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A Kiap’s Chronicle: 16 - Telefomin

O'Neill & Abel start 2018 with a profligate spending binge

The-state-is-out-of-controlPAUL FLANAGAN | PNG Economics

Read Paul Flanagan’s complete article here

CANBERRA – Papua New Guinea’s 2017 supplementary budget was a good start for the O’Neill-Abel government, but it then stumbled badly. Politics and presentational games overtook good economic policy.

The government has gone on an unsustainable spending binge in 2018 – expenditure is K2 billion (16%) higher than the International Monetary Fund was hoping.

The fiscal implications of this unsustainable spike in expenditure are hidden through misleading revenue games. The 2018 budget assumes revenues that are K1.5 billion higher than the IMF’s optimistic scenario. The IMF estimates PNG will break the 35% limit on its debt to GDP ratio.

The IMF also estimates that the deficit to GDP ratio will exceed 3%. Looking at the experience of the 2016 budget, including on-going revelations about payment arrears, the risk is that the deficit will end up being closer to 5% of GDP.

An IMF report was complimentary about treasurer Charles Abel’s first 2017 supplementary budget. It had hopes for an active fiscal policy continuing into the 2018 budget. They would be sorely disappointed.

The extraordinary blow-out in expenditure, backed by very unrealistic revenue expectations for 2018, severely damages the credibility of the new treasurer.

The politics of protecting constituency funding, the need to be seen to reverse the massive cuts to infrastructure, health and education in recent years as well as the high cost of hosting APEC have all contributed to this unexpected blow-out in expenditure.

The sacrificial lamb in this political budget process was revenue credibility.

As PNG’s shadow treasurer Ian Ling-Stuckey pointed out, the revenue estimates seem significantly inflated in terms of compliance cost returns, dividends and GST revenues.

The 2018 budget figures are very similar to the 2016 budget – K12.7 billion in revenue and K14.8 billion in expenditure. Actual revenues in 2016 ended up being K10.5 billion – an extraordinary shortfall of K2.2 billion.

There is a fear that this experience is about to be repeated with probably around K2 billion in unrealised revenues as even higher oil prices will take considerable time to flow into higher revenues.

Large revenue shortfalls means large expenditure cuts and even more difficulties financing the deficit. With O’Neill and his advisors dominating government economic policy once again, no lessons appear to have been learnt. The people of PNG will be the ones that will eventually pay the price.


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