Trinidad News, Tobago News

Welcome to Breaking News Trinidad and Tobago
Friday, November 17 2017 @ 10:45 PM AST

Trinidad & Tobago 2018 budget strategies unlikely to succeed

UWI Financial Economics Lecturer Dr Vaalmikki Arjoon:

A budget is supposed to convey a plan for taking us to economic prosperity. In this (fiscal 2018) budget, however, too much emphasis was placed on structural adjustments to increase taxes, cut spending and narrow the fiscal gap, without strategies to create sustainable jobs, improve the business environment, productivity and stimulate exports. Overall, much of the strategies proposed are simply building on those that already exist, but given the current difficulties in the business environment, will not likely yield successful outcomes.

Taxes and Tax collection

Business profitability is already woeful, owing to the sharp economic downturn, the drop in sales and higher taxes over the last two years. Retail sales have fallen by almost 13% in the first quarter of 2017, with the largest declines in supermarket items, construction materials, textiles and motor vehicle parts. The new corporation tax of 30% will naturally dis-incentivise businesses and worsen their profitability further. Already, many have had to downsize and cut costs by either laying-off employees or offering them a pay cut. This new tax, coupled with the rise in fuel prices and a likely hike in electricity and water utilities will exacerbate their financial difficulties, and leave more in a loss making state. Together with the inaccessibility of foreign exchange, these higher costs and taxes will mean that many others will continue to scale down their operations or close altogether.

Many businesses will likely charge higher prices to compensate for these higher costs and taxes the worst burden will be borne by the consumer. For instance, a soft drink manufacturer may charge, say, $5 extra for each case of soft drink to the supermarkets he sells to. The supermarket owner in turn will increase his price by more than $5 to compensate not only for the higher price paid to the supplier, but also for the additional taxes and utilities which he also has to endure. The consumer ends up facing a double whammy, as he not only has to pay higher prices for his grocery items but also increased fuel costs, utilities, taxi fares, etc., which he cannot pass on to anyone. Rental costs could also increase, not only because of higher utilities but also because landlords are faced with a higher cost of living which they will pass on to their tenants.

With further anticipated cutbacks in consumer spending and business activities, it is not likely that the State will raise all of its budgeted tax revenue. Over the past two years, the government budgeted to earn $70.7 billion in taxes but only realised $55.4 billion ($22 billion lower than projected). While this was largely due to lower aggregate demand, it was also in part due to inefficient tax collection systems. As it stands, there is a large tax-compliance gap, where many entities pay fewer taxes than what they legally owe or avoid payments completely. The increase in the tax rate could incite more of these tax avoidance practices through creative accounting and other fraudulent measures, in an effort to save money in these harsh times. Every effort must be made to ensure that the Revenue Authority (RA) is indeed set up in this fiscal year so that the tax collection leakages are minimised. The gambling legislation must also be passed, as globally, this industry is a haven for money laundering, tax evasion and financial leakages.

EXIM Bank allocation

The provision of forex to net exporters by the EXIM Bank could serve as a double-edged sword. While on the surface, it could ensure that those engaged in export manufacturing have continued access to forex to carry on or even accelerate their production and exporting activities, a number of issues arise. What about those companies that are not net earners of forex, but provide an essential service, such as distributors of pharmaceutical commodities? They require substantial amounts of foreign exchange due to the nature of their service, and therefore some more allocation ought to be prioritised to these companies. Owing to the limited supply, some non-export businesses could be crowded out many are already in queues to get forex, and soon, they may have to wait even longer or receive much less than what they ordered to facilitate the EXIM bank allocation. This will dampen productivity and tax revenue earnings. For instance medium sized car-dealers who utilise foreign exchange to import cars for resale, and in the process, employ a number of persons, and pay taxes each year to the State, could find themselves having to wait longer for forex, which naturally slows down their operations and sales. There may be the odd few that will take advantage of the priority allocation for other profit making schemes, other than production for exports. Due diligence therefore needs to be done on each request for US disbursements, to ensure that the allocations are used entirely for export production and there are no leftovers to facilitate hoarding or some black market activities.

Other comments

Incentives are being provided to encourage the participation of private developers in this housing market, but to date, there are problems with paying contractors and other private parties on time. This, together with the high bureaucracy in dealing with State institutions may deject some of these developers from participating in this initiative. Some may have problems in accessing their imported construction materials owing to arduous Customs procedures. While the State is moving to improve some business conditions, such as the Single Electronic Window, the speed in starting a business and granting construction permits, other issues need urgent addressing, such as crime, employee productivity and corruption. When monies are lost to corruption, the State has to borrow to fund our expenditure obligations. This results in over spending and increased debt, without value for money.

Some access to funding are allocated to SMEs, but if we are serious about the survival and development of these companies, more programs are needed, which may not necessarily be a burden on the State's coffers. They need access to venture capital funding, and training in the technical aspects of doing business, together with assistance to penetrate global markets. This could have been achieved by setting up an SME infrastructure and investment bank, charged with sourcing private funding and training for SME entrepreneurs. The stock exchange continues to be ignored as a means to diversify and earn revenues from the financial sector. At least five State enterprises should have been earmarked for divestment through the stock exchange, over the next two years, which would enable us to earn possibly between $6 to $7 billion.





Story Options