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Preparing for further fiscal adjustment

Sunday, March 12, 2017

The publication by the Central Bank on Friday of the March 2017 Economic Bulletin provides the population with an initial and preliminary reading of the central government’s fiscal position for the first three months of the current fiscal year.

The picture painted by the amount of money the Government collected versus the amount of money it spent during the October 1 to December 31, 2016 period is certainly not a pretty one.

The numbers indicate the Government collected $7.988 billion and spent $10.456 billion in the three-month period, which means that for the first quarter of the 2017 fiscal year there was a deficit in the nation’s fiscal accounts of $2.468 billion.

That first quarter deficit compares with $775 million for the similar period in the 2016 fiscal year.

The reason T&T’s fiscal hole is deepening is because the country’s revenue is estimated to have declined by 29 per cent to $7.988 billion between October and December 2016 from $11.222 billion in October to December 2015.

While revenue declined by 29 per cent, the country’s expenditure fell by a far more modest 12.8 per cent.

The simple but troubling fact is that the Central Government is continuing to spend more that the country is earning.

But what is even more troubling is that the country’s non-energy revenue—which the Government has been forced to lean on more heavily because of the reduction in energy revenue—declined by 29.5 per cent in the October to December 2016 period.

In the dollar terms, first quarter non-energy revenue dropped to $6.25 billion from $8.84 billion, which can be partly explained by a 13.4 per cent decline in income tax revenue, a 24.4 per cent reduction in taxes on goods and services, and a 61.5 per cent drop in non-tax revenue.

That precipitous fall in non-tax revenue is due to the fact that the Government collected $1.5 billion in revenue from the sale of shares in Phoenix Park Gas Processors during the first quarter of fiscal 2016.

While energy revenues may recover somewhat in the second quarter of the 2017 fiscal year (from January 1 to March 31, 2017) as a result of higher oil and natural gas, the Ministry of Finance still has to contend with the continuing slump in the production of those commodities as well as the added problem of the closure of two methanol plants on the Point Lisas Industrial Estate.

But the ministry’s real headache is that its 2017 budget numbers are based on an assumption that the country would collect $44.86 billion for all of the fiscal year. That means an average of $11.21 billion every quarter, which is significantly more than the $6.25 billion preliminary estimates indicate it collected in the first quarter.

While the non-tax revenue situation may improve in the second quarter of fiscal 2017 as a result of the First Citizens offering of shares—and with other divestments scheduled before the September 30 fiscal year end—the Government would be foolhardy not to take another close look at making yet more cuts to its expenditure.

Such reductions in spending would obviously have consequences for the ongoing negotiations between the Government and its employees in the public service and at state enterprises.

Spending cuts could also mean further pruning of the allocation made to transfers and subsidies and yet more delays in capital expenditure projects.

But while painful, these cuts may become necessary if the country’s fiscal position continues to deteriorate.

As our Caricom neighbour Barbados is finding out, there is a point beyond which a country cannot borrow its way out of a fiscal hole or depend on its central bank to keep funding the country’s fiscal deficits.

At some point, countries faced with fiscal problems have got to bite the bullet and make the necessary adjustments to their expenditure.


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