's rate.
While we are in difficult times, and our economy has been dealt a heavy blow, this Government has a plan for economic recovery, a workable plan. It involves spreading the burden of adjustment across the society and getting use to the fact that as the Economists like to say, that we are in an era of a "new normal", where we can no longer depend on oil to save us and we must now turn to the non-oil sector, to manufacturing, to commerce and to trade in services to maintain our standard of living, protect jobs and achieve our national development objectives. Most importantly, we must now cut our cloth to suit our measure.