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Playing with numbers: Cheap politics trumps bad economics

Paul Flanagan
Paul Flanagan - making sense of the PNG budget numbers (and the political spin) for our readers

PAUL FLANAGAN | PNG Economics | Edited extracts

CANBERRA - The O’Neill-Abel government continues to refer to how new loans from the Asian Development Bank and the World Bank will help with Papua New Guinea’s budget and foreign exchange problems.

But why have they let K418 million in cheap loans slip through their fingers, especially for good projects already approved under PNG’s planning processes?

This is one of many questions raised by Treasurer Abel’s 2017 fascinating and worrying final budget outcome (FBO) report which, given the number of errors it contains, was clearly rushed.

When looking at the claimed total levels of government expenditure and revenue, it is interesting that the 2017 budget outcomes match those of Abel’s predecessor, now opposition leader Patrick Pruaitch.

One would have thought they would be closer to the figures contained in Abel’s much trumpeted 2017 supplementary budget.

Specifically, total revenue estimates were 11 billion in the Abel supplementary budget with the 2017 FBO being K11.5 billion – precisely the number of Pruaitch’s previous 2017 budget.

On the expenditure side, Abel’s FBO was K13.3 billion, again exactly the same as Pruaitch’s 2017 budget and a significant increase over Abel’s K12.9 billion supplementary budget.

Former treasurer and now opposition leader Pruaitch was more accurate in his aggregate forecasts than his successor Abel.

However, there is more.

The movement in Abel’s figures mask a significant shift between domestic funding and donor funding. Donor funding increased by K471.8 million between Abel’s supplementary budget and the final budget outcome.

It could be that this reflected a shift to increased aid dependency; although it is possible it represented a more accurate accounting of donor flows.

The 2017 FBO also provides interesting information on what happened to the budget between 2016 and the claimed results for 2017.

In aggregate, revenue increased by about K1 billion. All of this was absorbed by an increase in operational expenditure of K1 billion. However, there were reductions of K908 million in capital expenditure and K418 million in concessional loan projects – both ‘easy’ ways to cut a budget but undesirable in terms of infrastructure and similar projects.

But, when combined with revenue increases, they were enough to allow Abel to claim the budget deficit fell by K1.3 billion.

Frankly, this is not the type of structural improvement one is looking for when lowering the deficit. Having all the reduction based around reducing capital expenditure is of concern as it lowers PNG’s future growth potential.

Of particular worry is the cut in concessional loan expenditures of K418m. These ‘concessional loans” are likely to be from sources like the World Bank and Asian Development Bank. Such loans are cheap – interest rates of 2-4%, much lower than the costs of borrowing from PNG’s domestic finance markets (where rates are 8% for one-year government bonds and around 12% for longer-term borrowing.

World Bank and ADB loans are also programs that have generally gone through strong and transparent project design and contracting methods.

This is the type of financing source that PNG should be seeking to increase rather than cut as they did in 2017. It was important to reduce the historically high budget deficits but doing this by slashing infrastructure programs and giving up concessional loans is difficult to explain.

In future articles, I’ll examine in detail why government expenditure is likely to be considerably greater than claimed by the final budget outcome (FBO) report. And I’ll also investigate why revenues are also likely to be lower than claimed.

But if you can’t wait for these revelations to come, my conservative estimate is that the 2017 budget deficit is likely to be at least K1 billion greater than claimed and it could be as high as K2 billion.


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