High Cost of Freeness
By Our CEO Gregory McGuire
TRINIDAD AND TOBAGO REVIEW JAN 2011
After much thought, it is now my view that this country will not accomplish its development goals, until the philosophy that Government is obligated to take care of my every need, is fully, and permanently, discredited, abandoned and totally destroyed.
Growth of the welfare state in Trinidad and Tobago became popular in the first oil boom-1974-82) and is now a feature of national life. In Trinidad and Tobago, the welfare state seems grounded in the belief that it is the best way of sharing the national patrimony derived from our natural resources with all citizens. It is a philosophy that has been encouraged and nurtured in the post-independence period by successive governments. It is a mindset that has now become the norm and therefore difficult to break. It causes us to make inappropriate and unsustainable choices in the expenditure of our oil wealth. Ultimately this philosophy may prove to be our downfall if we fail to rationalize and rein in expenditure on welfare. Far from addressing the problem, political parties and successive Governments have been prone to aggravate it by increasing welfare expenditure while boasting of “no new taxes”. To do otherwise is considered to be political suicide. How then does the society escape from this trap? Are we trapped forever?
Data on Government Transfer and Subsidies (T&S) show substantial movements over the last six years. Total transfers and subsidies, which includes transfers to state enterprises, has increased threefold between fiscal 2003-04 and 2008-09. The ratio of T&S to GDP moved from 9.9 per cent in 2003-04 to 15.3 per cent in 2008-09. Some of the major categories of expenditure within the global figure include; education, (GATE and others.); health (CDAP); housing, and energy (Petroleum fuels and electricity). The overarching objectives of most of the welfare programmes are laudable. The greater danger however is the distortions of market and mind that they create.
Examples abound. Compare for example, the different choices made in Barbados relative to T&T. Barbados with its very limited reserves supplies natural gas at market prices to over 60 thousand households. In Trinidad and Tobago, LPG, gasoline and electricity are provided at subsidized prices resulting in transfers that exceed $ 2.5 billion annually. In a society that boasts of having one of the highest motor vehicles per capita we are afraid to impose penalties for motor car use. In the capital city, people park all over the street while the infrastructure at Riverside Plaza is used for housing vagrants. We want to build new roads but in this land of freeness the idea of a toll is revolting!!! In UWI, the administration spends millions paving green areas on the grounds to provide free parking for students. These students, not having to pay for tuition use the money to purchase and maintain cars. Yet the Administration, apparently numbed of commercial thinking, can’t see that a multi-storey car-park and strict implementation of NO PARKING zones is a self-financing viable project. Maracas Beach needs developing but we still charge peppercorn fees for use of the bathrooms and parking etc. The school feeding programme provides meals on a universal basis but has anyone audited the programme to ascertain whether it is meeting its objectives? When financial institutions fail, the directors of the said institutions are not called to account. Instead, the Government promises to compensate investors over and above what would have been paid under the deposit insurance scheme.
Transfer and Subsidies 2003-09(TT $Bn)
03/04
Total Current Expenditure
Transfer’s & Subsidies($Bn)
% of GDP
% of Total Current Exp.
04/05
05/06
06/07
07/08
08/09
17.4
24.6
26.5
29.8
35.0
37.1
7.9
10.8
14.8
16.7
20.1
21.4
9.9
11.7
13.2
13.1
12.9
15.3
0.45
0.44
0.56
0.56
0.57
0.58
In expanding State welfare expenditure, Trinidad and Tobago is seeking to emulate the societies of Western Europe. The welfare state came into prominence in the post-World War 11era as part of the reconstruction effort. It was described by its intellectual architect, Lord Beverage, as a social structure built to protect the individual “from the cradle to the grave.” This model came to dominate every West European country, with local traditions and local politics dictating the diversity of its application. What we do not understand is that the citizens in these countries pay taxes and market related fees for services which then allow the Government to redirect expenditure to those who are less unfortunate. They do not rely on rents earned from the exploitation of natural resources. Consumption tax rates in Nordic countries are among the highest in the world. Norway for example is the world’s third largest exporter of oil, yet its citizens pay the highest price in the world for gasoline! It does not provide subsidies. But in this land of freeness we spend in excess of $2.1 billion year in a petroleum fuels subsidy.
There is an old saying that when you neighbour house is on fire wet yours. In the aftermath of the global financial crises, European nations have been taking steps to reduce Government welfare spending. Across the broad these initiatives have been greeted with mass resentment and protests. In the UK, Chancellor Osborne announced widespread welfare cuts in order to reduce the large fiscal deficit. In France the Government faced a wave of social unrest for its pension reform proposals including an increase in the retirement age from 60 to 62. These reactions are not surprising. The problem is that once the welfare state is created any changes would dramatically affect peoples’ lives and they can be expected to seek to defend those discretionary benefits which they now see as a right.
Several red flags warn that our current path towards expanding the welfare state is unsustainable. Firstly, Government expenditure in T&T is financed largely from direct rents and indirect taxes from the energy sector. (.50%). Apart from price volatility, the main revenue base is threatened in three ways- the finite nature and depletion profile of resources; reduction of overall tax take rates as Government seeks to encourage more investments in exploration and production activity.
Secondly, the population is ageing. A UNECLAC study shows while in 1975 almost two thirds of the population (59%) was younger than 25 years, in 2000 only a little less than half (47%) were found to be in that group. This share is forecast to decline further to about 40% by 2020. The medium age of Caribbean population in 1975 was 20.1 years. It has risen by about 7 years in 2000 and is estimated to have reached 32.2 years in 2010. The 2011 census would confirm whether Trinidad and Tobago diverge from this overall trend. The problem of an older population is exacerbated by migration. As more and more young people choose to reside abroad for whatever reason, the burden on the shrinking working population intensifies. Government may choose to impose higher taxes on consumption or incomes in order to limit the size of its deficits. Both labour and capital may respond by moving to places with a lower tax burden, thereby reinforce a viscous cycle of deficits, followed by increased tax rates, increased tax evasion and migration, lower tax take, further tax increases etc.
Thirdly, there is a tendency in tight fiscal situation to increase taxes on capital. In a globalized economy characterized by stiff competition for the investment dollar, increases in corporation taxes are likely to be met with a withdrawal of enthusiasm on the part of investors. leading to a lower tax take in the future.
Fourthly, it is evident that productivity in Government Service lags behind that of the private sector. However, if wage increases in both sectors are the same, as is demanded now by the public sector unions, then the unbalanced productivity growth creates costs pressures in the public sector which, in the long run will lead to higher taxation. (Baumol’s Disease).
The picture of the future is clear though not pleasant. If Trinidad and Tobago continue on the path of heavy state welfare expenditure including fuel subsidies and appeasement funding, we can expect some very rough seas ahead. It is therefore time that we take the long view even before the inevitable decline of our natural resources.
Some short- and medium-term corrective measures should include improvement in tax administration, rationalization of existing welfare expenditure- replacing the doctrine of universality with a more pragmatic needs-based approach, improving productivity in the delivery of public services and a phased removal of subsidies on fuel and power. The PP Government has an excellent opportunity to make the bold moves. Unfortunately, they may be hemmed in by a series of unforced errors and unsolicited elections promises.
