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Letter: Recession - debt - austerity
Published on April 15, 2017 Email To Friend    Print Version

Dear Sir:

Dr Valmiki Arjoon, a UWI economist, drew attention to the increasing debt burden of Trinidad and Tobago, now some 60 percent of GDP and claims that it is beginning to enter the danger zone. If this continues he expects that the international rating agencies would downgrade our debt to junk and the repayments will be passed on to the next generation.

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An emerging view is that government should restrict its spending to what it receives from onshore, some TT$41billion, which suggests that instead of spending some TT$52 billion (the minimum the minister of finance says he has been advised to spend to avoid economic collapse), he has to cut his budget further.

What this means is that government as the largest employer in the economy will have to reduce further its subsidies, its transfers, reduce its employment and its capital spending on construction/roads/a port; the latter would have enabled it to maintain employment and some economic activity – contra-indicated by lack of foreign exchange income.

What is being overlooked is that government’s income from onshore depends on the onshore maintaining economic activity, which itself is a function of the earnings of the energy sector. Hence, as long as the recession remains, as long as the country’s income from the energy sector remains depressed (low energy prices and reduced production) the tax and royalty income in the country will remain depressed, even reducing, and the immediate future is austerity so as to live within our means.

There are other countries also in this recession debt trap, for example, Puerto Rico, Suriname and Greece, though not all for the same reason as Trinidad and Tobago.

Puerto Rico built its economy via industrialisation based on corporate tax breaks. The most important of these was the exemption of company profits from federal taxes. Puerto Rico became the most attractive place in the world for US manufacturers. Hence Puerto Rico’s growth depended on these tax breaks, which the US Congress began to phase out in 1996 and expired completely by 2006.

As these subsidies disappeared many factories relocated to places with cheaper labour and fewer regulations – manufacturing jobs fell by half between 1996 and 2014 and Puerto Rico entered a long lasting recession and is now faced with the need to come up with a new economic strategy. There is 14 percent unemployment, 45 percent of the population lives under the poverty line, public debt is some US$70 billion and immigration to mainland USA (out with Trump’s moves to control) denudes the country of its skilled labour force.

The immediate problem is lack of economic activity and growth wherein the ensuing hardships were ameliorated by government debt/spending, which after a time dried up and creditor demands for repayment forced the inevitable austerity. The solution has to be the restructuring of the economy – tourism is being looked at but the sustainable solution is long term.

Suriname, on the other hand, similar to Trinidad and Tobago, depends on the export of petroleum, gold and aluminum. The country’s income fell in 2015 by 70 percent compared with the year before. As a result that country’s foreign reserves were almost depleted, leading to a 20 percent devaluation in the currency in 2015 and the exchange rate floated in March 2016. The country received international financial support of 24 month standby agreement with the IMF and debt/GDP ratio is heading for 68-plus percent.

Coupled with the devaluation the government hiked the price of fuel, water and electricity in an attempt to reduce spending on subsidies; the economy contracted by nine percent in 2016 and inflation stood at 74 percent in September 2016. This increased austerity has led to demonstrations by the trade unions. The devaluation has had no effect on engendering economic growth.

Again the problem is largely a non-diversified economy that depends on a small subset of exports to fund the large import needs of the country. When foreign exchange earnings fall, the economy contracts, government borrows to delay austerity measures and when the crunch comes the people demonstrate as if by a wave of the wand the government can restore the good times.

The banking sector in Greece found themselves up to their ears holding the US subprime mortgages. When these collapsed in the last great recession the government debt bailed out the banks. This was not via Greece’s quantitative easing, since the Euro was the local currency, but by borrowing the money on the open market. Recently, though, there is some agreement with the European Central Bank to buy Greek government bonds, quantitative easing in effect, to allow Greece to pay its other creditors. Again, without economic growth the see-saw continues between austerity measures – cuts in pensions, tax reforms and new debt to repay maturing debt as the public demonstrations continue.

These stories tell us important things. One of which is that small open economies, which depend on a small set of exports or manufacturers to fund the imports that support the rest of the economy, are at high risk especially if they do not spend export earnings counter cyclically.

Another is that such countries look to government in times of economic crisis to alleviate the hardships of recession, which is done in the short term by accumulating debt that for a time shelters the population from austerity. If the export sector does not recover before the debt burden becomes prohibitive, increasing austerity ensues. Then the illogical happens.

In a democracy government is charged with providing the services and infrastructure so that the population can grasp the opportunities to build a sustainable economy. Nothing in Trinidad and Tobago stops our onshore from becoming an export oriented economy. Yet when the petroleum sector collapses, the onshore complains to the government to do something – it cannot get the foreign exchange to continue its business endeavours, the people suffer and the trade unions threaten to shake up the place.

The literature tells us that some governments have indeed successfully taken on the task to reconstruct their economies. The obvious question then is why did our governments not do this over the past 50 years? Why did Vision 2020 fizzle out? Why did the PP government drop the diversification ball in 2011?

Mary K. King
St Augustine
 
Reads: 3381





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