Fiscal policy affects budget outcomes, think tank says


FISCAL policy in the form of government expenditure and taxation has a direct bearing on budget outcomes, according to the National Research Institute (NRI).
NRI, in its recently released discussion paper titled Fiscal Policy for Sustainable Debt in Papua New Guinea, noted that this in turn affected the level of government or public debt.
Public debt is considered sustainable when Government is able to meet all of the payment obligations without recourse to exceptional financial assistance or face prospects of default.
The paper, by Prof Satish Chand and Dr Osborne Sanida released yesterday, provided answers to specific questions on the size of the primary fiscal balance that was necessary to contain debt within the ceiling legislated under the Fiscal Responsibility Act (FRA).
“Specifically, the levels of primary balances that are required to contain debt within the legislated limits in light of possible changes to interest rates and growth of gross domestic product (GDP) was estimated,” the paper stated. “This was done using numerical simulations of the path of primary balance for given rates of growth of the economy and the prevailing interest rates.
“PNG has legislation in the form of the FRA that places a ceiling on debt so as to prevent the risks of debt-distress.
“Using data on debt and deficits since 2006, the fiscal path to debt sustainability was calculated, and risks of distress was identified using numerical simulations.
“It was found that the level of public debt in 2021 at 42 per cent of GDP is sustainable at the prevailing interest rates, and anticipated rates of growth of GDP and inflation.
“However, the risk of distress, amounting to the need to run smaller primary deficits to that of the past at the expense of public expenditure, rise with an increase in interest rates and a fall in the rate of growth of GDP.
“Specifically, a rise in interest rates on debt of 100 basis points or 1 per cent with GDP growing at 2 per cent will require a balanced primary budget for fiscal sustainability – an outcome that may not be politically palatable in such a climate.”