Steps to change: The government’s fiscal policy introduces measures to cut public spending and increase revenue collection

In late 2015 and early 2016 the newly elected government of Trinidad and Tobago took three major steps to set the policy for FY 2015/16 – which ends on September 30, 2016 – and immediately beyond it.

The first of these was the budget announced by the new administration on October 5, 2015, only a few weeks after it had taken office. The second came in December of the same year, when Keith Rowley, the new prime minister, made some key announcements about the intended use of foreign currency reserves and the country’s Heritage and Stabilisation Fund (HSF). Lastly, on April 8, 2016, Colm Imbert, minister of finance, made further fiscal adjustments as part of the government’s mid-year budget review.

First Budget Presentation

The October 2015 budget presentation was particularly significant in a number of ways. First, the new government acknowledged that high spending growth and a widening fiscal deficit were no longer sustainable. The budget thus envisaged a more modest increase in spending than in previous years. Total expenditure was set to grow by 2% to TT$63.04bn ($9.7bn), while revenues were to rise by 10% to TT$60.29bn ($9.3bn), resulting in a narrowed fiscal deficit of TT$2.8bn ($431.2m), the lowest in a decade, and representing 1.5% of GDP, down from an estimated 4.2% the previous year.

Second, for the first time, the new budget acknowledged the full fiscal impact of lower hydrocarbons prices. Based on the assumption of an average oil price of $45 per barrel and a US Henry Hub price of $2.75 per million British thermal units (Btu), energy revenues were expected to drop by 72% to TT$5.5bn ($847m) over the year, less than one-quarter of their average level in the preceding years.

Angela Lee Loy, chairman of outsourcing consultants Aegis Business Solutions, commented, “Compared to the budgets of years gone by, this budget has only a small percentage of revenue attributable to oil. This may well be ushering an era in T&T where oil dependency cannot be taken for granted.” Third, the budget set in motion a series of longer-term steps designed to strengthen tax revenues from non-oil and gas sectors, including the creation of a new revenue authority designed to improve tax collection, a combination of a lower value-added tax (VAT) rate with a wider scope, the reintroduction of property tax, increased personal allowances, higher business and green fund levy rates, and importantly, a reduction in fuel subsidies.

The VAT was cut from 15% to 12.5%, while at the same time, diesel and super gasoline prices were increased by 15%, saving an estimated TT$340m ($52.4m) in subsidies. However, the government was still expected to pay out around TT$1bn ($154m) in remaining fuel subsidies in FY 2015/16.

Lastly, the October 2015 budget made some optimistic assumptions about what could be expected in terms of one-off capital revenues. Specifically, the budget projected capital revenue of TT$13.4bn ($2.1bn) to be raised through initial public offerings (IPOs), divestments and extraordinary dividends. However, some economists expressed concern over whether the necessary divestments could be concluded in the limited time available.

Prime Minister’s December Speech

In a speech in December 2015, Rowley recognised that the situation had deteriorated further since the budget statement three months earlier. Oil prices had dipped below the planned-for level of $45 per barrel to around $36 per barrel. Similarly, the Henry Hub gas price had fallen below $2.75 per million Btu to around $1.90. In addition, the government discovered unfunded commitments made by the previous administration, described as “unpaid liabilities, settlement of negotiated wage increases and incomplete projects which must be finished and put to use”.

This called for further austerity, with the prime minister setting out new guidelines. All government ministries, state enterprises and statutory bodies were asked to make an additional 7% reduction in spending. Seeking to conserve import cover, the government would allow the foreign currency reserves to be drawn down a little further so as to represent not less than six months’ worth of imports. As of April 2016, foreign currency reserves totalled $9.23bn, equivalent to 10.9 months of imports.

The government also announced plans to split the $5.6bn HSF into two separate funds. The majority of the money would remain in a Heritage Fund, intended for the benefit of future generations, with the remainder to be placed in the Stabilisation Fund, which would be used to finance the budget deficit. “We intend to use approximately $1bn for stabilisation purposes in FY 2016 and perhaps another $500m in FY 2017,” Rowley said.

April 2016 Financial Review

The mid-year financial review of April 8, 2016 showed the government once more having to adjust its plans in the face of continuing fiscal pressures. Presenting revised budget targets, Imbert said “We are no longer as wealthy as we were before, we must now exercise restraint and fiscal discipline. If anyone doubts it, the change in the global economic environment has caused a profound transformation.”

The net effect of the revisions was to cut planned government spending to TT$59bn ($9.1bn), 6% less than planned in October. Based on shortfalls evident in the first five months of the fiscal year, Imbert also reduced expected total revenue to TT$52.7bn ($8.1bn), down 13% from October.

As a result of these changes, the T&T fiscal deficit was revised to TT$7bn ($1.1bn), or 4% of GDP, which represents a small improvement from FY 2014/15. However, this in turn then forced a revision to the government’s original plan to balance the budget by 2018. Instead, under the modified plan, the government is currently committed to a more modest target – that by FY 2019/20, only capital spending will be financed by borrowing.

The April 2016 announcements also included a range of further tax increases and expenditure changes. First, a new 7% tax would be levied on goods and services purchased online from non-resident retailers. The measure, to be introduced in September 2016, is intended to reduce foreign currency outflows and provide support to domestic manufacturers and service providers.

Second, Customs duties on imported luxury motor vehicles with an engine capacity of more than 1999 cc were increased by 50%.

Third, Imbert said the government could no longer continue the existing practice of importing crude oil to run the Petrotrin refinery, paying market prices for the feedstock and then selling the refined products to domestic motorists at a loss. Both super gasoline and diesel prices would be raised by a further 15%. This meant that super gasoline would no longer be subsidised, while diesel would continue to be subsidised at TT$1 ($0.15) per litre.

Over time, the government plans to move to a new pricing regime, where fuel prices would go up and down in step with international markets, as in other countries. However, in the meantime there would be tax breaks for compressed natural gas (CNG) fuel, and Customs duty and VAT exemptions for vehicles using CNG, electricity or hybrid fuel systems.

Lastly, the ruling government’s electoral promise of introducing a rail-based mass public transport system – estimated to cost TT$22bn ($3.4bn), with financial assistance from the Inter-American Development Bank – would be shelved, as it was deemed unfeasible at current energy prices. Imbert said that had oil prices remained at $100 per barrel, it would have been a different story, but that at $37 per barrel, “we simply cannot, as a country, afford to proceed with this project at this time”.

Asset Sales

As part of the review, plans for divestments and asset sales were also re-programmed. The original target of raising TT$13.4bn ($2.1bn) from capital revenue and financing items was reduced by 35% to TT$8.7bn ($1.3bn). Imbert said the government intended to close the gap between ongoing income and expenditure with borrowings and extraordinary income, such as proceeds from the sale of assets in Colonial Life Insurance Company, the insurance company the government rescued in 2009, dividends from the National Gas Company, drawdowns from the HSF and the proceeds from the Phoenix Park IPO (see Capital Markets chapter).

Summarising the fiscal changes, Marla Dukharan, RBC Financial’s group economist, said, “The external environment has deteriorated, while internally we have had a change in government, a change in the governor of the central bank and a much-needed reality check. The authorities have articulated a fiscal adjustment period to 2020, by which time the finance minister plans to borrow only to finance capital spending and infrastructure investment.”