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PNG’s 2017 budget 'fails credibility test & is fiscally fraudulent'

Paul Flanagan 2PAUL FLANAGAN

PAPUA New Guinea’s 2017 budget, which was brought down today in Port Moresby, was a key opportunity to demonstrate the credibility of the O'Neill government’s economic management before next year’s election.  It fails.

Foolish games with numbers and unrealistic assumptions severely undermine the budget’s credibility. Indeed, the level of deception arguably approaches fraud.

This preliminary assessment of the budget documents will be updated over the next few days. Hopefully I will find more good in the detail.

The biggest winners from the budget are overseas petroleum shareholders with proposed cuts in the company tax rate from 45-50% 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. 

In stark contrast to the government’s claimed priorities, the real cuts to health are 29%, to education 18% and to transport 35%.

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 fees means that these clinics are forced to operate without basic medicines or to close down altogether. “Free health” becomes “No health”.

Here are other examples of decisions 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 five or eight 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 Sovereign Wealth Fund from the “sale of shares”.

This is a surprise as there appears to be no public announcement of that sale having been completed.  In accounting terms, this is simply swapping a 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% in nominal terms, and over 30% 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, with smaller deficits predicted through to 2019, it was admitted that interest costs were likely to rise to K1,553.6m by 2019.

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.

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 such as the exchange rate and policies likely to undermine growth mean that the best option for fixing the budget - stronger rates of broad-based growth - is unlikely.

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