Business Page – November 3, 2002

Introduction

Less than two weeks after receiving the clear mandate of the electorate of his country following a debilitating deadlock at the elections one year earlier, Prime Minister and Minister of Finance of the twin island Republic, presented a TT$20Billion Budget with the theme “Vision 2020: People, Our Priority”. According to a review by Ernst & Young, the budget delivered several measures aimed at providing adequate support systems for the youth, senior citizens and the less fortunate in the T&T society. In addition, the Government’s medium term strategy is hinged on the development of that country’s human capital, and outlines elements of a major reform of its health and education systems. It also addresses the question of crime generally and kidnapping specifically.

The budget was presented against a backdrop pf real growth in the economy of 2.7%, a stable exchange rate and a fall in inflation from 5.6% in 2001 to 3.9% in the current year. Mr. Manning notes that with prudent management of the economy over the last nine months, his administration was able to convert a deficit of $1.671 billion into a surplus of $68.9 million at the end of September, 2002.

Bold Budget

It is a bold budget premised on the all-important estimate of oil price of US$22 per barrel. The budget estimates revenue collection of TT$19.55 billion and expenditure of TT$20.1billion, leaving a deficit of $600. For this reason the budget has not been without its critics including some in the private sector who considered it somewhat generous. While the budget is indeed generous, it is almost certainly what the people of that country needed after a long period of political stalemate. Given that country’s resources the generosity can certainly be justified certainly in the first year of the new administration. Prime Minister Manning must be aware that he has time on his side and when his administration moves towards its middle years he can then make the kind of tough adjustments that the then conditions may demand.

On the other hand, Ernst & Young Caribbean has questioned the abolition of the export allowance with effect from January, 2003 which had been promised in the last budget of the Panday Government administration. E&Y attributes this decision to international pressures from the World Trade Organisation, but notes that the removal of the allowance will certainly impact on those companies that manufacture for export. According to E&Y, with the removal of the allowance, manufacturers in T&T will find it extremely challenging to be competitive in global markets where other measures of protectionism exist. “At a time when the Government needs to promote exports and create an environment in which our manufacturers and other export service providers are encouraged to expand their businesses, the removal of this allowance could significantly impact on the cash available for the investment needed for this type of expansion” E&Y notes that T&T is still in preliminary negotiations regarding the FTAA and wonders whether the complete removal of this allowance is not premature and whether consideration should not be given to a phased removal of the allowance.

It is interesting to note that the export allowance in Trinidad & Tobago as well as Barbados is often referred to by Guyanese businesspersons when discussing some of the advantages which their counterparts enjoy. Guyana has had such an allowance since 1988 and is not required to remove it at this stage in view of the low level of per capita GDP. It is a little strange however that Barbados does not consider itself bound to remove this allowance and the concerns of E&Y are therefore quite justified. E&Y considers that the adverse impact of this reduction would be somewhat softened by the reduction in the corporation tax rate.

Main Tax Measures

Corporation Tax

The rate of corporation tax is being reduced from 35% to a rate of 30% with effect from January 1, 2003. This reduction will not however apply to companies engaged in the petrochemical and related sectors. E&Y believes that this reduction will encourage greater investment and lower the cost of operating a business in Trinidad & Tobago, thereby encouraging foreign investors into the country. Additionally, in light of the Free Trade Agreement of the America’s (FTAA) it will make us more competitive in this arena.

By comparison, the rates of corporation tax paid by companies in Guyana are 45% for commercial companies (defined to include commercial banks ad telecommunication companies) and 35% for other companies.

Personal Income Tax Rates

The Minister has proposed to reduce the Income Tax rate from 28% to 25% on the first $50,000 and from 35% to 30% on every dollar thereafter. It should be noted that individuals including self-employed persons are entitled to various allowances so that the effective rate is considerably less. This measure which E&Y estimates will represent a considerable loss of revenue to the government has been widely welcomed particularly as it had been in the pipeline for some years.

Housing Allowance

In addition to the $18,000 mortgage interest relief currently granted to home owners, a further deduction of $10,000 per residence for a period of 5 years is proposed and is to be granted to first time home owners who purchase their homes on or after January 1, 2003.

As Ernst & Young has pointed if the measure is enacted as expressed, it will contain some measure of inequity since people constructing their own homes will appear not to benefit from this measure. Apart from the purchasers, construction companies will be major beneficiaries of this measure.

Credit Union Shares

In a bid to encourage further savings, individuals will be able to claim a deduction of up to $10,000 in respect of incremental shareholdings in a society registered under the Co-operative Society Act.

Mortgage interest relief was abolished by the Hoyte Administration in 1991 while credit union dues have not as far as I am aware been allowed as a deduction for tax purposes.

SECTORAL ISSUES

The social sector

In addition to housing covered elsewhere in this column, education and health have received considerable attention in the budget. In education, the Prime Minister has recognised this as a critical element in the long term strategy of attaining first world status by 2020 and has announced the rehabilitation of Secondary schools and modernisation of Secondary school curriculum within the commitment to provide affordable tertiary education for all qualifying candidates. A University of Trinidad & Tobago will be established with an initial concentration on Science and Technology, whilst maintaining a commitment to the advancement of the University of the West Indies.

In health the Prime minister has announced the need for an efficient system to deliver not only the more traditional services but the introduction of additional facilities and equipment to cater for the growin incidence of illnesses such as cancer, heart disease and HIV/AIDS.

Manufacturing

Despite the proposed abolition of the export allowance, the Manning administration has identified the manufacturing sector as a principal generator of growth in the economy and has identified a number of initiatives to achieve this objective. These include Investment promotion; Export Development; Development of external transport links; Entrepreneurial Training and a Credit Union Development Bank.

Tourism

The effects of September 11 and the absence of strategic vision have been blamed for the poor performance in this sector. To redress this adverse trend the budget proposes the injection of the injection of $305million into a Tourism Development Plan to promote sustainable development over the next three years.

Financial Sector

The Minister noted the need to enhance the regulatory and supervisory framework to internationally accepted standards to achieve the vision of a major financial centre of the Caribbean and the Western Hemisphere. As a result in the next fiscal year the Government commits to the introduction of legislation to integrate the supervision of insurance companies and pension funds into the banking system under the authority of the Central Bank.

Conclusion

Trinidad & Tobago is clearly serious about its goal to become the Singapore of the Caribbean. Its maturity in resolving its political crisis of the past year augurs well for that country and this budget can help the healing process so necessary after fears that the country was going “Guyana’s way.” Our politicians on all sides need to study the experience of our neighbour with which we have so much in common.

At the government level, we need a clear vision as well as the capacity to execute. Presentation of the national budget before the beginning of the year will be a good start but better execution is almost equally important. The opposition needs to raise the level of debate in the country not only criticizing but offering meaningful recommendations both to the government and the people. All the evidence is that neither side offers much hope.

In this column we have drawn extensively on the Ernst & Young publication, Focus on Trinidad & Tobago Budget 2003 which is available on their website: www.ey.com