Will the state budget decision be fair to private and public sectors?

THE government is expected to pass the 2017 supplementary budget amid a challenging economic climate which has the public sector operating on a bare minimum and the private sector anticipating much needed budgetary reforms to kick-start the economy.  Institute of National Affairs executive director PAUL BARKER spoke to The National on changes that need to be contained in the supplementary budget and the resulting government policy.  Here is what he said:

ELECTION years are invariably difficult ones for governments around the world.
Governments are looking at their future electoral chances and don’t want to jeopardise them with extra taxes or expenditure restraint, especially in Papua New Guinea by cutting the DSIP (district services improvement programme) or PSIP (provincial support improvement programme) funding, so beloved by sitting MPs, but largely poorly planned and relatively unproductive and widely abused.
Papua New Guinea’s 2017 budget was a case in point. With five years of deficit budgets, and growing debt levels and debt servicing costs, 2017 needed a tight budget, with a firm restraint on expenditure, particularly on marginal or wasteful spending, and strong focus on revenue raising, including driving through some of the needed structural reforms to gain extra revenue, but also to spread the burden and reform aspects of resource rental, so as to avoid the diversion of public funds into commercial equity acquisition.
This was especially needed, considering that lower commodity prices and factors such as the El Nino had restrained export earnings and  increased import demand for food, at least in theory, except that the lack of foreign exchange slashed most imports, along with squeezing the entire level of business activity.
So, despite major cuts to expenditure on infrastructure, health and education in both the 2016 supplementary budget and the 2017 budget, the latter still had to wear the burden of the national election costs, plus the Asia-Pacific Economic Cooperation hosting and SIP funding on top of more routine expenditure.
It failed to adequately budget for increased public sector operational costs, especially salaries and wages obligations.
It remained over-optimistic over potential tax and non-tax revenues, including the continued severe fall of tax revenue from the extractive industries, with only K92 million of income tax revenue from the sector in 2016.
There was also the continued low tax revenue from this source into 2017 despite over K20 billion export earnings from extractives, and gold prices remaining reasonable.
So, the challenge for the 2017 supplementary budget is to take some of the harder budget decisions deferred in the 2017 budget (regardless of the cuts to all priority sectors, except the above mentioned activities, in the 2017 budget).
It includes cutting the DSIP or PSIP, and to try to coax extra tax and non-tax revenues at the same time as encouraging business and restoration of overall economic activity, especially in the non-mining sectors; quite a substantial challenge, especially for a government that is essentially the same one as before the election, that had formulated the problematic 2017 budget.
So the task falls, especially on the new Treasurer to demonstrate in the 100-day programme and this supplementary budget, that he and the government comprise a substantial change, albeit while providing some policy continuity.
They have to demonstrate that the government is more business-friendly in terms of recognising the challenges for legitimate businesses, and encouraging them to invest again and reinvest, and reverse the recent downward economic and business spiral, by listening to and understanding the business challenges.
This includes working with the Central Bank to find better ways to address the shortfall of foreign exchange, through market and financing mechanisms, and removing some of the recent unfriendly investment policies and legislation.
It must refinance costlier commercial debt, where possible, with more concessional arrangements, securing more affordable international and domestic finance, while restoring the pathway to lower debt levels (including to gross domestic product).
It needs increasing tax and non-tax revenue, including from those bypassing the requirements or from non-operating entities, such as the Lands Department and its uncollected land rental, and commence the process of tax reforms, and shift in resource revenue, without imposing new or uncompetitive tax burdens on businesses and households that cannot afford them.
Certainly cutting the SIPs at this stage of the year, when there’s no time left to properly plan and implement, should be achievable, if not necessarily politically popular.
And restoration of some taxes introduced in the 2017 budget and withdrawn, could be applied, along with offloading businesses and unproductive assets where the government doesn’t need to be, from insurance to some of the extractives to owning executive aircraft etc and really showing that the government is committed to its core functions or duties, to providing services to the public and core public goods required for business, including agriculture, to function.
It must cut the levels of waste in overpriced and often urban-based contracts, unnecessary overseas travel and strengthening the oversight and governance institutions to make cuts and abuse of public funds bite.
The early application of the Sovereign Wealth Fund is important, albeit that there won’t be funds to put away right now.
And the Independent Commission Against Corruption (ICAC), needs to be launched and funded, but not a watered-down body, lacking investigative, arrest or prosecution powers, that has no real teeth.
It needs to make the present and future abusers of public funds and assets sit up and think, and fear the consequences of their misdeeds.
There are ICACs in some countries that work, and others in other countries that are just ineffective figureheads, playing lip service, but having no effect.
An Independent Commission Against Corruption needs a real public and government commitment to the rule of law and the teeth to apply it, without fear or favour.
Otherwise, it just becomes like so many of Papua New Guinea’s already failing public sector institutions, many of which were once relatively effective, but have been undermined by political interference, appointments by-passing merit, lack of operating resources and effective accountability.