Budget FY2021/22: Sectoral Initiatives Hope to Boost Economic and Fiscal Prospects
Commentary
The Budget Statement for FY2021/22 was delivered on 4 October 2021, kicking off debates in both Parliament and the public square. Based on oil and gas price assumptions of USD65/bbl and USD3.75/mmbtu respectively, projected revenues are TTD43.33Bn and projected expenditure is TTD52.43Bn, yielding a projected deficit of TTD9.096Bn.
If the Government’s projections are realised, FY2021/22 would see a smaller deficit compared to the revised figures for FY2020/21, where revenue was estimated at TTD36.09Bn and expenditure was estimated at TTD56.8Bn. Figure 1 above shows the fiscal performance of Trinidad and Tobago in the period from 2011 to 2020.
A further breakdown of the country’s revenues into energy and non-energy revenue, illustrated in Figure 2, reveals an interesting pattern. In the first half of the last decade, the energy sector contributed roughly half of total revenue. However, after the end of the commodity supercycle in the middle of the decade, this contribution declined rapidly, and the estimate for FY2021/22 is that energy revenues will represent less than 30% of the total. Non-energy revenues stayed relatively stable throughout the period, fluctuating in the TTD20Bn-25Bn range. With declining energy and flat non-energy income, overall revenues have sagged, especially since the onset of the COVID-19 pandemic.
Economic Rebound Requires Non-Energy Uptick
Given the stated intention of the Minister of Finance to achieve an overall fiscal balance by 2024, as well as the longer-term goal of economic diversification, there will be a need to significantly boost output and revenues from the non-energy sector if the domestic economy is to find more solid footing. In the Budget presentation, the Minister identified several fiscal incentives targeted at specific sectors of the economy, in particular the Agriculture, Construction, Digital and Manufacturing sectors. These incentives include but are not limited to:
- A TTD300Mn allocation to the Agriculture Stimulus Package Fund;
- A 50% tax exemption on the first $100,000 of chargeable income in the first year and the first $200,000 in the second year for new companies in the digital sector;
- A Development and Expansion Incentive for manufacturers investing in productive capacity, equivalent to a 5% tax reduction;
- A 3-year, 5% tax reduction for SMEs in the construction and digital sectors; and
- A Research and Development Capital Allowance of up to 40% of eligible expenditure.
Below we will briefly examine the performance of each targeted sector in recent times.
Figure 3 above illustrates the percentage contributions of the targeted sectors to the country’s GDP. Manufacturing is by far the largest contributor, with nearly 20% of domestic output in every year since 2013. However, it is important to note that in 2017 the CSO reclassified key industries such as LNG, petroleum refining and petrochemicals under Manufacturing, in accordance with the International Standard Industrial Classification of All Economic Activities (ISIC), revision 4. Previously these industries were classified under the Energy sector. Construction is the next largest contributor, at around 5% of GDP, while Information and Communication and Agriculture produce roughly 2.5% and 0.8% respectively. It should be noted that the Information and Communication sector encompasses both the digital sector (software, hardware, telecommunications and IT) and publishing activities, following ISIC rev. 4. Therefore, the digital sector will account for somewhat less than the stated Information and Communication sector figure, though an exact disaggregated estimate is not available.
Turning to the recent growth performance of the targeted industries, illustrated in Table 1, the picture is fairly mixed. Agriculture experienced explosive growth of 35.9% in 2015, though in subsequent years the sector’s output has fluctuated significantly and generally tended towards the downside. According to the CBTT’s Quarterly Index of Real Economic Activity (QIEA), agricultural output grew by 33.7% between December 2019 and March 2021, and it appears that the COVID-19 pandemic has boosted local purchases of food items somewhat. This is a trend that Government will seek to encourage and sustain through its stimulus measures. Construction activity contracted in every year between 2015 and 2019, although the period from December 2019 – March 2021 did see a 6.8% increase in the construction QIEA, as some Government projects were initiated and continued when restrictions were lifted after the first COVID-19 wave. To maintain this momentum, however, more construction activity in the private sector will have to be incentivised, to ease the burden on Government investment as a driver of growth.
In the Information and Communication sector, growth from 2013-2019 was fairly flat, with positive growth in one year often reversed in the following year. The QIEA for the pandemic period December 2019 – March 2021 shows a similar pattern, with 4% growth in that time. Though some economic sectors transitioned to work-from-home and digital transformation initiatives were announced by Government and the private sector, thus far the impact on digital sector productivity has not yet been as explosive as hoped for. In Manufacturing, growth has been flat since 2013, and pandemic-era output has declined further, by 6.9% between December 2019 and March 2021. Though manufacturing was one of the first sectors to partially reopen following the initial lockdowns of 2020, significant work must be done to revive the fortunes of a significant non-energy contributor to the economy.
While the sectoral incentives announced in the Budget will come at some initial cost to the taxpayer, they will, if successful, help to increase the non-energy contribution to GDP. A significant turnaround in the targeted sectors, especially in manufacturing, plus improvements in tax administration through the proposed T&T Revenue Authority (TTRA), would increase the revenues available to the Government and hopefully bring the country closer to balancing the budget over the medium term.
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