Targeting the budget deficit at low-income earners and the social safety net will not be enough to get the economy going, say financial analysts. More effort must be placed at improving confidence of higher-income earners and getting people to begin spending and rebuilding the economy, they are saying. "Low-income earners are much more frugal than policy-makers think, and we need to get confidence levels up for higher-income earners and corporate customers to purchase cars and invest in factory and stock to generate growth and demand," said head of Securities and Asset Management at CMMB, Brent Salvary. "I don't think targeting the stimulus at low-level income earners will help much, because consumers need to start spending on larger commodities, such as on their homes, factory construction, or real estate asset repairs, which will generate employment, economic activity and provide the infrastructure for future productivity and growth."
He said the budget attempted to tackle several very complicated and inter-related issues, as the Government sought to replace consumer-spending with government-spending during a recession to keep the economy going. This strategy could work in other economies such as the US, where consumer-spending made up to 70 per cent of Gross Domestic Product (GDP), but in Trinidad and Tobago this contribution was much lower, he explained. Some stimulus measures were important for developing infrastructure, for protecting the less fortunate in society and for generating employment. "However, even though much of this stimulus is targeted towards lower-income persons who are expected to spend more of their incomes than wealthier persons, what we may find is that even low-income people are holding back on spending, as they are not confident about their income streams into the future.
"As a result, you may not get the kind of rebound that you might expect. In the US, incentive programmes for local production such as the auto industry's "Cash for Clunkers" directly provided a stimulus for one of the largest employers in the economy. "Similarly, it will be difficult to find industries such as these in the local economy to generate employment and economic activity as expected," he explained. "The idea of a stimulus package is commendable, but in our economy I don't think it will have the desired effect. World energy prices are relatively low, and gas prices have fallen significantly and have not recovered. "Gas is still around US$2.50. This is way down from where it was just a year ago, and there is no end in sight for a recovery over the next few years. "Deficit running cannot be considered a long-term solution, particularly with energy prices so unpredictable.
"Major challenges I see moving forward include the shortage of labour, dealing with inflation, funding education and enhancing the current skill set–particularly in the construction sector, so we will be able to take advantage of opportunities for growth."
Long-term deficit?
Republic Bank economist Ronald Ramkissoon said the Finance Minister was pursuing a standard economic management policy, and the deficit must be made to get the economy rolling again. He noted, however, that it must be targeted, and it must have a clear objective in mind that is measurable. "When revenues fall during a recession, governments must run a deficit to inject funding into the system to boost economic activity and employment, thus taking up the slack for the private sector. "In the long run, current deficits balance off themselves with surpluses when the economy becomes buoyant in the future, but deficits are unavoidable if you want to get the economy out of its downward cycle faster. "Deficits are inevitable in a recession, because revenues received are lower, as well as you need to spend more into targeted sectors of the economy to get the biggest impact on growth, poverty-reduction and business activity.
"If we take the view that deficits in these times are appropriate, we have to be careful that we do not run deficits indefinitely.
"This is okay over the period of between one to three years, but you have to find other sources to fund deficits as well as hold back on expenditures over time. "For Trinidad and Tobago and most countries across the globe, deficits must be viewed as temporary to maintain employment and economic activity until prices for world commodities pick up and the economy is able to generate surpluses again." According to Ramkissoon, "We are in the fortunate position that we have been having surpluses over the past eight years.
"This makes it easier for us to access local and international markets and enhances our ability to borrow or use from our savings to fund budget deficits. "Many others are not in such a fortunate position, so there are still some positives. We do not want to move forward with spending too quickly and use up our resources before the world economy recovers.
"If growth is not sustained, we may have to take a second dip or a much longer-term view of deficits. No one knows what the future holds, but we must be careful about the period we are looking for growth to resume. "The Finance Minister must focus on infrastructure development that will encourage private sector lending and the expansion of private sector business activity." Access roads, breaking into new foreign markets, international marketing and social development spending must be key sectors targeted for government spending, if the Minister wanted to stimulate the local economy in a sustainable manner. He said incentives needed to be introduced to get more private companies to go public and become listed on the Stock Exchange. This would provide avenues for savings and the surplus liquidity in the system to be invested into production, economic diversification and wealth-generation.
