Trinidad and Tobago (T&T) is currently in the throes of a major macroeconomic shock amid subdued energy markets as well as the debilitating effects of the global pandemic. The budget for the fiscal year 2021 was formulated in this context, incorporating elements intended to manoeuvre this shock while simultaneously providing the social support necessary for the most vulnerable in society. The country is currently grappling with a second wave of Covid-19 with cases increasing daily and while the economy has been reopened for the most part, borders remain closed and consumers as well as businesses remain very cautious.
Recent economic developments
During the first quarter of 2020, economic activity declined by 1.9 per cent, but as borders and non-essential businesses closed towards the end of March, second quarter GDP was more severely affected, plummeting by ten per cent. Overall for the first half of 2020, economic activity fell by 5.9 per cent and a decline of 6.8 per cent is projected for full year 2020. The fiscal performance has deteriorated markedly in the context of considerably lower revenue due to subdued economic activity in both the energy and non-energy sectors.
For FY 2020, current revenue shrank 27 per cent, driven largely by a 51 per cent decline in energy revenue, while current expenditure fell by 0.5 per cent. As a result, the current account balance ended with massive shortfall of $13.4 billion, relative to a deficit of $1.2 billion in FY 2019. The overall fiscal balance rose sharply to $16.8 billion – the equivalent of 11 per cent of GDP. Consequently, net public sector debt rose by 17 per cent in FY 2020, increasing the debt to GDP ratio to 80 per cent from 65 per cent in FY 2019.
Over the period FY2015 to FY2020, external public sector debt increased at twice the rate of growth in domestic debt, with the external public sector debt representing 21.5 per cent of GDP in FY2020, from just around 10 per cent of GDP in FY2015. The country’s financial buffers remain fairly sound, even though withdrawals from the Heritage and Stabilisation Fund (HSF) were made to finance the deficit. As at the end of September 2020, the net present value of the HSF was US$5.7 billion and foreign exchange reserves stood at US$7.3 billion.
Protecting social safety nets
Transfers to households rose to $10.2 billion, an increase of nine per cent over the previous fiscal year and was associated with the Government’s responses to Covid-19. The increased transfers to households during FY2020 was largely a result of grants to provide salary and income support, various social support programmes, expenditure associated with personal protection and other humanitarian assistance. Among the five development themes under Vision 2030, “Putting People First: Nurturing our Greatest Asset”, recorded the highest expenditure ($1.7 billion) during FY 2020 and focused on the implementation of programmes in Education, Housing and Shelter and Community Development.
Further measures have been announced in FY 2021 to bring financial relief to displaced and vulnerable sections of society. Specifically, the increase in the personal income tax exemption limit from $72,000 to $84,000 per year, which will reduce Government revenue by $750 million, but will benefit over 250,000 individual taxpayers. The intention is to increase disposable income of individuals to help stimulate aggregate demand.
Budget in numbers
The budget projects a cut in the overall fiscal balance to $8.2 billion or 5.6 per cent of GDP in FY 2021 as revenue is expected to recover by 21 per cent over the 2020 provisional outturn. Revenues from both the energy sector and non-energy sector are budgeted to pick up by 16.3 per cent and 19.5 per cent respectively, relative to FY2020.
On the expenditure side, spending is projected to decline by 2.5 per cent. The largest budgetary allocation went to Education and Training in FY 2021, as the Government aims to leverage technology services more within the sector. Taxes have also been removed on laptops and tablets to make these devices more affordable and an allocation was made in the budget to provide computers to students in need.
There are several challenges which fiscal policy must attempt to overcome, including how best to allocate expenditure specifically required to retool and reshape the economy. Government intervention is necessary to help soften the social impact, however, there must be a mix of both expenditure rationalisation and revenue-raising measures in a manner which will not have a materially adverse impact upon cost of living, especially for the most vulnerable, embedded within a medium term fiscal strategy.
This strategy should also contain measures to help sustainably reduce the country’s growing debt burden as persistently increasing debt will put additional strain on already limited revenues through increasing interest and principal payments. Some concrete and bold steps have been announced in the budget, however focus must now be placed on execution and follow through to ensure that the economy rebounds post-Covid-19.