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Charles Abel’s one billion kina (or more) budget blow-out

Summary of likely sources understating 2017 budget deficit
Summary of likely sources used to understate Papua New Guinea's 2017 budget deficit

PAUL FLANAGAN | PNG Economics | Edited extract

You can read Paul Flanagan’s full article, including charts, here

CANBERRA - Deputy prime minister and treasurer Charles Abel’s credibility was on the line. He had made a commitment. Now could he deliver on it?

So did Charles Abel keep his 100-Day Plan promise to reduce Papua New Guinea’s 2017 budget deficit from its unsustainable level?

The answer is almost certainly “no”.

The actual 2017 budget deficit is conservatively estimated at more than one billion kina larger than claimed – largely because the government has not paid its bills or its GST refunds.

The conservative estimate lifts the size of the 2017 budget deficit from 2.4% to just under 4% of GDP. However, the upper reaches of the deficit estimate could be K2 billion more than the K1.8 billion deficit reported in the 2017 final budget outcome.

That’s more than double.

The government made its budget reductions in the wrong way. Expenditure was cut entirely in areas key for PNG’s future growth and concessional loan projects were delayed.

Even using the government’s preferred figures, the blow-out in operating expenditure entirely consumed the claimed increase in revenue. This would have been bad enough.

But operational expenditure K700 million more than revealed and revenue likely K350 million lower than revealed means only one thing.

The operational side of the budget is not under control.

One is left with a sense of unease. Some claimed cuts are just not believable - such as the K535 million cut to education.

The cut of K229 million to superannuation is also not credible.

Games seem to have been played with trust accounts, such as likely deferred payments of GST to provinces of at least K200 million.

The large jump in GST collections is not credible – and can be explained only by a deferral of GST refunds by at least K250 million.

There are clearly large expenditure arrears – the issue is acknowledged by the treasury but one needs to go to parliamentary statements to get an idea of their magnitude. For example, the public works minister alone has acknowledged arrears of K700 million.

Ultimately, the final budget outcome as presented to the public is just too convenient. Treasurer Abel wanted a result no more than the 2.5% budget deficit he promised, and preferably something better. A d his treasury secretary duly delivered a deficit of 2.4%.

The political convenience of the outcome combined with the games in under-reporting expenditure and over-reporting revenue indicate the deficit was adjusted downwards to hide the likely truth.

Abel should have accepted the budget did not turn around as quickly as he had hoped, allowed a bit more time for correcting likely errors in a rushed report and maintained trust in a genuine, even if disappointing, final budget outcome.

But he did not do that. And it is still not clear that he understands the difficulty of turning around five years of poor fiscal management.

The budget itself is not sufficiently transparent to deal with some key issues, especially around the level of expenditure arrears and GST refund delays. Including more information on these two critical areas in the forthcoming mid-year update would help restore some trust.

An implication of this analysis is that budget pressures will be greater in 2018.

In the same way as a household which does not pay its bills on time, deferring spending simply builds up pressure in the future. The 2018 budget was already built on some dubious numbers and adding at least another K1 billion to these highlights the challenge of PNG’s continuing high deficit.

Unfortunately, given the political situation, I do not expect the mid-year budget update due by the end of July to provide a more transparent or honest statement of the government’s actual fiscal position.

One can no longer trust the government’s budget documents. Papua New Guinea will likely go into APEC with many questions hanging over its true economic situation.

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