PAPUA New Guinea has already imposed “tougher expenditure cuts than undertaken by Greece”, says economist Paul Flanagan, but further budget repair – including higher taxes - is required in the medium-term.
The prominent economist, who has worked for the Australian Treasury and in PNG and has been banned from entering PNG by the O’Neill government, was writing in his PNG Economics blog.
The solution for PNG in the longer term, he says, is to diversify and improve the non-resource sectors of the economy such as agribusiness.
But foreshadowed government policies are undermining sustainable budget repair because they are discouraging reforms in small business, agriculture, land use and the exchange rate.
Flanagan has calculated that, despite the hefty budget cuts already imposed, revenue this year is likely to be K780 million less than forecast. The actual revenue hole in 2016 is likely to be more than K2.6 billion, he says.
This consists of shortfalls in personal income tax, company tax and GST revenues. Flanagan provides a detailed analysis for his predictions in PNG Economics.
The PNG Treasury’s recent mini-budget cut revenue forecasts because of this low level of tax collection. However, Flanagan says the forecasts were not reduced sufficiently and are too conservative.
Flanagan is one of the best placed economists to provide a definitive analysis of PNG’s budget problems.
He was involved in revenue forecasting in the Australian Treasury and headed the tax analysis division in 2006-07 and co-chaired the secretariat charged with checking the accuracy of revenue and expenditure costings for the 2007 federal election.
He was also in charge of the Henry Tax Review secretariat in areas responsible for capital and resource taxation and is acutely aware of the limits of economic forecasting.
“A key lesson learnt is to use a simple methodology if possible,” he says.
It’s probably past time that the PNG government brought Paul Flanagan into the tent and used his expertise instead of leaving him out in the cold.