paul-barker

How much more can the govt take from businesses?

Business

THE Department of Treasury released on Monday the report on the mid-year fiscal and economic outlook.
Below is Institute of National Affairs executive director Paul Barker’s comment on it.  

THE report is highlighting that the economy is continuing to face tough times, with low growth and employment growth rates, relatively high inflation, continued shortfall in foreign exchange which is contributing badly to the downturn in business and investment.
Businesses in Lae and Port Moresby are reporting 20 to 35 per cent reduction in sales over the past year or so.
Revenue, particularly from corporate taxes are well down on the 2017 budget forecasts, and expenditure is substantially exceeding budgeted levels, despite firm restraint by Treasury and Finance in issuing warrants in most areas of public expenditure.
This is pushing deficit levels up from the forecast K1.8 billion to nearly K3 billion, with associated debt servicing costs rising above K1.5 billion, well in excess of funding for the key areas of public goods, such as transport, health, education, law and order, etc.
With limited apparent capacity to borrow internationally, except the current Credit Suisse financing facility, nearly all the deficit is being financed domestically through Treasury Bills and other instruments, substantially bought by the Central Bank (that is, printing money and contributing as a  result to the relatively high inflation).
The debt-to-GDP ratio is forecast to substantially exceed the 30 per cent allowable limit by the year-end.
Clearly, firm fiscal and debt management measures will be needed, through an early supplementary budget to seek to rein in expenditure and boost revenue.
But this will be hard for a new government, if it is hoping to have an easy entry for its new members into office.
Expenditure has been steadily and heavily cut back over the past two years, imposing a big burden on already deficient public infrastructure away from the National Capital District, health and education services and law and order.
There are opportunities to increase tax revenue, notably from businesses and individuals currently slipping the net, but this will take time and much effort.
Simply trying to squeeze more out of existing businesses and individuals who are paying tax, will further constrain the business and investment needed to grow the economy and future revenue.
So care must be taken.
Securing extra revenue from the resource sector could be gained in some areas, but will be constrained by existing agreements with the State. Clearly, there are expenditure priorities and it is hard to see relatively unproductive status projects such as sports stadiums or international conferences stacking up against the need to address PNG’s continued poor social indicators such as health and education, or economic opportunities, restrained by poor basic infrastructure and access to foreign exchange, which in turn requires returning the exchange rate to market determined levels, to find its prevailing equilibrium.
The Government with the Central Bank needs to be ready to take firm steps to restore economic confidence, and encourage investment, which requires being ready to pursue real structural reforms, addressing exchange rate and foreign exchange issues, ensuring more consistent and secure investment conditions, better prioritising and trimming expenditure for economically and socially unproductive activities, including DSIP, which is largely poorly planned, managed and accounted for, and thereby restraining borrowing and debt service costs, applying measures proposed under the recent tax review and commit to broadening the tax burden, including across recalcitrant businesses.
The Government needs to start by listening to the private sector and civil society, and being better guided by research and evidence, rather than hunch, but also following systematic expenditure arrangements to ensuring the delivery of basic services more equitably across the nation rather than developing these and then ignoring them, for ad hoc expenditure items pursued by powerful players in the coalition. Government must particularly strengthen the mechanisms for restraining excessive expenditure in over-priced contracts, by improved and more transparent public procurement, reinforcing the financial inspection and audit functions and penalties, and Parliament needs to be adequately funded to ensure that its oversight functions are restored, including the Public Accounts Committee.

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