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Gende is losing its virginity in the name of development

PNG budget – loss of discipline heralds rough ride ahead

Planning Minister Richard Maru and Treasurer Charles Abel (ABC)
Planning Minister Richard Maru and Treasurer Charles Abel (ABC)

PAUL FLANAGAN | PNG Economist | Edited extracts

CANBERRA – In this analysis of Tuesday’s Papua New Guinea budget for 2019, I conclude there is a distinct risk that the country is moving away from fiscal discipline and back into a boom-bust cycle.

The planned 21% increase in expenditure from 2017 is risky and depends on the achievement of high oil prices and GDP growth, both outcomes far from certain.

The fiscal anchor underpinning the 2019 budget was severely breached due to the government spending almost the entire K1 billion bonus from higher oil prices (expenditure, I would note, probably illegal under PNG’s Fiscal Responsibility Act).

The sudden reversal in fiscal policy towards a loose setting in the 2019 budget is probably the major short-term policy concern. The budget strategy released in August indicated expenditure in 2019 of about K14,960 million, a modest increase from 2018’s expected K14,718 million. That seemed fine.

But the actual budget announced on Tuesday turned out to foreshadow spending of about K16,130 million, an increase of 9.6% - a variation that has occurred in less than three months.

One would have hoped that the standard reasons for expenditure growth had been fully built into the 2019 budget strategy (e.g., wage increases, the medium term development plan etc). The quality of this extra K1.4 billion in spending – that is, what exactly it is for - needs close scrutiny.

There had been a major reduction in budget expenditure from K15,454 million in 2014 to K13,319 million in 2017. In nominal terms, this has now been entirely reversed, so 2019’s budget expenditure represents a substantial increase over 2017 of 21.1%.

This significant loosening in fiscal policy is a very different story from the one included in the 2019 budget speech.

As part of its recent budget support loan from the World Bank, PNG agreed that it would use a new fiscal deficit measure – technically termed the ‘non-resource primary balance’.

Legislation had passed the parliament in September 2017 to allow this the new fiscal measure, which was the first condition for the recent $US150 million in budget support from the World Bank.

PNG may by now have received the first release of this budget support assistance, but the current figures indicate it may not receive the second release.

The extra revenue derived this year has flowed mainly from high oil and gas prices. It is unclear how long these will continue. The future revenue estimates are also based on very high GDP growth rates. In a future analysis, I’ll look at their achievability.

On balance, however, there is a distinct risk that PNG is heading back into a boom-bust budget cycle.

To the casual reader that may sound exciting in the same way a roller-coaster does. To us economists it comes close to being the worst news of all.

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