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No course correction in PNG budget

It is no secret that the PNG economy is facing some very tough times.

Houses in Tubusereia Village, Central Province, November 2017 (Photo: Bradley Kanaris/Getty Images)
Houses in Tubusereia Village, Central Province, November 2017 (Photo: Bradley Kanaris/Getty Images)

It is no secret that the Papua New Guinea economy is facing some very tough times. The collapse of global commodity prices, a severe drought, an ongoing foreign exchange crisis, and questionable government spending have all contributed to a dramatic reversal of fortunes for a country that just four years ago had the fastest rate of growth in the Asia Pacific.

The 2018 budget was handed down on Tuesday and is the first in this government's second term. It offered a chance for a course correction to address some of the underlying drivers of the country's economic malaise. Unfortunately, and unsurprisingly, the government has not seized this opportunity. Still, there are aspects of the budget that deserve praise.

What to like

One bright spot of the controversial 2017 elections was the emergence of Charles Abel as both Treasurer and Deputy Prime Minister. Abel, through an ambitious 25-point '100-Day Plan', has injected a sense of urgency into the portfolio. In his budget speech, Minister Abel provided a point-by-point update on the progress of the Plan, which expires 2 December, and it appears considerable progress has been made. Minister Abel seems to have a genuine desire to shake up the status quo and we should hope that the pace and intensity of this reform agenda can continue.

Abel's budget speech was also upfront about the weak state of the economy after it 'endured a series of economic shocks'. Emphasising fiscal discipline, Abel acknowledged that the government was facing a revenue crisis. Indeed, government revenue now only represents 13% of Gross Domestic Product, well below the long-term average of 32%. Abel argues that 'need to identify why our GDP growth is not being matched with a corresponding growth in revenue'.

We already know some of the answers as to why revenue has collapsed: declining capacity of revenue collection agencies, accelerated asset depreciation of new major resource projects, revenue streams being channelled off-books through state-owned enterprises and tax and compliance avoidance. All have contributed. Above all of these issues is the reality that PNG's non-resource economy is now in the throes of a recession, a point not picked up by the Treasurer.

Yet acknowledging the severity of the revenue problem is certainly a prerequisite to solving it, and Abel does put forward some reform proposals that are steps in the right direction.

What not to like

Unfortunately, the language of the budget speech does not stack up with the numbers. Both revenue and expenditure are estimated to be two billion Kina, or roughly 17% and 15% respectively, above numbers found in the 2017 supplementary budget. This hardly seems credible.

With so many expenditure commitments considered key deliverables for this government (the decentralisation agenda, including fully funding the controversial constituent funds used to buy political stability; APEC 2018; free education, and so on), the Treasury is caught in a straightjacket of spending.  

In an effort to make the deficit spending look somewhat achievable, the budget announced a number of one-off revenue collection efforts. These include yet another attempt at a sovereign bond, further squeezing of state owned enterprises, and budget support from the World Bank and Asian Development Bank.

If you have been watching the PNG budget over the last few years this is a very familiar story. We have seen similar promises in multiple previous budgets. Unfortunately, the government has consistently failed to deliver on these revenue generating efforts. This results in the need for a supplementary budget with much lower revenue projections and a deficit that the government simply cannot finance. In response, expenditure is slashed in a way that ultimately protects the government's priority areas of expenditure at the cost of recurrent expenditure in education and health.

While there is a new Treasurer in the chair, the administration and the government is ultimately the same. Their failure to deliver on one-off revenue injections in the past is a body blow to the credibility of the budget. I hope that I am wrong, but I worry that this time next year, just as the dust is settling on a successful APEC leaders' summit, we are going to see history repeat itself.   

Pacific Research Program

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