budget essay final draft

8/8/2019 Budget Essay Final Draft

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On the heels of a unanimous vote into power, the Peoples Partnership Government has

created a budget which focuses mainly on managing, and in some cases negating, the policies

established by the previous Peoples National Movement government. The theme of the

2010/2011 National Budget aptly describes this drive, Facing the Issues: Turning the Economy

Around. In addition to dealing with the policies already in place, the Budget was influenced by

the Governments Seven Pillars as outlined in their Election Manifesto, namely:

Foster people-centred development,

Ensure national and personal security,

Entrench good governance,

Steer the country towards a diversified knowledge intensive economy,

Move towards eradicating poverty and promoting greater social justice,

Present an accommodating foreign policy, and

Expand the use and availability of Information and Communications Technology.

These themes are seen throughout the presentation, however, most of the economic measures

in the Budget involve reducing the costs of business start-ups and taxes. For the purposes of

this assignment, only the fiscal policies and initiatives which affect the business environment will

be discussed.

The presentation discusses the state of affairs within the construction sector as it relates to the

outstanding debts owed to local contracting firms. These debts include VAT refunds and general

payments for works done. It can be deduced that a cash strapped construction firm will suffer

from a limited number of jobs that it can viably tender for and on a large scale, this could lead to

an overall slowdown of the construction sector, and maybe even suspension of activities of

some firms. If they were to be paid accordingly, however, this restriction on tender viability

would be removed, leading to a rise in competition for jobs, and by extension, an overall

lowering of the average cost of a construction project. This would undoubtedly lead to an

increase in the activity within the sector and the rate of development of the country. Further,

being no longer cash strapped, firms will demand more materials from their suppliers causing a

domino effect within the industry.


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The Financial Institutions Supervision Department (FISD) of the Central Bank of Trinidad and

Tobago aims to supervise the licensed financial institutions and registered insurance

companies and pension plans in accordance with the Financial Institutions Act, 1993 and the

Insurance Act, 1980 respectively (Anon. 2010). The government proposes to form an

Independent Risk Committee charged with identifying large risks within the economy in an

attempt to prevent the occurrence of economic failures which can lead to a wide scale economic

collapse similar to that caused by the CLICO debacle. One would assume that the legislation

governing the operations of the Committee would empower it to force companies to change

their practices, shut down, or even manage a public take over to protect the interest of its

shareholders and the economy as a whole. Thus, financial firms would be forced to implement

stringent measures to root out bad practices and under the table transactions.

The budget also proposes an efficiency analysis of the current gasoline subsidy that is enjoyed

by the citizens of the country. If the subsidy was to be removed, however, it would lead to a rise

in the costs of transportation of goods and services for all firms, and, undoubtedly, this increase

in cost will be passed on to the final consumer of the product. The overall rise in the price of

goods within the economy because of the increase in transport costs is known as cost push

inflation, and this is definitely something that should be considered by the Government before

any decision is made. On the other hand, the budget presentation proposes many tax incentives

to encourage firms and individuals alike to convert their vehicles to utilize Compressed Natural

Gas instead of Gasoline. This will have the opposite effect on the firms cost of transportation if

they converted their vehicles as the cost of CNG is currently lower than both Gasoline and

Diesel.

Pensioners were relieved to hear that their monthly allowance was raised to $3000 per month.

With respect to businesses, this increase means that the elderly have more money to spend in

firms like pharmacies and groceries, and they will experience an increase in demand for their

products. This increase in economic activity, however, comes with the risk of demand pull

inflation, which is the rise in the general price level due to an increase in demand for goods and

services. This inflation may erode the purchasing power of the TT dollar, thereby nullifying theeffect of the increase in sales enjoyed by firms.

The budget provides a great business opportunity in the form of the incentives offered to

encourage the establishment of firms providing alternative energy source solutions to other

firms and households. These incentives include the removal of import duties and VAT charges


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on solar water heating equipment and wind turbines along with supporting equipment. This

forms a very attractive base for the establishment of outfitting firms in the alternative energy

industry. Furthermore, wear and tear allowances of 150 percent of procurement costs are

offered to firms investing in the technology.

The establishment and expansion of Economic Spaces and Free Trade Zones also play an

integral role in the governments attempt to encourage the establishment of new firms and

industries. The Five Poles of Expansion are based on a cluster development approach and the

first pole aims at filling the void left by the sugar industry in the areas of Couva, Charlieville,

Carapichaima and Chaguanas, including a Port and business incubators. This is in an effort to

increase investment flowing into these areas and therefore form a thriving community-based

economy in each area. The other four Poles focus on Point Fortin, Port of Spain, the North

Coast and the North East section of Tobago, and all involve business incubation and incentives

for entrepreneurs to establish businesses in these areas. The expansion of Free Trade Zones

allows businesses to enjoy the benefits of tax exemptions on customs duties and other

expenses. The effect of this would be to promote and foster the establishment of new firms in

these areas, thus leading to increase economic activity and entrepreneurship.

In a further attempt to foster the establishment of industries by the private sector, the

Government intends to change the wear and tear allowance of 10 percent to 25 percent,

excluding buildings. The aim of this is to assist entrepreneurs and small and medium sized firms

in writing off assets and reduce the burden of tax during their start-up phase.

The Employee Share Ownership Plan (ESOP) seeks to promote more share ownership and

savings by giving employees the opportunity to own shares in their firm. It is a tax advantageous

method to replace cash benefits with shares since the shares will be taxed at a standard rate

based on their initial value and not on their current market value. This investment will cost the

State approximately twenty million dollars and become effective on January 1st, 2011. This aims

to encourage the reinvestment of funds into the company so as to promote its growth and

development, instead of it being spent by the employee on consumer goods and services.

Continuing along the general theme of the budget, the Government intends to support creativity

and innovation with the establishment of a ten million dollar facility to assess and promote

pioneering business ideas. These ideas will not be assessed on traditional criteria but on new

ones developed by the Ministry of Trade and Industry. Financing is to be made available by the


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Commercial Banks but with the advantage to firms of a one year delay in the repayment of

funds. This measure also aids in entrepreneurial development.

In accordance with the campaign promise made to axe the tax, the government has repealed

the Property Tax Act of 2009, and declared that no property taxes will be due for the year 2010.

Come 2011, however, the Land and Buildings Taxes regime will be reinstated at its original

rates and values. This counts as yet another tax break that businesses enjoy as they can now

utilize the funds that they would have paid under the Property Tax Act for alternative and more

productive endeavours. Further, reverting to the old tax regime will mean more free funds than

was previously anticipated if the Property Taxes Act were to become effective.

The Government has also decided to raise the minimum wage from 9 dollars per hour to 12.5

dollars per hour. Although there are calls from the leaders of trade unions throughout the

country that this increase is not sufficient given the current average price levels of basic

necessities, a rise in the minimum wage may impact negatively on firms. One such

consequence tends to affect smaller businesses more than larger ones in terms of an increase

in the overall cost of operation, sometimes to such an extent that the business becomes no

longer viable. Further, to compensate for the rise in employment costs, firms may try to pass on

the increase to the consumer, resulting in a rise in the price of the good or service. An increase

in price will most likely result in a fall in demand for the commodity and by extension the income

of some firms, again, sometimes to such an extent that firms may be forced from the market.

It is by now clear that the Governments attempts to kick start the economy involves massive

amounts of tax cuts and expenditures to entice entrepreneurs to establish themselves and firms

to expand their operations. It seems that besides the revenues expected from the export of Oil

and Gas, the Government intends to rely upon a penalty amnesty where they waiver the

penalties and interests on outstanding tax liabilities due up to 2009. This amnesty is effective

until May 31st, 2011 and the rationale behind it is that the Government expects to collect much

more in outstanding taxes than it is foregoing by providing the penalty amnesty. After May 31st,

however, the State intends to fully enforce the tax requirements of firms and widen its tax base.

How effective this measure is shall only be seen in time.

In conclusion, the effects of the budget on businesses may not be seen immediately since most

of the measures proposed aim to improve the sustainability of certain industries, and by default,

these measures become longer term oriented rather than short term.


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References

Anon 2010 Financial Institutions Supervision Department (FISD). Retrieved from

http://www.central-bank.org.tt/the_bank/index.php?pid=1057

Budget Statement 2011. Retrieved from

http://www.finance.gov.tt/content/Budget%20Statement%202011.pdf

Word count: 1797 including title page

budget essay final draft

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