All time series variables consist of two main aspects: cyclical and noncyclical. The noncyclical aspect can be considered the trend here. When the cyclical component of the time series variable is removed, what remains with annual data of the nature used in this short note is the noncyclical (trend). In the literature, there are several techniques available for separating the trend aspect of the series.

In this short note, a Hodrick Prescott filter is used to separate the trend and cyclical components of macroeconomic variables, petroleum rents, and transfer and subsidies in the T&T economy. Using the data in the table, the trend component of petroleum rents clearly started to decline after 2008. The cyclical aspect of petroleum rents, not surprisingly, also fell and indeed the average value of the cyclical component of the petroleum rents variable from 2008 to 2014 was negative US$1,191 million, compared to an average annual value of US$3,837 million from 2005 to 2008.

Observe, though, that the trend aspect of transfers and subsidies continued to increase throughout the given time period. Note also that the cyclical aspect of transfers and subsidies increased every year after 2010 (except 2013), and this upward motion of the cyclical component and the overall buoyancy of the trend aspect of T&S complemented each other, in a climate of falling petroleum rents. This indicates that the transfer and subsidies macroeconomic variable as a whole displayed a tendency that could only be described as irrationally exuberant. Here the term “irrational exuberance” is defined as the behavioural tendency in a variable that supersedes what the realities of the market would infer for that same variable.

The prices of oil and gas are likely to remain depressed during the next 36 months, and by extension T&T’s petroleum rents are thus likely to remain constricted. In this setting, the trend in government transfers and subsidies would have to be addressed, as their momentum is unsustainable in the medium-term outlook for the T&T economy. More significantly and with immediate effect, the cyclical aspect of transfers and subsidies should be brought as close as possible to zero.

All of this means that the T&T economy has exhausted the fiscal room that buoyant energy prices have afforded it since 1998, and it is now necessary that the state halt further increases in outlays for transfers and subsidies and reduce its overall non-capital expenditure outlays. Failure to do this in the medium term may result in painful austerity measures. Let us restrain our tendencies toward irrationally exuberant behaviour.