Budget 2022/2023: Government Forced to Make More Difficult Decisions

In the weeks leading up to the presentation of the 2022/2023 National Budget, government was determined to deliver a message that was both encouraging and cautionary. That is, “the economy is on the mend, but we must remain prudent with our expenditure”. Indeed, in his delivery of the fiscal package, the Finance Minister stayed on message. Given the backdrop against which the Budget was set, cautious optimism was perhaps the most appropriate tone for the government to adopt. The Minister’s comments concerning the $25.4 billion projected increase in nominal GDP to $190.7 billion and the expected 2 percent rise in real GDP in 2022, were understandably upbeat given how difficult the last few years have been. Even so, it’s worth noting that the estimate for real GDP in 2022 is still notably below 2019 levels, which suggest that there is still considerable lost ground to recover. Also of concern, is the increasing possibility that the global economy may slip into recession in the coming months. This represents a major threat to high energy prices, which were the major source of revenue growth and momentum for the domestic economy in 2022. This uncertainty is surely troubling to the government and in part, accounts for its actions to further streamline its suite of subsidies on this occasion. However, the budget also included initiatives to cushion the effects of reduced subsidies on vulnerable segments of the population. Encouragingly, they seem to be much better targeted than the subsidy spending they replaced, in some cases temporarily.

The 2022/2023 fiscal package is based on an oil price of US$92.50 per barrel and a gas price of US$6 per million British thermal units (MMBTU). While this price outlook is in line with the forecasts of globally respected agencies such as the U.S. Energy Information Administration, there was room for a bit more conservatism, particularly considering the uncertainty pervading the global economy. In any case, the government will have the opportunity to make any necessary adjustments in the Mid-year Review should the need arise. Otherwise, the country could be saddled with a larger fiscal deficit than the $1.5 billion (0.8 percent of GDP) projected for the fiscal year. During the fiscal year, total expenditure is expected to increase to $57.7 billion compared to actual expenditure of $54.1 billion in the 2021/2022 fiscal year. Of this amount, $6 billion is earmarked for capital expenditure, an increase of $2 billion over the previous year’s allocation. Given the nation’s well documented implementation challenges, the successful execution of the capital programme will certainly be welcomed. Total revenue is expected to increase by $4.5 billion to $56.1 billion, with oil revenue accounting for $25 billion. Only $1 billion in capital revenue is expected to be raised during the period.

In the lead-up to the presentation of the budget, government made clear its intention to cap the fuel subsidy at $1 billion dollars. Therefore, its move to increase the prices of diesel, super gasoline and premium gasoline by $0.50, $1 and $1, respectively did not come as a surprise, as painful as it may be for some. On the other hand, the reduction of the subsidy on the domestic sea and air bridges probably came as a surprise to many. One-way Caribbean Airlines tickets were increased by $50 to $200, while one-way fares on the sea bridge increased by a range of $25-$50. This could have a negative effect on domestic tourism and Tobago’s economy as a consequence.

While the government responded to the pressures to streamline its expenditure on subsidies, it also attempted to cushion the blow on vulnerable citizens. The increase in the personal income tax allowance to $90,000 from $84,000 means that individuals earning $7,500 per month or less will be exempt from paying income tax. Additionally, the provision of a one-time $1,000 transport grant to all recipients of social grants is expected to provide some ease to at least a segment of the low-income population, in the wake of increased fuel prices. Finally, government took the decision to relax restrictions which previously barred students who access the GATE programme for intermediate level studies from receiving funding to pursue baccalaureate degrees. Now students who got GATE funding for diplomas, associate degree etc., can also access the programme as they pursue undergraduate degrees consistent with the country’s development needs.

Another important initiative in the latest fiscal package, is the move by the Minister to adjust the fiscal regime governing the energy sector to enhance its competitiveness. Several energy industry practitioners have been calling for a review of the domestic energy sector’s taxes and incentives for some time, given its waning attractiveness. It remains to be seen to what extent these latest amendments will improve the sectors competitiveness however. The Supplemental Petroleum Tax (SPT) concession for small onshore oil producers was increased, while a tiered system at reduced rates was introduced for shallow water marine operators.

Government’s latest fiscal package is titled “Tenacity and Stability in the Face of Global Challenges”. It goes without saying that addressing the challenges facing the domestic economy requires a great deal of resolve (tenacity) on the part of all key stakeholders of which the government is chief. While opinions may differ on the administration’s messaging leading up to the 2022/2023 Budget, its tone in the budget document itself, suggests that it has embraced the harsh reality that it will be required to make difficult decisions for the foreseeable future and must drive the changes the country needs, both the painful and the pleasant.