Rapid revenue growth but spending misses mark
31 August 2012
ANDREW ANTON MAKO | Development Policy Blog (extracts)
THE GROWTH PERFORMANCE of Papua New Guinea and the status of its public finances improved significantly in the last decade, underpinned largely by the boom in global commodity prices of key PNG exports, and good macroeconomic policies.
The national budget, which was in deficit from the late 1990s, recorded its first surplus in 2004, public debt fell from more than 60% of GDP in 2003 to about 25% by 2011, the trade balance recorded large surpluses, and foreign reserves improved.
The country also passed several record national budgets due to a tripling of revenue. And yet many suggest, with good reason, that it was a wasted decade. What lessons can PNG learn in terms of its experience with rapid revenue growth moving forward?
With the large increase in revenue in the last decade, the government did several things.
First, the government increased its expenditure. Both the recurrent and development budgets expanded, almost doubling over the last 10 years, an increase of just over K4 billion, after adjusting for inflation. Projections for the next few years show a small fall in public spending in 2013, and increases for both total revenue and expenditure thereafter.
Second, the government used the increased revenue to fix its fiscal balance which was in deficit before the turn of the decade. Under the guidance of the 2002-2007 Medium Term Fiscal Strategy, the government aimed for a balanced budget by 2008 and in the medium term.
Third, the government also used the large revenue increase, and surpluses in the boom years, to retire its burgeoning public debt, as well as its liabilities to domestic financial institutions.
Despite the improved fiscal condition and the increase in public expenditure, it seems that the country may have missed the opportunity to turn the rise in national revenue into tangible development to improve the socio-economic conditions especially of its rural population in the last decade.
The large rural population of the country have felt little to no impact of the decade-long increase in public expenditure as crucial rural infrastructure such as airstrips, roads and jetties close down, and basic public services such as health and education fail to reach them.
The country’s Human Development Index has fallen to 153 out of 187 countries from 132 in 2003.
The governments of the last decade must be applauded for their sound macroeconomic management including the improvement in public finances.
However, much is needed to improve the quality of public expenditure so that public funds spent through the national budget create tangible development.
Although revenue growth will probably be lower for the next few years than has been seen in the past, it is expected to stay positive. In any case, even after inflation, the PNG government already has twice as much revenue to spend now as it did a decade ago.
Using the experience of the past decade, it is imperative that the government establishes sound mechanisms not only for macroeconomic management, but also to improve the quality of its public expenditure.
Andrew Anton Mako is a researcher with the Development Policy Centre of the ANU. He has just completed his Masters in International and Development Economics at the Crawford School of the ANU