PNGBLOGS

by PAUL FLANAGAN Deputy Prime Minister and Treasurer Charles Abel’s credibility was on the line. Did he actually deliver on the 100 Day Plan promised reduction in PNG’s 2017 budget deficit from unsustainable levels? The answer is almost certainly “no”. The actual 2017 budget deficit is conservatively estimated at over K1 billion larger than claimed – largely due to not paying bills or GST refunds. The conservative estimate would lift the size of the 2017 Budget deficit from 2.4% to just under 4% of GDP. However, the upper bound deficit estimate is K2 billion larger – or more than double – the K1.8 billion budget deficit reported in the 2017 FBO. Even a 4% outcome would have better than the budget deficits of 2014 to 2016. However, the reductions were made in the wrong way. Expenditure was cut entirely in areas key for PNG’s future growth and concessional loan projects were delayed. Even using FBO figures, the blow-out in operating expenditures entirely consumed the claimed incre

by PAUL FLANAGAN In an article for the ANU’s Development Policy Centre eighteen months ago (see here) , I congratulated PNG’s central bank (BPNG) for its very constructive stance in stopping its effective printing of money to fund the government’s budget deficit. I noted how this reflected positively on the independence of BPNG, an independence built into its charter by Sir Mekere Morauta (PNG’s former Prime Minister) and Sir Wilson Kamit (PNG’s central bank governor from 1999 to 2009) in response to PNG’s last major economic crisis in the late 1990s. Unfortunately, this independent role appears to have been reversed from the start of this year. Based on the latest Quarterly Economic Bulletin released on 18 November 2016 and its accompanying tables (esp Table 2-3 for BPNG’s assets sheet see here ) PNG appears to have returned to a very slippery slope of effectively printing money by back-stopping auctions in government securities – a practice initially warned about in September 2

by PAUL FLANAGAN PNG is a high-taxing and very high-spending country relative to its Asia Pacific peers . Most of any adjustment to the fiscal balance should therefore occur on the expenditure side. PNG is planning to do this with a drop in the expenditure to GDP ratio from the highest level ever, of 38.1% in 2013, to its lowest level ever, of 24.6% in 2020. PNG has never attempted such a fiscal consolidation – not even to recover from the fiscal crises of the 1990s. Putting this into an international perspective, PNG is seeking to adjust government expenditure by 13.5% of the economy. This is more than double the government expenditure reductions undertaken by  Greece  of 6.3% (from 51.4% of GDP in 2010 to 45.1% of GDP in 2015). Of course, PNG is not facing a Greek-style fiscal crisis (at the start of its crisis Greece had a broadly similar deficit of 11%, but a much higher public debt level of 170% of GDP), but it is planning a similar or more draconian response. PNG is seekin