Budget framed to grow economy

The National Business

By Dr OSBORNE SANIDA,
National Research Institute director
A budget is a money plan for expected or planned expenditures, revenues and financing if revenues are not enough to fund the expenditures.
The expenditure plan sets out the expenditure items or areas (i.e goods and/or services) that one intends to spend on to achieve a particular objective.
The revenue plan is the plan for incomes that one will earn, which will be used to fund the expenditure plan.
The third component, the financing plan, will apply if there is a deficit, that is when expenditures exceed revenues.
If the budget is balanced (i.e total expenditure equals total revenue) or there is a surplus (i.e total revenue is greater than total expenditure), then a financing plan (for the deficit) is not required.
The above description of a budget applies whether it is a personal budget, a family budget, a community budget, a business budget or a government budget.

Key features of the 2022 National Budget
The 2022 National Budget by the Marape Government was handed down on Nov 25, 2021.
It is anticipated that the Budget will be debated and passed today  in Parliament.
The key National Budget documents and related material are: Volume 1 (Economic and Development Policies); Volumes 2A, 2B and 2C (Budget Estimates for Government Departments); Volume 2D (Budget Estimates for Statutory Authorities, Provincial Governments and Government Debts Services and Trust Accounts); Volume 3A (Public Investment Programme for National Departments); Volume 3B (Public Investment Programme for Statutory Authorities and Provincial Governments); and speeches by the relevant ministers and departmental secretaries.
The total expenditure estimate is K22.17 billion.
The total revenue and grants estimate is K16.19 billion.
Because the expenditure is greater than the revenues, there is a deficit of K5.98 billion, which is 5.9 per cent of gross domestic product (GDP).
The GDP is estimated to be K101.7 billion which if realised, will be a key milestone in the history of the nation.
The deficit implies that there is a financing plan to fund the gap (or deficit of K5.98 billion).

Expenditure
The expenditure plan of K22.17 billion comprises 60.5 per cent (or K13.42 billion) for recurrent (or operational) expenditure and the remaining 39.5 per cent (or K8.75 billion) for capital investment expenditure.
The operational expenditure (K13.42 billion) constitutes 45.1 per cent (or K6.05 billion) for compensation of employees; 27.8 per cent (or K3.73 billion) for goods and services; 17.3 per cent (or K2.32 billion) for interest payment (debt service); 5.4 per cent (or K0.72 billion) for GST and BTT transfers; and 4.4 per cent (or K0.59 million) for provincial function grants.
The capital investment expenditure (K8.75 billion) is allocated as follows: 35.2 per cent for administrative sector; 19.7 per cent for infrastructure sector; 19.5 per cent for provinces; 15.6 per cent for social services sector; 7.4 per cent for economic sector; and 2.6 per cent for law and justice sector.
The source of the funding for the capital investment expenditure is K5.86 billion (or 67 per cent) from the Government’s public investment programme (PIP); K1.57 billion (or 18 per cent) from donor support grants; and K1.32 billion (or 15 per cent) from concessional loans.
From a sector viewpoint, the breakdown of total expenditure (K22.17 billion), ranked in budget size, is as follows:

  • GENERAL public service:  K10.36 billion (46.7 per cent of total expenditure);
  • ECONOMIC affairs: K5.02 billion (22.7 per cent);
  • HEALTH: K2.49 billion (11.2 per cent);
  • EDUCATION: K1.37 billion (6.2 per cent);
  • PUBLIC order and safety: K0.94 billion (4.2 per cent);
  • GST and bookmakers’ transfers: K0.72 billion (3.3 per cent)
  • HOUSING and amenities: K0.42 billion (1.9 per cent);
  • DEFENCE: K0.36 billion (1.6 per cent);
  • SOCIAL protection: K0.25 billion (1.1 per cent);
  • RECREATION, culture and religion: K0.13 billion (0.6 per cent); and,
  • ENVIRONMENTAL protection: K0.11 billion (0.5 per cent).

Revenue/Income
Of the total revenue estimate of K16.19 billion, the Government expects to earn 77.3 per cent (or K12.52 billion) from tax; 11.4 per cent (or K1.84 billion) from other revenue; and 11.3 per cent (or K1.83 billion) from grants.
In terms of tax revenue, more than half (52.6 per cent) will be generated from taxes on income, profits and capital gains.
This is followed by 40.6 per cent from taxes on goods and services dominated by the GST receipts, and taxes on international trade and transactions contributing the lowest (6.8 per cent).
Other revenue (K1.84 billion) is to be generated from property income (72.6 per cent), unclassified transfers (25.4 per cent), sale of goods and services (1.9 per cent) and fines, penalties and forfeits (0.1 per cent), mainly from judicial fines.
A grant of K1.83 billion is to be sourced from two sources: foreign governments and international organisations.
Foreign governments are expected to contribute 82 per cent of grants with the remaining 18 per cent from international organisations.

Financing
To finance a deficit, the government will typically borrow either from domestic sources through treasury bills or inscribed stock (i.e treasury bonds) or borrow overseas from foreign governments or international organisations on concessional terms.
Treasury bills (short term) and inscribed stock (medium to long term) are financial debt instruments issued by the Bank of Papua New Guinea (Central Bank) on behalf of the Government to raise funds in order to finance budget deficits. For 2022, the Government expects to fund 63 per cent (or K3.74 billion) of the K5.98 billion deficit from external borrowing with the remaining 37 per cent (or K2.24 billion) to be funded from domestic borrowing.
Contextual Analysis of the 2022 Budget
The following discusses some contextual issues relating to understanding the 2022 Budget.
The need to increase government revenue:
Increasing Government revenue is important for funding its expenditure plan.
Considering the deficit financing that has occurred over the recent past, it has become ever so important to focus on mechanisms that will increase Government revenue.
In order for Government revenues to be increased, two conditions are required.
First is that the economy must perform strongly through the increase in Gross Domestic Product (GDP) or economic growth.
GDP is the value of final goods and services produced within the PNG economy over a given period of time, usually one year.
GDP represents the total value of production, total value of income and total value of expenditure in the economy for a particular year.
According to the statistics from the Final Budget Outcomes published by the Treasury Department, PNG’s GDP in 2006 was K25.5 billion and four years later (2010), it had increased by 52 per cent to K38.8 billion. Five years later (2015), GDP increased by 55 per cent to K60.1 billion.
By 2020, GDP had increased to K81.6 billion, which is a growth of 220 per cent from 2006 GDP.
GDP grew at an average of 8.2 per cent per annum between 2006 and 2020, which is a strong growth for the PNG economy.
The estimated GDP for 2021 is K93 billion and K101.7 billion for 2022, a 9.4 per cent nominal increase. So, GDP continues to grow.
The second condition is that the Government revenue should increase commensurate with the GDP increase.
In other words, Government revenue, which is for the people, must increase in line with the increase in GDP in order to finance the goods and services needed to improve the welfare of the people.
In particular, the people must benefit fairly from the growing GDP generated by the development of the resources in the country.
During the five-year period from 2006 to 2010, Government revenue increased by K2 billion from K6.3 billion to K8.3 billion.
Five years later (2015), revenue had increased by 33 per cent to K11 billion.
After increasing again to K14.1 billion in 2018, revenue fell to 12.1 billion in 2020 due to the Coronavirus (Covid-19) impacts.
After that, increases are expected for 2021 (up to K93 billion) and 2022 (up to K101.7 billion).
On average, Government revenue increased by about 5 per cent per year between 2006 and 2020. So, Government revenue has increased in absolute terms between 2006 and 2020.
However, focusing only on the increase in the absolute value of revenue does not give a full picture of what ought to be earned by the Government.
To get the full picture, one has to look at Government revenue as a share (percentage) of GDP.
In other words, this question should be asked: out of what the country makes in a year, in terms of GDP, how much share is the Government taking in revenue.
This is the revenue-to-GDP ratio, which is measured by dividing the Government revenue for a given year by GDP for that year and multiplying by 100 (to get the percentage).
An increasing revenue-to-GDP ratio is a good sign because it means that the Government is getting more and more from the GDP growth, and vice versa.

Debt servicing
As presented earlier, the expected interest payment for 2022 is K2.32 billion which is about 17 per cent of GDP.
Seventy-nine percent (79 per cent) of the interest payments will be for domestic interest payments; 21 per cent is for foreign interest payments; and the remaining half a percent is for borrowing related charges.
Any interest payment is obviously a cost to Government and the tax payers.
However, when one considers the flow on effect, not all is lost.
In particular, if the interest payment is going to domestic borrowers, there is a positive spin to it.
That is, a positive thing about majority of interest repayments going to domestic borrowers is that the interest receipts (money) will stay onshore which will contribute to either investment spending (if interest receipts to borrowers are spent on investment) or consumption spending (if interest receipts are spent on consumption), which is beneficial to business growth and sustainability.
Both actions will benefit the economy.
Having said this, any Government should aim at controlling its borrowing for sustainable debt servicing.

Concluding remarks
We live in uncertain and trying times due to the Covid-19 pandemic, particularly in the context of the Delta variant and the new Omicron variant recently detected in South Africa and now spreading.
The budget is a tool to generate revenue and spend on infrastructure and programmes to address current needs and wants and also to work on mitigation measures to address potential new challenges and problems such as the Covid-19 pandemic.
The 2022 Budget has been framed to grow the economy and address the social service delivery through increases in both the operational and capital expenditures.
Various measures have been proposed to generate revenue and also build and maintain infrastructure and programmes.
Any measure would have both positive and negative implications.
The challenge is to ensure that there is net benefit to the target population or the general population.
A budget is a future plan and to realise the benefits of the plan, the contribution of each stakeholder is needed for effective implementation and outcome, whether you are an individual or a family or a business or Government, from the national to the local level.