10° 40' N, 61° 30' W

Tuesday, October 22, 2002

As I referred to in my last post, not much changes in Trinidad and Tobago. A classic example of this is the annual budget statement. I once railed against the annual performance of "budget theatre", considering most post-1995 statements to be superfluous and of little effect. Budgets are, in essence, two things. Firstly, they are an exercise in fiscal policy, as the goverment uses taxation and public spending to stabilise the macroeconomy. Secondly, they tell you how the the government plans to financially intervene in the economy to raise revenue and pursue its policy goals. Except during the depressing years of structural adjustment, Trinidad's budgets are all the second, with little of the first.

Of course, the information's all there, if you want to find it, especially in the accompanying Medium Term Macro Policy Framework. (no link yet available, I'm afraid.) One could also do worse than read the IMF's annual Article IV consultation report on the country. But, no, that's not what budget speeches are about. Rather the people had to endure over an hour of Patrick Manning's alternating high-and-low intonation to get a gist of what he was going to give them, 10 weeks before Christmas. Like the Santa Claus that most West Indian politicians pretend to be, Manning did not dissappoint.

Summarising what Manning announced today would take too long. Given the lack of a Throne of Queen's Speech in Trinidad and Tobago, the budget also serves as a huge government policy statement. So, more of the dysfuntional usual spending measures--new and refurbished police stations, new and refurbished schools, new and refurbished health facilities, increased old age pensions, etc., etc. If I sound dismissive, it is because every government announces them, to little discernable effect on the problems they're meant to be addressing--education, health care, crime, living on a fixed income. These are the great intractables, and it will take more than throwing money at the problem to make, say, Trinidad's education system work tolerably well.

I confine my comments to the thing the budget does directly--the actual taxation measures. To summarise, these are:

▪ a cut in Corporation Tax from 35 to 30 percent, with more cuts promised in future;
▪ a cut in the top Income tax rates from 35 to 30 and from 28 to 25 percent;
▪ a TT$10,000 annual credit union investment tax deduction;
▪ a TT$10,000 decuction per year (for the first five years) for first-time home buyers;
▪ the removal of duty and VAT on medication;

I have little to quibble about concerning the first two--lower taxes are, in general, a good thing, though they are not a supply-side panacea they are often made out to be. (The Laffer Curve is a bit disingenuous, especially with tax rates already so low; given the dominace of Trinidad's oil revenues, it probably would not apply anyway.) Is Manning's stated goal of lowering corporation tax to make "Trinidad and Tobago the most attractive location for investment in the Western Hemisphere" a sound one? There is only a limited correlation between tax rates and investment levels--most of Trinidad's current investment is in the energy sector, which still "suffers" under a 50 percent corportation tax rate. It takes a lot more than mere tax rates to create an attractive investment environment.

The deductions, on the other hand, I have a major problem with. Post-adjustment, Trinidad and Tobago had one of the simplest income tax regimes in the world, with only a few deductions, and a rate structure that was simple to calculate (The tax declaration, on the other hand, remained a semi-labyrintine bureaucratic construct--the form could easily have been one side of one page.) This just goes an reverses that who process. Worse than that, it create a distortion--a bias towards a particular kind of investment. Credit unions provide low returns to their members--lower, certainly, than mutual funds like the Unit Trust. Now, after some lobbying by the credit union "movement" (it almost makes these financial intermediaries sound progressive) the imbalance is going to be at least partly redressed. Are people not smart enough to make investment decisions on their own merits?

The home ownership deduction is worse. Like the UK (where I am currently based) Trinidadians have a bias against rented accomodation; the deduction reinforces the motion that renting does not pay. (Note to young people; renting is simply paying for having a roof over your head. Home ownership is the same, with a bit of speculative debt/home equity value thrown in.) Some could rant about the despoilation of good agricultural land for housing, but that's unfair; unless arbitrarily restricted, land generally goes towards it's most highly valued use, and in Trinidad that's no longer agriculture. The real problem is the notion that property prices will always rise. Trinidad and Tobago are small islands, and some people in parts of the twin-island republic may be able to quote rents in hard currency, but the notion that land and housing scarcity will mean ever-rising prices will be tested sooner or later. The pundits fear rising inflation with an increase in hydrocarbon-fuelled spending; I fear, after this deduction, for the formation of a asset-price bubble.

VAT on medication; not much to say on this except that it's inefficient. For a VAT to work properly (at least accordig to theory) it has to be levied on everything. It would have made more sense to have a ubiquitous VAT and drop the overall rate to, say, 7.5 percent. It would not have made the VAT any less regressive (all indirect taxes are, by nature) but it would have been far less distortionary, and been a benefit to far more people.

In his brief exposition of fiscal policy, Manning announced some sensible things, like

(i) trying to organise and structure government borrowing plans across a range of maturities in order to establish a yield curve;
(ii) expand the list of primary dealers and facilitate the development of a liquid secondary market in government debt;
and
(iii) assure transparency in government bond markets.

I fear that these plans may be slow in coming. Trinidad and Tobago is not exactly a home of democractic capitalism. The number of people who trade on the Stock Exchange is painfully small, as is the number of securities available for trading. Unless local financial markets develop, with improved liquidity and real alternative means for companies to obtain capital other than bank loans, then a deep and effective local government securities market will not develop either.

As for Manning, I have a problem with paragraphs like this:

"The current expenditure estimates include a one-time payment of $600 million to cover salary arrears. In fact, it is this one-time payment that leads to the overall deficit of $623 million. Excluding this payment, the budget would show a deficit of a mere $23 million."

Manning just condescended to the nation, by assuming that the public can't subtract. Not only that--he's wrong. The $600 million could be any sample $600 million of government spending; he singled out the public servants to make a point about the good he was doing for them.

Manning's issue is not hubris. I think he probably means well, not for the sake of being altruistic, but rather for aspiring to deliver national greatness--he want's to be the one who finished what Eric started. The aim is not original: Malaysia's Mahathir Mohamad, one of the world's last decolonisation-era leaders, first mentioned a Vision 2020 back in the late 1990s. (The Asian economic crisis slowed things down a bit, though.) Manning wants to be known as the man who took Trinidad beyond another great threshold. That' why he went to Hong Kong six years ago, and that's his election-winning mantra now.

The real problem with what Manning's announced is that he sounds as if he really expects his measures to amount to something. Individually, they're all piecemeal; I am not sure what they all sum to. There is no major reorganisation, no terminating of programmes, no holding people to account. There is mainly the announcement of spending plans--so many, it turns out, that the failure of a few would not be seen to detract from the whole programme. This is not leadership, it's appeasement--a desire not to rock the boat too much. Many institutions require root-and-branch reform (the health and education sectors); others need to to stopped and restarted from scratch (the police) and still others are merely hopeless, and need to be put to sleep (the Unemployment Relief Programme and PTSC). There is no sign of any of this in this policy-statement-disguised-as-budget. The same people remain in place, carrying out a never-ending series of incremental measures and reforms. Trinidad and Tobago goes on, continuing on the same course, the autopilot firmly switched on.