In the context of the proposed variation of appropriations for fiscal 2016, I rise in this Honourable House to present the budgetary framework for these measures, by way of the mid-year review of Budget 2016. It is to be noted that the 2016 Budget was presented on October 5, 2015, less than one month after the new Government was sworn in, and at the time, we made it clear that it was based on the limited information available to the new Government upon assuming office.
The purpose of this presentation is two-fold.
Firstly, to present a review of economic developments in the first half of the fiscal year 2016, and to identify the policy changes required to meet our medium term economic objectives; and secondly, to present for the approval of Parliament, certain variations to the Appropriation Act 2016. The variations to the appropriations are by and large as a result of portfolio changes and adjustments to ministries, but they involve expenditure, which must be supported by revenue. It is incumbent on me therefore to give details of the fiscal outturn for the first half of fiscal 2016 and the projections to the end of the financial year, as well the proposed budgetary measures to generate the necessary revenue. If I did not do so, the proposed variations would be left hanging in a policy vacuum.
Several of the policy changes and fiscal measures that are proposed will require amendments to a number of pieces of legislation which will be identified in due course. Some of these legislative changes will take effect immediately, while others will take effect upon the passage of the Finance Bill No.2 of 2016, which I propose to introduce and debate in this House in the first week of May 2016, i.e. within the next month.
Madam Speaker, when this Government presented the 2016 budget in October 2015, we had no illusions that we were in a difficult economic situation caused by radical changes in global energy markets, which led to a collapse of oil prices in 2015, and a consequent drastic reduction in revenues from petroleum. This difficult revenue situation was compounded by five years of mismanagement of our finances. In October 2015, we fully recognised the risks for fiscal planning, given the uncertain prospects for oil and gas prices and the unclear position with respect to extent of liabilities incurred by the previous administration. We thus made what were considered by the experts at the time to be conservative price and revenue assumptions, with the proviso that these assumptions were to be revisited at the time of the mid-term review, in April 2016.
We are now at the stage of the mid-term review and it is no secret that the economic environment has turned out to be significantly worse than envisaged at the time of the 2016 Budget presentation. Before I begin, allow me to debunk the mischief that is being peddled in the public domain by certain propagandists and armchair theorists that this mid-year review has come too late. By definition, the middle of the Government’s financial year is March 31st. It is therefore impossible to do a proper mid-year review until the month of April. Any review done before that would be inaccurate, questionable and irresponsible, and we have thus come to the Parliament in 2016, one week after the end of the mid-year period. By any standards, this is a record, since mid-year reviews in Trinidad and Tobago have been routinely done in May and even in June. I trust this puts to rest the old talk that has been propagated in the public domain.
On the flip side, while I appreciate the calls for a deferral of the review to sometime year later in the year, to allow widespread public discussion on the most appropriate fiscal measures, it is just not practical or feasible to do so. We do not have the luxury of time. We therefore ask the various interest groups to bear with us, as the economic situation is very serious and corrective action must be taken immediately, lest we find ourselves in such dire straits that we would have no choice but to request the IMF for balance of payments support, with all of the attendant adverse conditionalities that come with that scenario. Indeed, we must avoid an IMF programme at all costs and must therefore be proactive and chart our own economic course without being forced into structural adjustment.
The reality is that the current severely depressed oil and gas prices have had a significant adverse impact on the public finances, notwithstanding the Government’s considerable efforts at fiscal consolidation, careful debt management and prudent expenditure restraint.
In order to understand where we are, it is necessary to look at our macro-economic situation. Based on data available from the CSO in September 2015, it was assumed that there would be virtually no economic growth in 2015, i.e. 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.
Madam Speaker, this Honourable House will recall that the 2016 budget was based on an oil price of US$45 per barrel for WTI crude, a level that was considered fairly conservative even by international experts, since at the time the WTI price was averaging US$46 per barrel, with a projection that it would average $53 per barrel in 2016. The gas price assumed in the Budget was US$2.75 per mmbtu, Henry Hub, at a time when the market price was US$2.66 per mmbtu.
As it turned out, due to the hardline position taken by OPEC, where Saudi Arabia and other OPEC countries, in their ongoing battle for market share with shale oil and gas producers in the USA, chose not to cut production in the face of a global oversupply of oil. Accordingly, notwithstanding the predictions of international energy experts, such as the highly respected USEIA, the average oil price for the first six months of fiscal 2016 was US$37 per barrel while the average gas price was US$2 per mmbtu. By way of comparison, Madam Speaker, in the previous fiscal year 2014/2015, the corresponding oil and gas prices were $61 per barrel for WTI and $3.35 per mmbtu for Henry Hub, respectively.
It is also worth noting that because we are a mature hydrocarbon province with declining rates of production. This aggravated by the fact that it is becoming increasing difficult to produce petroleum at the current depressed prices. As a result, both oil and gas production in the first six months of this year were lower than envisaged in the Budget.
It is no secret, Madam Speaker that commodity producers all over the world are experiencing very trying times. Energy and energy-related companies have been slashing investment budgets, laying off workers and several international companies have gone out of business. Unfortunately, Trinidad and Tobago is not immune to these difficult conditions. With oil prices at unprecedented low levels, exploration budgets have been trimmed and there have been layoffs in the energy sector. Some of the smaller operators are now on the brink of going under, which has had spillover effects throughout the economy.
Madam Speaker, if anyone in Trinidad and Tobago doubted that we are in a new paradigm in terms of national income and expenditure, those doubts should have been erased by now. Indeed, the change in the global economic environment, particularly for oil-based economies, has caused what is referred to in the literature as a “sea change”, or profound transformation, in Trinidad and Tobago’s modern economic history.
It must therefore be understood, Madam Speaker, by all concerned, that the dramatic collapse of energy prices is tantamount to a sharp and sudden drop in Trinidad and Tobago’s national wealth. All persons with a stake in the future of this country need to understand and appreciate that we are no longer as wealthy as we were before and we simply cannot afford to continue with the fiscal indiscipline that occurred over the last five years. We must of necessity now exercise restraint and financial discipline.
In March 2016, Madame Speaker, we were subject to the annual Article 4 Consultation by the International Monetary Fund. For those who may wondering why such consultations occur, and may even incorrectly attribute a sinister motivation to them, it is necessary to appreciate that when a country joins the IMF, it agrees to subject its economic and financial policies to the scrutiny of the international community. The IMF's regular monitoring of economies and associated provision of policy advice is intended to identify weaknesses that are causing or could lead to financial or economic instability. This process is known as country surveillance. It is an ongoing process that culminates in regular (usually annual) comprehensive consultations with individual member countries, with discussions in between as needed. The consultations are known as "Article IV consultations" because they are required by Article IV of the IMF's Articles of Agreement.
During an Article IV consultation, an IMF team of economists visits a country to assess economic and financial developments and discuss the country's economic and financial policies with government and central bank officials. IMF staff missions also often meet with parliamentarians and representatives of business, labour unions, and civil society.
The team reports its findings to IMF management and then presents them for discussion to the Executive Board, which represents all of the IMF's member countries in the world. A summary of the Board's views is subsequently transmitted to the country's government and published for the information of the general public. In this way, the views of the global community and the lessons of international experience are brought to bear on national policies. These consultations are vital to maintain a country’s reputation and creditworthiness in the international financial community.
Trinidad and Tobago joined the IMF in September 1963. We have therefore been subject to routine Article 4 consultations for over 50 years. There is thus nothing untoward about this relationship with the IMF, as some on the other side would wish to pretend.
Madame Speaker, you should note that the previous Article 4 consultation should have taken place one year ago in March 2015. However, the previous government, obviously afraid of the effect of a negative IMF report on the outcome of the 2015 election, chose to avoid a visit by the IMF to Trinidad and Tobago in 2015. In similar fashion, the previous government postponed a scheduled review by Standard and Poor’s Financial Services, an international credit rating agency that this country subscribes to, as well as a review by Moody’s Investment Services, another international credit rating agency that we subscribe to. Clearly, they were afraid of what these international agencies might find.
We on the other hand have no such fears. Where others may wish to duck, run and hide, we believe in transparency and full disclosure. We believe in levelling with the population.
I can therefore confirm that not only did we complete this year’s regular Article 4 consultation with the IMF during last month, March 2016, but we also facilitated visits by Standard and Poor’s and Moody’s in the same month of March, and just last week, we accommodated a visit by CariCris, the Caribbean’s regional credit rating agency. In the first 6 months of this Government, therefore, we have accommodated all of the required visits by all of the international rating agencies.
We look forward to the final reports from these international agencies in due course and we shall take careful note of their findings and recommendations as we chart the way forward for Trinidad and Tobago.
It is noteworthy that at the end of their visit, the IMF Team issued a press release, as is their practice, and made the following important statement:
“Despite the great challenges posed by the need to adjust to energy prices, Trinidad and Tobago still has enormous strengths, including a well-educated work force and a stable political system. With substantial financial buffers and low, albeit rising levels of public debt, Trinidad and Tobago is not in a crisis. Nonetheless, in recent years, taking into account the size of energy revenue windfalls, the country has under-saved and under-invested in its future. As a consequence, the imbalances that are now starting to build up could lead the country to uncomfortable levels of debt and external financial cushions absent further action.”
In other words, although we are not in a crisis, if we are to survive the present economic difficulties, we need to recognize and quickly adapt to the new reality. We must also avoid the mistakes made in the last 5 years (i.e. underinvesting and undersaving).
It should also be noted that in its March 17 press release, the IMF recognised that the new PNM Government had already taken some difficult but necessary steps in the face of sharply lower energy revenues, including widening the tax base, cutting fuel subsidies, reducing the number of Ministries with a view to streamlining the civil service, and instituting spending cuts.
The Fiscal Outturn (Oct 2015-Feb 2016)
I now come to the fiscal outturn. As a result of significant cutbacks in expenditure, the net fiscal outturn in the first half of the year is on the face of it a little better than anticipated. However, policy changes are critically needed in order to strike a better balance between adjustment and the promotion of economic growth, so that we can spend the money proposed in this variation of appropriation.
This Government is also intent on ensuring that the required adjustment is done in an equitable manner. This Government is absolutely committed to minimising hardship on the poor and lower income groups even as we maintain and improve incentives for increased investment and production by the business community over the medium term.
Madam Speaker, in the first five months of the fiscal year revenue collection was $2.96 billion lower than expected. However, on the positive side, government expenditure was $7.75 billion lower than programmed in the Budget. It is to be noted that the 2016 Budget had initially assumed early payment of high cost items, such as arrears of salary (i.e. backpay), and was thus front-loaded. However, the very tight cash flow and the heavily overdrawn exchequer account that we were faced with upon assumption of office did not permit these payments to be made in the first half of fiscal 2016.
As a result of the deferral of payments of backpay and other arrears, such as debts owed to suppliers and contractors, which were incurred in the run-up to the September 2015 election, the fiscal accounts show that the budget deficit for the period was $2.91 billion as compared to a programmed deficit up to March 2016 of $7.70 billion. Members should note that although the fiscal deficit fluctuates throughout the year, consistent with monthly fluctuations in revenue, the final end of year deficit for 2016 was originally programmed at just under $3 billion.
Madam Speaker, the revenue shortfall was primarily in tax receipts from the energy companies, reflecting a sharp decline in projected income from oil and gas companies in the first 6 months of this fiscal year of over $2 billion. And this was even after the revenue projections from petroleum were cut drastically in preparing the 2016 Budget. There was also a further shortfall of $1 Billion in other corporation tax receipts from then non-oil sector, due to the slowdown in economic activity, among other revenue shortfalls.
To counteract this shortfall in revenue, the cutbacks in expenditure were informed and influenced by two main factors namely (1) the Government’s decision in December 2015 that all ministries and departments would be required to reduce operational expenditure by 7 per cent; and (2) the acute cash flow problems faced by the Central Government. We have thus had no choice but to drastically cut programmed expenditure, otherwise we would be faced with a situation where the Central Bank would have to cease honouring Government cheques. For fiscal 2016, therefore, we are now looking at revised expenditure of $59 billion.
You would recall, Madam Speaker, that in my 2016 Budget presentation I pointed to the unprecedented recourse by the previous administration to the Central Bank overdraft and their excessive short term borrowing. By way of reminder, just a few days before the September 2015 election, the former Cabinet approved a short-term loan (a 6 month financing facility) of $1.6 billion for TTEC, which matured in February 2016.
Can you imagine being faced with a requirement to repay in full a $1.6 billion short term loan with oil prices below US$30 per barrel, the Government overdraft maxed out to the limit, and the Exchequer account overdrawn by over $30 billion, less than 6 months after assuming office?
This was a thoughtless move on the part of the former administration and we had to move quickly to convert this imprudent billion-dollar short term loan into a proper long term arrangement, to ease the burden on the Treasury. And this is just one of many such irresponsible short-term loans.
These two factors sharply reduced available liquidity in the financial system, which also acted as a brake on Government spending. At the same time, we were close to the limits in Government borrowings and thus could not finalize a number of loan arrangements entered by the previous administration for Government projects, simply because we did not have the lawful authority to conclude these financing arrangements. These included billion-dollar loans for hospitals, infrastructure, housing, military vessels, security equipment and so on.
Madam Speaker, to give the country breathing space, to honour contractual obligations, and to facilitate our development programme, we came to Parliament and obtained approval for increases in Government borrowing ceilings, something the previous Administration was afraid to do. However, with the financial system strapped for liquidity there is not much room for new Government bond issues, unless adjustments are made to the reserve requirements in the Central Bank or alternatively, the Central Bank improves liquidity through open market operations. We are therefore working closely with the Central Bank to facilitate this, since we must raise funding on the domestic market to finance the budget deficit.
As stated before, these funding constraints led to an unprogrammed accumulation of arrears, mostly to public officers, to suppliers and contractors and on VAT refunds.
Fiscal Operations April-Sept 2016 (looking forward)
Revenue
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.
Madam Speaker, it will take some time before the full impact of the value added tax reform and the enhanced tax administration efforts are fully realised. For this reason we will continue to have recourse to one-off capital revenues in the form of extra-ordinary dividends from some state enterprises and divestment proceeds.
For example the interest earned by the Central Bank on the large Government overdraft will give rise to an increase in profit transfers from the Central Bank in this year of about $500 million, since after deducting its expenses for the year, the Central Bank pays all of its surplus income back to the Government. In addition, having already received US$300 million (TT$1.9 billion) from TGU, we expect to collect a further US$255 million (TT$1.7 billion) from TGU in the second half of this fiscal year. The sale of some Clico assets, including MIHL, will add another $3 billion in revenue.
Regarding Clico, it is necessary to briefly explain what has happened with that difficult and contentious issue, so that the public will understand our approach to asset sales and recovery of the money spent on the Clico bailout.
From the information available to me at this time, the Government has spent in excess of $20 billion bailing out and supporting Clico. This was done to avoid a systemic collapse of the Trinidad and Tobago economy since Clico was so large and affected so many people and so many economic interests and factors that if it had been allowed to collapse, it would have had a severe adverse effect on the country, which we might not have recovered from.
From 2009, the plan always was to consolidate, strengthen and sell or liquidate Clico’s assets to repay the Government for the money that it put into Clico, since it is taxpayers’ funds that were used to repay depositors and creditors.
For reasons best known to itself, the last government dragged its feet with this matter. The original plan was to resolve all issues and repay the government for money owed no later than 2012. However, by September 2015, when we came in, all that had occurred in the 2010 to 2015 period was, as result of an irresponsible breach of a shareholders’ agreement, a contentious arbitration and an order to the previous government to sell Clico’s methanol shares at a price considered by many to be $2 billion below market, thus losing billions of dollars of asset value in the process. In the interim, various Clico policyholders and depositors had taken the PP government to court for what they considered to be a breach of trust and a breach of contract.
The remaining assets sales were left hanging in the air and we found the Clico resolutionplan in limbo, with no apparent purpose or direction, consumed by internal power plays, inertia, dithering, apathy and stagnation.
As the new Minister of Finance, 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 have also requested the Central Bank to transfer to the Government, Clico’s shares in Angostura, Home Construction and CL World Brands, valued at $3 billion more or less, and after this transfer, we will take appropriate decisions to dispose of these assets in a sensible and productive manner. With particular reference to lands owned by Angostura and/or Home Construction, it is the Government’s intention to acquire these assets for public purposes such as housing, tourism and infrastructure development.
It is also expected that since Clico’s Statutory Fund has recovered, that all legitimate creditors and policyholders of Clico that still remain on the books will be repaid in full by the Central Bank during this year, 2016.
With regard to the other assets held by Clico, such as its shares in Republic Bank, we have requested the Central Bank to start the required preparatory work to allow the orderly disposal of these shares in 2017.
Members should note that these proposals only relate to Clico and in due course, I will report on our plans to monetise the other assets held directly by CL Financial, all in the interest of recovering as much of taxpayers’‘ funds as is possible and settling liabilities to policyholders and depositors
Returning to our overall revenue situation, 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
Expenditure
While we will continue to cut out waste and reduce the cost to Government of goods and services, which spiralled out of control over the last five years, and keep tight controls on spending, Government expenditures in the second half of the year will need to provide for:-
1. Allocations to address the payment of salary arrears to public officers, and contractors. In this regard, I wish to confirm that it is the Government’s intention to pay 50% of the outstanding arrears of salary to public officers by the end of June 2016. The remaining 50% will either be paid in interest-bearing government bonds by the end of September 2016, or in two further instalments in cash in 2017, at the option of the workers.
2. An increase in capital expenditure to set the platform for future growth.
Madam Speaker, for years the fuel subsidy has drained public resources. I think that it is safe to say that finally there is an emerging view that the country can no longer afford this level of expenditure, given the sharp reduction in oil and gas revenues.
We thus need to engage a national dialogue on this issue as a matter of priority.
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.
A number of studies have also demonstrated that fuel subsidies disproportionately benefit the rich, rather than the poor. In fact, based on consumption patterns, the average benefit of the fuel subsidy to low households is less than $1,000 per month, whereas the benefit to upper income households exceeds $2,000 per month.
Fuel subsidies also contribute to traffic congestion, pollution, damage to roads, environmental damage and revenue leakage. Further, in terms of total cost to taxpayers, Trinidad and Tobago has been determined to be among the top 12 fuel subsidizers in the world, which has even resulted in smuggling and illegal resale of diesel fuel to foreign pirates, among other undesirable side effects.
Even after the adjustment in domestic fuel prices in November 2015, the current cost of the fuel subsidy, including arrears, remains at close to $600 million, at current oil prices. If oil prices rise to $45, which is not an unreasonable assumption, the subsidy will exceed $850 million for 2016 and at an oil price of $50, the fuel subsidy will exceed $1 billion.
The Government has thus decided to initiate the process of phasing out the fuel subsidy over time. However, in so doing, the savings that are achieved will be targeted towards improving our social safety net and introducing measures aimed at reducing costs for low income groups.
Further, since diesel is used primarily for public transportation, which absorbs a larger part of the income of the lower income groups, in the interest of equity, a gradual approach will be taken towards the phasing out of the diesel subsidy, and, before completely eliminating the subsidy on diesel the Government will explore all possible options for minimizing the adverse impact on lower income groups. One such measure will be a reduction in taxes on maxi taxis and taxis, thus reducing the cost of public transport vehicles. We plan to introduce these tax reductions in May 2016.
Premium gasoline is already unsubsidised, while at an oil price of $45, the unsubsidised price of super gasoline would be in the vicinity of $3.61 per litre. The unsubsidised price of diesel fuel, which is the fuel most commonly used by maxi taxis and goods vehicles, is $3.13 per litre at an oil price of $45 per barrel, rising to $3.45 a litre at an oil price of $50 per barrel.
Accordingly, Madam Speaker, 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 spor