PNG’S 2017 BUDGET – FISCALLY FRAUDULENT

by PAUL FLANAGAN 
PNG’s 2017 budget was a key opportunity to demonstrate the credibility of the government’s economic management before next year’s election.  It fails.
Foolish games with numbers and unrealistic assumptions severely undermine the budget’s credibility (detailed examples on the revenue and expenditure side are provided below). Indeed, the level of deception arguably approaches fraud.
This preliminary assessment of the budget documents will be updated over the next few days.  Hopefully more good will be found in the detail.
A major winner from the budget are overseas petroleum shareholders with proposed cuts in the company tax rate from 45 or 50% down to 30%. This will be of particular joy to Oil Search and others that will gain from a new possible Papua LNG project – but they are possibly accessing the lower rate for condensate already. PNG’s tax regime for the petroleum sector was already considered generous relative to world standards – it now will be even more so. And although some of the changes mirror suggestions in the the Sir Nagora tax review, off-setting elements such as the introduction of a capital gains tax and reduced tax incentives are not mentioned in the budget changes.
These are interesting choices by government given major cuts in key areas such as health, education and infrastructure , with further foreshadowed cuts of 11% in nominal terms and 37% in real terms from 2017 to 2021.  Even from the 2016 budget, the cuts are very large.  Extraordinary, and in part reflecting the needed priority on the election but the more optional K250m for APEC in 2017, the administrative and “community and culture” areas are the only sectors that grow in real terms between the original 2016 budget and the 2017 budget.  As shown in the table below, in stark contrast to the government’s claimed priorities, the real cuts to health are 29%, to education are 18% and to transport are 35%. The sectors of key government priority are shaded in green.
png-sectoral-expenditure-2017-budget
Of course, key election elements are protected.  For example, K20m is still provided to fund the “free health” policy.  This represents less than 2% of the total health budget and is miniscule relative to the K315m cut in health in this 2017 budget.  The K20m “free health” policy is a smokescreen for the major cutbacks in health that are hurting church services and the level of assistance provided by health centres.  There is essentially no mechanism for distributing these funds down to rural clinics – so simply banning the collection of any fees means that these clinics are forced to operate without basic medicines or to close down altogether. “Free health” becomes “No health”.
Following are some examples that severely damage the credibility of the budget.
On the revenue side,  the budget assumes that an extra K16 million for the Internal Revenue Commission will magically produce a K400 million increase in revenue – all in 2017. Increased resourcing to the IRC should help increase revenues, but it has not helped over the last two years despite more and better paid staff.
  • The practicalities of needing to go through additional recruitment and training of new staff are ignored.  Such a pay-off figure of K1 extra in IRC resources producing an extra K25 in revenue is unrealistic – the figures used by tax agencies is more usually in the range of 5 or 8 to one over time, not 25 to one.
  • Company tax levels are expected to increase from an estimated K2,305m in 2016 to K3,322m in 2021. This 44% increase just does not seem credible – and it is a vital K1 billion assumption in closing the budget deficit hole.
  • Meanwhile, there are major revenue holes that appear in the budget that are very difficult to explain. In the 2016 revised budget, there is K725m shown as payments into the SWF from the “sale of shares” (Table 14 in Appendix). This is a surprise as there appears to public announcement of that sale having been completed.  In accounting terms, this is simply swapping on capital asset for cash – it should be shown as a ‘below the line’ transaction which should not affect the deficit.
  • Meanwhile, Kumul is paying no dividends through the SWF.  The SWF is effectively dead.
On the expenditure side, from 2017, there is a straight cut of 11 per cent in nominal terms, and over 30 per cent in real terms after allowing for inflation, in all sectors other than provinces.
  • So the claim is that debt servicing interest costs will fall from K1,480m in the revised 2016 budget down to K1,393m in 2017, and then down to K1,290m in 2019.
    • This is just not possible given growing nominal debt levels and the increasing costs of moving the debt portfolio to longer terms.
  • At least in the 2016 budget, were smaller deficits were predicted through to 2019, at least it had the sense to admit that interest costs were likely to rise to K1,553.6m by 2019 (compare the figures in Table 12 of both budgets).
  • Once again, this type of game, which produces K263m to close the budget deficit, appears to be deliberate and simply deceptive.
  • The flat cut of 11% to all sectors also indicates a severe lack of forward planning and budgeting systems.  Numbers appear to have changed to produce the desired reduction in the deficit and to control debt levels.
The financing for the budget deficits do not seem to be fully considered.
  • For example, Table 10 indicates for the 2016 revised budget K2,800m in extraordinary financing.  This is the value of the Sovereign Bond that was assumed in the 2016 but has not been delivered – and is unlikely to be delivered by the end of the year.
  • As noted above, it is also assumed that the PNG LNG shares are sold by the end of the year for K725m.
  • These are key sources of financing given the difficulties of accessing domestic bond markets. There may be a cash flow crunch around the corner if these assumptions do not occur.
Overall, it is important to map out a course to return to fiscal sustainability. The massive deficits entered into in 2013 and 2014 were a huge gamble, and the fall in commodity prices means the gamble did not pay off. However, fiscal policy must be credible. There are too many at best errors, but more likely deliberate manipulations in this budget to restore credibility in PNG’s economic management. And poor policy choices in other areas covered in other blogs such as the exchange rate and policies that are likely to undermine growth (SME, land, agriculture) means that the best option for fixing the budget, stronger rates of broad-based growth, is unlikely.