Good budget forecast vital

Business
Paul Barker
Institute of National Affairs director Paul Barker says the government has been underestimating its expenditure and overestimating its revenue generation from major resource projects when drawing up its annual budgets over the years. He told a budget workshop in Port Moresby last Friday that revenue from the resources sector had picked up recently but not as fast as the country was spending money. Business reporter DALE LUMA summarises what Barker said:

“THE country’s economy is still flat and this is an issue that occurred with the budget.
Every year the Government tries to budget an amount. They say this is the spending and this is the revenue that we are expecting.
And in doing so, we usually underestimate the expenditure and overestimate the revenue.
That has happened this year as well.
The revenue started off in the first months of the year below what was forecast and we are spending in excess so we have to have another supplementary budget.
Each year we’ve had this supplementary budgets to correct what turned out to be errors in the actual budget itself.
It is a really difficult thing to be forecasting what’s going to happen because you don’t really know what’s going to happen with commodity prices and revenue flows.
It is partly the question of its difficult to forecast and how much information you have to have in order to do accurate budgeting.
Sometimes we have problems with State-owned enterprises which do not want to share information with other parts of government.
There is a lack of sharing information with Treasury to enable them to do accurate forecasting.
There are also other factors that are determined by the global markets like the scale of the Chinese growth and how that affects commodities.
On the expenditure side, last year’s revenue started picking up over the course of the year but then expenditure was not properly controlled partly because it was not properly budgeted.
We knew and we should have known and budgeted properly. For example, the government was hiring extra teachers and health workers during the course of the year.
They also made a commitment to increase public service salary and that was a commitment that was made way back in 2017. That should have been properly forecast in the budget documentation.
But it was not properly forecasted so expenditure was going up and other public servants were taken onboard and the controls were not properly in place.
As the year goes by, the Treasurer is trying to manage the expenditure and close off the books and say no more expenditure.
The problem is that commitments are continuously being made even if the expenditure is not all shown before the end of the year that carries over to the beginning of next year.
In the new budget they are trying to say that we are starting a clean year, this is the new expenditure for the New Year.
And suddenly in the first quarter, you get all this hangover from the previous year that comes in.
The expenditure from the previous year comes in and suddenly your new year’s budget is substantially pre-committed.
You have to spend time saying sorry, we cannot release money for these things in this New Year.
And you end up making a supplementary budget to cut back and reshuffle on expenditure.
In the recent supplementary budget, total appropriation had risen from the ceiling that had been approved in the 2019 budget by about K400, 000.
It also reshuffled something like K1 billion between activities partly to pay debts from the previous year, to pay the increased expenditure for public service salaries among other things and partly to pay all those APEC expenditure which were not properly budgeted.
This was expenditure above what was being budgeted in 2017 and 2018 and earlier on and those extra expenditure had to be diverted from things that had meant to be spent on during 2019.
So that’s the problem. And the government is now trying to accurately determine what the actual debt levels and commitments are from the past and the present.
It is trying to avoid that situation happening again next year of having to have a supplementary budget because there all kinds of unforeseen expenditure happening this year.
However a budget is only a forecast and you cannot really completely predict.

Management of funds
If more revenue is coming through than what was budgeted then a supplementary budget will be put together to determine how to spend that money. You don’t necessarily want to just spend it because that could be inflationary and it means that you might not properly plan it and if you don’t properly plan money, you don’t spend it well.
That is one of the reasons which you will need a Sovereign Wealth Fund (SWF) in-place and it has to be an accountable SWF.
It must be transparent, accountable which the public feels an ownership of it because it is their money so politicians can’t go and just dip into it.
You want the mechanism there of an SWF so that when you do have a revenue that is above forecast when commodity prices are high, you then park some of the money away for a rainy day.
This is so that when you have low commodity prices, low revenue, you can then dip in to this fund which has accumulated and invest in various place.
One of the big problems that PNG has that more developed economies usually do not have is that it is dependent on global swings and troughs (rise and falls of commodity prices).
The purpose of having a SWF is to do things properly by managing the money well.
What you don’t want to be doing is what we have been doing which is smoothing out the swings and troughs.
When the commodity prices goes down, you dash off and borrow heavily.
That is a legitimate exercise if you are going to have a short term of drop in prices and it then goes back up again and you can repay.
If it is a longer term and a downturn in prices and you are not managing the budget that well and you go and borrow and continue to do so, the borrowing will accumulate and debt burden will also accumulate.
Someone is going to pay that back.
And that burden is obviously passed on to the next generation if the government is not careful.
So what you want to be doing is to accumulate money and have good revenue when the times are good and build that up into a SWF.
You want to have the money, invest it in good places so when the times are down, you can draw on those funds rather than having to go and borrow.
Those are some of the issues or priorities that we would like to try and move on to.
In the last few years the country has had tough budgets were it has not been able to grow those budgets although it has expended by default due to prior commitments.
In 2020, it is going to be another tough year because there is no big bonanzas in the pipeline (projects) and it is really important that the government doesn’t go tying itself.
As we have seen in the past, the big resources projects may grow the economy overall but they don’t necessarily convert into extra revenue.
So spending in advance of when the actual revenue comes in is really something that the government has to be cautious about.

Public awareness on the budget
It is important that the public is aware of the budget process through government awareness through government websites, parliamentary websites and through the media.
This is basically the income and expenditure so the public is paying money into the government coffers as taxes,” he said. The government is then going to spend their money, public money.
So it’s really important that the public knows why they are giving the government money to deliver goods and services on their behalf.
In PNG, we really should be increasing the awareness right through the budget process.
Treasury earlier in the year invites the public to make submissions, to make comments and things that they would actually like to see in the budget.
We also do an exercise every two years which is called the Open Budget Process, and that exercise is to increase the awareness of the level of the budget process.
It’s to increase the awareness among obviously the members of parliament, the government participants but really among the public as well so they know.
This year the country has had a fair share of budgets from a supplementary budget as well as the main budget.
Obviously we had a change of government and quite a number of discussions on issues that relate to the budget were presented.
This is the government’s most important piece of tabling of a document, including a bill or a series of bills.
It is the most important event conventionally in one year.
You can have votes of no confidence and you can change governments but standardly, the budget document is the most important process and it will include the budget appropriation.
The bills are submitted for parliament to approve the ceiling under which the allocation for entities to spend during the course of the year.”

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