THE Papua New Guinean Treasury has released an update on what may really have happened with the 2015 national budget.
Like the mid-year Treasury update, this is a frightening document that points to a collapse in government revenues of 20% in 2015. Equally frightening are the revealed 2015 expenditure reductions of 37% in health, 36% in infrastructure and 30% in education.
The biggest expenditure cuts were made in key areas which the government previously said would be protected. The combined budget deficits over the last three years of at least 23.6% of GDP are the most fiscally frightening (and irresponsible) run of deficit figures in PNG’s history.
The final budget outcome (FBO) is one of four key budget documents each year and must be released by 31 March. On the positive side, the 2015 FBO is a comprehensive document that fills in many of the gaps of the 2016 budget, including itemising the supplementary budget cuts.
In the 2015 supplementary budget, the government acted to try to shore up the 20% forecast collapse in revenue. However, it had limited success, with tax revenue falling K2,460 million in 2015, around K400 million more than expected.
The outcome is nearly 10% lower than in 2014 despite the great pressure placed on the tax and customs departments to increase collections. As tax revenue is strongly correlated to the underlying health of the PNG economy, the continuing fall in revenues outside of the resource sector is a concern.
Non-tax revenues fared better but at risk to other policy objectives. With the failure to sell shares in National Petroleum Company PNG for the K2,500 million originally included in the 2015 budget, pressure was placed on state owned enterprises to increase payments to government.
This occurred, with payments totaling K455 million relative to a budget estimate of K80 million. Given the poor performance of most of PNG’s state owned enterprises, the availability of such funds is surprising.
However, it appears that these enterprises have been able to make major borrowings from the domestic banks (especially the Bank of the South Pacific).
This cycling of funds through state owned enterprises may be a clever financing technique to avoid prudential limits on direct exposure to government bonds, but doing so could entail significant risks including for the health of PNG’s financial system.
Potentially, and this is less clear from the documents, the dividend payment of K451.4 million from the National Petroleum Company may be from sources other than revenues flowing directly from the PNG LNG project.
The final budget outcome also suggests a major fall in donor grants of 40% but this may mainly reflect late reporting by some donors.
In the 2016 budget, the government acted to reduce expenditures in line with falling revenue projections. As I have argued elsewhere, this adjustment was too late, and the forward year cuts were considered unrealistic and excessive (larger than those imposed on Greece as part of its austerity program).
The 2015 FBO reveals that overall domestic expenditure reductions in 2015 amounted to 14.3%. However, the cuts in particular sectors are particularly worrying. The largest cuts were to health – an extraordinary within year cut of 37.1%. Infrastructure was cut by 36.0%, and Education by 30.3%.
This pattern of cuts is the opposite of what the government claims are its priorities and the areas that would be protected. These are frightening figures for service delivery in PNG as well as investment in human resources.
Amongst these cutbacks, public service wage payments have escaped the pain. Despite attempts to trim these, the final outcome was K3,934 million – about the same as the original budget and considerably higher than the 2014 outcome of K3,696.9 million.
The 2015 FBO reflects the PNG government’s major economic challenges flowing from its earlier expenditure build-up, the collapse in revenues (only half of which is explained by falling commodity prices), the massive cuts in expenditure which will flow through to lower demand in the economy, and the difficulties of financing the deficits.
The documents flips back to a 1986 accounting system rather than the system used in the 2016 budget. This probably presents the increased deficit in the best light possible. The ‘1986 system’ showed the deficit in 2014 as 6.9% of GDP while the new system showed it as 8.3% - 1.4 percentage points higher.
The 2015 deficit is reported as being 5.0% of GDP, up from the 4.5% level originally expected. However, the GDP figures used in PNG Treasury documents include miscalculations on LNG prices and are overstated, according to the IMF, by over 10%. Using the IMF estimated figure for 2015 GDP of K45.3 billion, the revised deficit is 5.6% of GDP.
This is the best possible outcome as using old accounting standards may understate the deficit by around a further percentage point of GDP (based on the 2014 experience). In addition, more 2015 expenditure may eventually be recorded which will make this ratio even worse.
The combined deficits from 2013 to 2015 now total at least 23.6% of GDP. The previous largest three year run of deficits was 16.1% from 1991 to 1993. This is the most fiscally frightening (and irresponsible) run of deficit figures in PNG’s history.
The financing challenge is also reflected in the new debt to GDP ratio. The PNG Treasury document shows the debt to GDP ratio at 35.2%, just above the legislative limit of 35%. Using the IMF GDP figures, the ratio is 39.7% of GDP. This does not include other government liabilities such as superannuation.
Overall, the final budget outcome is a frightening document on both the revenue side and the expenditure side. It reveals a gulf between government statements and actual outcomes.
The fall in international commodity prices was outside PNG’s control. However, spending so much up-front in anticipation of higher PNG LNG was a risky strategy.
The pattern of expenditure reductions in 2015 suggest that processes have not been put in place to adjust to the new realities. Cycling funds through state owned enterprises to finance the deficit is a worrying development.
Especially with the likelihood that there will be no sovereign bond, the FBO adds to the arguments that PNG is in a fiscal cash crisis. PNG should be reaching out to friends for assistance, accepting that this will involve some conditions for getting the house back into order.