PNG’s budget strategy not yet credible

The World Bank recently released its update on economic prospects for countries in the East Asia and Pacific region – see here. This is the second of two parts analysing that report.

The Budget – more credibility required

After reviewing the Supplementary Budget, the World Bank estimates that the deficit will not be 2.5% of GDP  in 2017 but 3.2%. This is in line with the IMF’s earlier expectation of the deficit being just over 3%.

The public debt to GDP ratio would be slightly under 35% by the end of 2017.

Going forward, the World Bank estimates that the deficit will fall slightly to 3.1% of GDP in 2018 and then increase to 3.5% in both 2019 and 2020.

The debt to GDP ratio is expected to climb to nearly 40% of GDP (see orange bars in graph below with the height showing as a percentage of GDP on the left hand side axis – graph from p134 of the report )

There is not much international confidence about PNG’s claimed path back to a budget surplus and reducing debt levels.

Given past experience, those concerns are justified.

Genuine budget savings are very, very difficult to deliver because of entrenched political interests in key areas such as the electorate funds to parliamentarians. PNG failed in its attempts a decade ago to make for a more efficient and effective public service. With higher public debt levels expected, interest costs will continue to rise.

The cuts in budget expenditure in recent years have already been more draconian than those imposed on Greece. And the report actually indicates that PNG needs to spend much more on basic services to improve PNG’s worst rating in the region on the Human Development Index (see table B1.C.4.1 on p67)

Much more needs to be done on the revenue side.  The best way to get revenues up is to get growth going again. In addition to better pro-growth policies, there will be a need to look at either raising tax rates or introducing new taxes.


Yet another outside umpire is extremely worried about the health of the PNG budget.

There is a need for some tough medicine.

The 2018 Budget, due to be delivered in a month’s time, will hopefully turn around the current negative perceptions. But this will require much more whole-of-government unity than shown in the Supplementary Budget – see here.

I still hope Charles Abel, the new Treasurer and Deputy Prime Minister, can perform a miracle and get his Prime Minister to accept that real change is needed after the economic mismanagement of the previous five years.