Opinion
- Editorial- Commentary
Mary King
:
Financing the good times
When the current global economic downturn became obvious to most of us our Government continued its state of denial, insisting that the downturn would have minimum impact on our economy. A reason given for this view was that we had diversified our economy away from oil to gas and that the price of gas was not as volatile as oil. The concurrent fall of the prices of natural gas and its products, vis-a-vis oil, demonstrates the fallacy of the Government's thinking.
Subsequently our Government accepted that we would be negatively affected by the global downturn and agreed that the 2008-2009 Budget should be scaled down. The Government estimated that its revenues would fall by some $5.5 billion and without a formal modification of its Budget statement requested ministries to cut back on discretionary spending.
However, our Government indicated that it had no intention of reducing its expenditure on social services, including URP and CEPEP, and neither on infrastructure whose contractual obligations were too far advanced. The Government also reiterated that, though the law allowed it, it had no intention of drawing down on the Heritage and Stabilisation Fund (HSF).
Given the continuing low prices of petroleum and its products and their reduced demand globally, our Government has again reviewed its position and is now talking about deficit financing to meet its "scaled down'' budget.
Deficit financing of a budget occurs when a government spends more money than it collects via taxes etc. If the present money supply in our country is below the maximum, as constrained by the Central Bank's foreign reserves, then the deficit can be funded simply by the creation of TT dollars by the Central Bank. However, this will increase the liquidity in the economy.
Another option is to raise Treasury bonds in the local market, which would simply defer the injection of liquidity to a future date at a price (yield). If we are also strapped for foreign exchange then the Government could also go for foreign loans, which could be expensive, if available in these times of tight international credit. Other more exotic methods in construction include the BOOT (build, own, operate transfer) in which the private sector funds the project, operates it and eventually sells it back to the Government - again deferring liquidity injection into the market.
Our Government has not indicated what methods it intends to use. What however is untenable in this period of global and national economic turmoil is that our Government does not see the necessity for a major budget change. Simply decreasing discretionary spending in a budget designed for the previous good times and borrowing to meet this spending in the face of reduced revenues are insufficient.
The global economies are typified by the US, that operated on credit with a major trade deficit, or by China and even South Korea that exported much more than they could consume, so increasing savings/investment. The global recession requires that these economies restructure themselves. China has been forced to lay off workers and even close factories in addressing the mal-investment. In the US consumer spending has all but collapsed. Coupled with this are the declining competitiveness of US manufacturing and the loss of confidence of the consumers in both the economy and the financial system.
President-elect, Barack Obama, as others in the EU, sees a solution in government spending/investment together with low interest rates (bordering on zero per cent) to stimulate economic consumption and innovative and competitive entrepreneurship.
The repayment of this Central Bank funding will be made via the resale of shares and payment of loans when the economy picks back up. The important point to appreciate is that government spending in the developed economies is about restructuring the production-consumption system.
In T&T our Government's proposed deficit spending is about retaining as much as possible the status quo of the recent good times. The placebo that our Minister of Finance is administering is that the rating agency, Moodys, has advised that given our reserves and the HSF we are well positioned to ride out this downturn, the depth of which no one can honestly predict.
Our petroleum-based plantation economy is unsustainable, and is getting more so, given our depleting resources and the inevitable global turn away from petroleum usage. This is indeed the opportunity to follow the lead of the developed world and restructure our economy -- use the proposed deficit financing, the Treasury bonds and the associated foreign reserves, even part of the HSF, to build the national innovation system that this column has been advocating for years.
Mary King is a columnist of the Trinidad Express (maryking@tstt.net.tt). Petroleumworld does not necessarily share these views.
This
commentary was originally published by Trinidad Express, Monday, January 12, 2009. Petroleumworld
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