Currently all provinces excluding National Capital District and Morobe rely on conditional block grants from the national government for fiscal equalisation.

This is a fancy term that refers to the funding the national government provides to provinces so they have the financial means to meet a specified minimum benchmark of key services in education, health, transport infrastructure, agriculture services and village courts.

The National Economic and Fiscal Commission has done some tremendously good work to shape the regime for revenue sharing between national governments and provincial and local-level governments.

Such a system is necessary as government revenue systems work more efficiently and with less administrative costs if many taxes are centralised under the national government.

One example is a consumption tax like the goods and services tax. If provincial governments were to impose and collect GST themselves this could lead to various complications, including cascading taxes and economic distortions.

Given these constraints, it is clear the national government needs to share the revenue it collects with provinces, otherwise the pool of funding for provinces will be too small.

Nearly every province, has a fiscal gap, for example Madang’s funding capacity is just above 10% of the total cost required for the benchmark services. This is greatly concerning. There is a need to embed within the regime incentives for provinces to increase their fiscal capacity.

Provincial governments and local-level governments (LLGs) combined get a fixed ratio, 6.57%, of the net national revenue. LLGs then get 10.05% of that amount. This is split between rural LLGs and urban LLGs in the ratio of 79% to 21%.

This allocation does not include the services improvement program allocations of K10 million for each district nor the K10 million for each province nor the funding for each LLG or staffing costs borne by the national government.

For the provincial allocation, each province receives an amount that is equivalent to its share of the fiscal gap. Similarly, each LLG receives an amount that is equivalent to its share of the total LLG fiscal gap.

Now therein lies the problem. There is no assurance that the funding levels will be sufficient to bridge the gap.

Additionally, there is a performance disincentive in that provinces that fail to bridge the fiscal gap can continue to rely on the national government.

There are many provinces that will never the bridge the gap for the foreseeable future but you do want them increasing their efforts at improved self-reliance.

The service improvement programs for districts and provinces have tended to add to the costs of provincial government operational expenses as most are physical capital outlays that will require maintenance funding over the coming years.

The driver of demand for many services funded by the grants is population. As population grows so does the demand for services. This needs to be taken into account when determining the cost of delivering essential basic services.

So what are the potential solutions to the incentives problem and the falling resource envelope?

An obvious solution is to rely on the service improvements program funding as a gap filler when economic conditions are difficult and a consequential decline in conditional grants is anticipated.

Whilst this will be unpalatable to parliamentarians it has the benefit of encouraging them to seriously consider improving the fiscal capacity of their provinces to ensure they receive their district and provincial services improvement program funds and to improve the efficiency of the resources they have available.

The new government to be elected next month will need to move decisively to address this amongst a host of other emerging budgetary and development problems to protect our people from further hardship.