How Will a Decline in Energy Sector Revenue Affect Social Services?
Trinidad and Tobago's future development is undeniably intertwined with the country’s oil and gas sector. Revenue from the sector serves as a key driver for growth and will finance any future diversification efforts by the Government.
Given global demand and supply imbalances, unpredictable weather patterns and geo-political tensions, since 2011 there has been a concerning trend in declining government extractive sector revenue punctuated by marginal peaks. Concurrently, Government’s social sector spending has exhibited consistency, prompting a crucial question: what will be the impact on social expenditure if there is a marked decline in oil and gas revenue?
The volatility inherent in extractive sector revenue prompts reflection on how these fluctuations may affect vulnerable groups, including the elderly, low-income households, disabled, sick, unemployed, and university students. Given the importance of social expenditure, which accounts for 41% of oil and gas revenue, exploring how a 20% decline in energy revenues impact society or those in need is worth exploring.
The Trinidad and Tobago Extractive Industries Transparency Initiative (TTEITI) took on the question. The EITI standard prompts countries to foster greater dialogue on revenue management and expenditure. More specifically, the objective of requirement 5.3 of the 2023 EITI Standard is to “strengthen public oversight of the management of extractive revenues; the use of extractive revenues to fund specific public expenditures and the assumptions underlying the budget process, including considerations related to revenue sustainability.”
In keeping with this objective, the TTEITI in collaboration with the EITI International Secretariat, developed a model to project extractive sector revenue and its impact on social expenditure. The model leverages publicly available data primarily sourced from TTEITI Summary Data templates, the Ministry of Finance budget documents and the Ministry of Energy and Energy Industries (MEEI) bulletins. The model projects extractive revenue and its impact on social expenditure up to 2033 if oil and gas revenue declined by 20 percent. The model uses historical social expenditure, projected oil and gas production and conservative oil and gas prices of $80 per barrel and $3 per million British thermal unit (see Chart 1, 2, 3).
Social expenditure in Trinidad and Tobago, averaged TT$6.5 billion from 2011-2023, has demonstrated stability, with the model reviewing programmes such as Senior Citizens Pension (SCP) and the Community-Based Environmental Protection and Enhancement Programme (CEPEP). The model demonstrates that social expenditure is sticky and remains constant even amidst oil and gas revenue declines.
The senior citizen’s pension continues to record the highest expenditure during the period under review. Total expenditure has increased from TT$3.5 billion in 2017 to TT$4.3 billion in 2022. Thus far, 2022 recorded the highest expenditure to SCP. Over the last decade, 2022 recorded the second largest total social expenditure of TT$6.9 billion, while the largest figure was recorded in 2020 at TT$7 billion.
However, over the projected period from 2023-2033, total social expenditure shows a declining trend. An in-depth examination of specific social sector initiatives, like the Government Assistance for Tertiary Education (GATE), indicates that GATE's documented expenditure was TT$400 million in 2022.
However, according to the model, this amount is expected to rise to TT$422 million by 2033. Similarly, the Public Assistance Grant exhibits an upward trend, escalating from the recorded TT$356 million in 2022 to a projected TT$392 million by 2033.
Contrastingly, selected programs like SCP display a declining pattern, with actual expenditure decreasing from TT$4.3 billion in 2022 to TT$3.9 billion in 2033. The Disability Assistance Grant follows suit, experiencing a decrease from the actual figure of TT$620 million in 2022 to the projected expenditure of TT$577 million in 2033.
These findings should prompt policy dialogue on rationalization of spending, especially as demographic trends point to the aging population increasing over the next 20 years. Discussion on industries for the future and Government spending to equip today’s students with skills to work in these industries is also vital.
Government Share of Exports
The model also assesses Government take from energy exports. The government's take of extractive sector revenue has declined due to falling production levels, creating a potential misalignment between revenue and expenditure. Government take of exports in this model was quantified by dividing government revenues from extractives by export values of extractives. Examining the relationship between exports, revenue, and oil and gas contributions reveals an average government take of around 30% from exports, with fluctuations tied to commodity price changes (see chart below).
“Social expenditure in Trinidad and Tobago, averaged TT$6.5 billion from 2011-2023, has demonstrated stability, with the model reviewing programmes such as Senior Citizens Pension (SCP) and CEPEP. The model demonstrates that social expenditure is sticky and remains constant even amidst oil and gas revenue declines.”
The data underscores potential scenarios, such as a 20% decrease in the anticipated government revenue, which, even in such a scenario, would still exceed social expenditure levels, ensuring the maintenance of current levels.
However, more substantial declines, ranging from 40% to 60%, require a thorough reassessment of revenue streams, reduction in expenditures, or a combination of both. In such instances, the government would be compelled to increase its share from the sector to bridge the gap caused by decreasing revenue.
For instance, the government has already taken measures to address the challenge of its share from exports and has initiated efforts to counteract declines in revenue from the extractive sector. The implementation of transfer pricing legislation and a monitoring regime is designed to combat revenue leaks, while the restructuring of Atlantic LNG and expediting oil and gas drilling projects offer promising avenues for generating revenue.
Moreover, the emphasis on energy efficiency and renewable projects underscores a commitment to extracting maximum value from our energy reserves. Although a reduction in extractive sector revenue does not necessarily ensure a proportional cut in social expenditure, it does raise concerns about the country’s capacity to allocate funds to vital social programs.
In conclusion, Trinidad and Tobago faces complex challenges in balancing extractive sector revenues and social expenditure amid economic uncertainties. While current initiatives mark positive steps, a comprehensive strategy is essential. This model serves as a valuable conversation starter, urging stakeholders to address the evolving needs of the population, secure sustainable revenue streams, and navigate the intricate interplay between economic variables.
As the nation grapples with questions surrounding an aging population, how to boost energy sector revenue and overall economic resilience, proactive measures and multi-stakeholder policy dialogue are imperative to ensure a sustainable future for Trinidad and Tobago.
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