PNG’s 2016 Supplementary Budget is a positive development confirming key Ministers accept the importance of budget repair.
The K1,886m loss of tax revenue highlighted in the recent MYEFO has been replaced exactly through “revenue-raising” measures of K958m and expenditure cuts of K928m.
The confidence-building objectives of the announcement are partially undermined by the lack of debate in Parliament and the lack of transparency (the actual details have not been released – there is very little detail in the Treasurer’s speech and a copy of the actual supplementary budget is not on the Treasury website).
Unfortunately, the K958m in revenue measures are largely playing games and certainly do not represent sustainable increases in the revenue base.
The sale of shares in the PNG LNG project to landowners does not improve the government’s net worth – it is simply a substitute of one good asset held by government (shares in the PNG LNG project) with another asset (cash). This is a capital transaction and technically does not reduce the budget deficit.
Interestingly, the expected returns from this sale are well below the K2,500m assumed in the 2015 budget.
Indeed, they appear closer to the K600m estimated in the 2014 Budget.
The other revenue measure of increased dividends from SOEs would seem to come at a time when those SOEs are already facing cash flow issues on their operations. There appears to be a growing practice of SOEs borrowing from local banks simply to pay dividends to government – this is not a long-term strategy for PNG’s development.
The major source of expenditure cuts are in infrastructure. With a K649.3m cut, capital works spending falls to K1,267m. This represents a 71% cut relative to peak K4,413.6m in 2014.
The criteria used for the cuts are pragmatic (those with projects that are disbursing well or are being geared up through donor financing). Ideally, another criteria could have been added of protecting those projects with the highest rates of social and economic return.
It is also positive that maintenance expenditure is being protected as it is much better to maintain roads than build new ones.
There clearly were wasteful capital projects which will do little to build the welfare of people in PNG.
However, the extent of cuts is a cause of concern. Infrastructure spending is now half the level of 2012.
Well designed, properly tendered, priority capital work projects can be vital for improving development outcomes in PNG.
More effort should be directed towards cutting costs in areas such as the public service, or even re-evaluating the effectiveness of some of the government’s key policies – including DSIP.
There is some confusion in the analysis in the Supplementary Budget. In the speech, the Treasurer states that a budget deficit of K2,112.5m is equivalent to 3.8 per cent of GDP (page 7). However, the Treasury’s MYEFO indicates the same deficit is equal to 3.1 per cent of GDP (page 13).
The Treasurer states that “this Government has always been in control of the country’s fiscal affairs” (page 4) citing a 2015 deficit of 3.9 per cent of GDP. However, the Treasury’s MYEFO indicates that the 2015 deficit was in fact 4.7 per cent of GDP (Table 2 page 14).
Such inconsistencies, although at one level minor, do not build confidence that the government is in full control of its fiscal affairs
Of greater concern is this government having from 2013 to 2016 the largest pattern of deficits in PNG’s history, even after the still unconfirmed actions to increase GDP by nearly 50% in 2006,
Money was spent, sometimes on grandiose projects, well before money had been received. Future generations in PNG will pay for this.
The document is primarily a useful confirmation that there are those in government that recognise something needs to be done to repair the budget (the PNG Treasury and BPNG clearly see such changes are important as do economic ministers).
However, based on the information available, it does not appear that actual structural changes are being made to deal with PNG’s wider economic problems.
The collapse in domestic tax revenues shown in the MYEFO is primarily because of low growth in wages and profits.
Government policy actions in areas such as agriculture, land, SMEs and the exchange rate are undermining fiscal repair by undermining growth in employment levels and profits.
Although the Supplementary Budget is a positive step, the politically tough decisions required for PNG’s long-term sustainable development are not being made.