PNG’s plan to balance the budget

In recent years, PNG has been running record deficits. In 2019, even before the Coronavirus (Covid-19), the budget deficit was already 5 per cent of GDP. The Covid-19 has understandably made things worse, STEPHEN HOWES, KELLY SAMOF write

THE deficit reached 8.6 per cent in 2020 and 7.1 per cent of GDP this year.
Borrowing more during a pandemic makes sense, but it cannot be sustained.
It was understandable, indeed commendable, that the PNG government, therefore, put reducing the deficit at the centre of their 2022 budget, brought down last week.
Indeed, it promised to go further.
Perhaps taking his cue from Australian politics, the Treasurer, Ian Ling-Stuckey, undertook to eliminate the deficit by 2027, and to reduce it every year between now and then.
How is PNG going to achieve this?
With strong revenue growth and tight constraints on expenditure.
As the graph below shows, adjusting for inflation, expenditure in 2027 is budgeted to be no higher than in the current year.
Revenue, however, is projected to climb rapidly, growing at an average of 7 per cent a year in real terms.
The result is an ever narrowing gap between expenditure and revenue, implying less borrowing and a lower deficit every year.
On the revenue side, much attention has been given to the controversial levies on the Bank of the South Pacific and Digicel, which the Prime Minister himself apparently deferred this week until after the election.
Much more could and should be said about these levies, but there are relatively small in the scheme of things, coming to just 0.3 per cent of GDP for 2022.
More important are two other factors that have not got the same attention.
First, on the back of stronger commodity prices, the reopening of Porgera and the maturing of the PNG LNG project, a recovery in resource sector revenue is projected, from a historic low of just 3 per cent of resource GDP in 2020 to 10 per cent in 2027, still below the historical average of 15 per cent, but an increase of 1 per cent of GDP
Second, a recovery in non-resource revenue is projected from 16 per cent of non-resource GDP in 2020 to 19 per cent in 2027, mainly on the back of improved administration. This is an ambitious objective.
Taxes on goods and services (mainly GST) are budgeted to grow at almost 10 per cent a year in real terms between 2021 and 2027, more than twice as fast as the projected non-resource GDP growth rate.
A new goods and service tax monitoring system and tax administration system are both scheduled to be rolled out in 2022, so we soon should have an idea of whether these new tools are up to the job.
On the expenditure side, there are tight constraints on all aspects of the budget, with both the salary bill and the development budget falling by 2-3 per cent after inflation between 2021 and 2027.
Aggregate expenditure is budgeted to grow next year (2022) by 3.5 per cent after inflation.
About half of this is election funding itself, but there are also increases in education, infrastructure, funding to combat violence against women, and, especially, health, all funded in part by the modest increase in aggregate spending and in part by salary savings.
Whether whoever wins the election in 2022 will be prepared to start on the task of cutting expenditure is a big unknown.
The government is perhaps at last getting on top of the salary bill, which grew explosively between 2013 and 2018 (by 43 per cent after inflation), a period in which revenue growth was anaemic.
But the salary bill in 2020 was only 3 per cent more than that in 2018, again adjusting for inflation.
Can the government continue to keep the lid on salaries, especially in an election year?
Perhaps the biggest question about the budget is its economic growth projections.
In the five years before the pandemic, 2014 to 2019, real non-resource GDP grew on average only by 0.9 per cent a year.
The budget projects this to accelerate to an average of 4.6 per cent from 2022 to 2027.
How, especially if government spending is being restrained?
The main drag to growth over most of the last decade has come from the rationing of foreign exchange and an overvalued exchange rate.
Without tackling the foreign exchange regime, can PNG accelerate its growth?
PNG has been unable in the past to sustain a balanced budget.
And given the country’s development needs, and the availability of cheap financing from overseas, it is hardly credible to commit to not borrowing in the distant future.
That said, PNG does need to borrow less, does need to restrain expenditure, does need to increase revenue, and, most of all, does need to increase economic growth.
The 2022 Budget aspires to take PNG in the right direction.
Whether its aspirations can be converted into reality is a much more difficult question to answer. – Devpolicy Blog

Note: The PNG Budget Database has been updated to reflect the 2022 budget. All data used in this blog available in this spreadsheet.

Disclosure: This research was undertaken with the support of the ANU-UPNG Partnership, an initiative of the PNG-Australia Partnership, funded by the Department of Foreign Affairs and Trade. The views represent those of the authors only.

Stephen Howes is the director of the Development Policy Centre and a Professor of Economics at the Crawford School

Kelly Samof is a lecturer in Economics at the School of Business and Public Policy, University of Papua New Guinea

Solomon Islander views: Survey shows ‘deep-seated unhappiness’

By Stephen Howes
THE riots in Solomon Islands last week have thrust the small Pacific country into the international spotlight.
What is their cause?
A useful source is the public opinion survey conducted by the survey firm Tebbutt Research in April and May on behalf of an international NGO, the National Democratic Institute, with funding from USAID.
Tebbutt surveyed 1,249 randomly selected Solomon Islanders by phone, using local interviewers, in English and Solomon Island Pidgin.
(According to the report, mobile phone penetration in Solomon Islands is 77 per cent, and the survey had a response rate of 62 per cent.
Quotas based on province, gender and age were used.) A lot of the questions were about the Coronavirus (Covid-19).
Given what has just happened, the more general questions are now of greater interest.
To start with the most general, 66 per cent of respondents thought their country was heading in the wrong direction.
Only 18 per cent said it was going in the right direction.
Solomon Islanders aren’t the only people to be negative about their future, but a figure of 18 per cent does put them at the pessimistic end of the international spectrum.
Respondents were also asked whether things were getting better or worse in relation to a number of specific issues.
Corruption and unemployment headed the list of concerns, with “getting worse” responses exceeding 90 per cent, followed by land, cost of living, and violence against women, where such responses exceeded 80 per cent.
Access to basic services and schooling were the only areas where as many people felt things were getting better as they did getting worse.
People were asked about the most important issues for government to address.
Unemployment was the most popular response (36 per cent), followed by cost of living (27 per cent) and corruption (26 per cent).
Climate change didn’t rate.
There were quite a few questions about corruption – 70 per cent of respondents thought the government was doing a poor or not so good job fighting corruption.
Respondents also had to rate different institutions in relation to their corruption concerns – 94 per cent were very or somewhat (mainly very) concerned about corruption in the Constituency Development Funds, the money given to each MP to spend in their electorate (and one of the largest such schemes in the world).
Parliament followed second with 91 per cent concerned about corruption there, forestry third with 89 per cent.
A lot has been made of ethnic or inter-island tension in Solomon Islands, especially between those from Malaita and those from Guadalcanal, the country’s two most populous islands. Some of the results are broken down by province and they look quite similar – 73 per cent of Malaitans think the country is going in the wrong direction, slightly more than the 68 per cent of those from Guadalcanal.
But concerns around corruption were higher in Guadalcanal.
The responses certainly point to some deep-seated unhappiness.
If the three problems identified as the most serious (unemployment, cost of living, corruption) are also ones that nearly everyone (almost or more than 90 per cent of the people) thinks are getting worse, that is surely a recipe for frustration and anger – and perhaps violence, if the biggest of those problems is a lack of jobs. – Devpolicy Blog