2018 National Budget – Economic & Development Policies

FOREWARD

It is my great pleasure to deliver the 2018 National Budget which is my first substantive budget as the Treasurer in the new O’Neill-Abel Government. The 2018 Budget marks the beginning of the new Medium Term Fiscal Strategy 2018-2022 that aims to confront the current set of challenging fiscal conditions with vigour, including the current subdued economic conditions and depressed revenue, strengthen the macroeconomic and fiscal fundamentals of the economy, and get the economy moving forward.

At the same time, the Budget will the Government’s social spending priorities and improve the opportunities for people and the standard of living for ordinary Papua New Guineans.

In recent years the PNG economy has endured a series of economic shocks following the rapid growth brought about by the commodity boom and the construction of the PNG LNG project. Commodity prices have fallen and remain relatively low and the severe drought in 2015 added to the difficulties.

A foreign exchange imbalance has developed which has further constrained economic growth, together with rising debt levels and domestic financing constraints. We have had to respond to these shocks by cutting discretionary spending, mostly from the capital budget, which has further suppressed economic conditions.

The shocks have had a much greater impact than initially anticipated and continue to have an adverse impact as we end 2017.

Total government revenue has collapsed as a share of the GDP from 20 per cent in 2012 to 13.4 per cent in 2016 and is expected to decline further to below 13 per cent by end-2017. This has resulted in larger than anticipated budget deficits and delayed the projected return to a balanced budget.

Furthermore, within the overall expenditure envelop, a number of categories have expanded, particularly personnel emoluments and interest costs. As part of its decisive and responsible management of the economy, when the lower economic growth rates were realised, the Government pursued fiscal consolidation with a significant reduction in expenditure over the past few years.

However, given the difficulty of even slowing the growth in these rigid categories of expenditure, especially against a backdrop of the continuation of subdued economic conditions, most of the burden of adjustment fell on the much-needed and productive capital expenditure Budget.

The 2018 Budget and medium-term strategies we have formulated will combat these adverse trends and get the economy moving forward again with some momentum. The strategy will pursue three parallel paths: (i) to halt the declining revenue trend then lift collections onto a higher sustained rising trend over the medium term; (ii) to reign back locked-in and less productive expenditure categories onto more sustainable paths to create space for a lift in more productive capital spending that will get the economy moving significantly forward again; and (iii) improve debt management and cost of financing and extinguishment of the foreign exchange imbalance.

The international outlook is becoming more positive, commodity prices have started to trend higher and international capital, particularly into emerging markets, is starting to expand as investor’s appetite for risk improves. We need to be ready to capitalise on these more positive international developments. The APEC summit in 2018 will allow PNG to showcase its

readiness for enhanced capital and trade flows. The 2018 Budget will provide the platform for fixing our fiscal problems and then building optimism for growth and development.

The Government announced its intentions in a 100 Day Plan to kick start the Alotau Accord 2. The 25 policy actions of the Plan were specific interventions aimed at restoring fiscal discipline, addressing the foreign exchange imbalance, enhancing revenue, strengthening our economic base and improving governance and were reinforced in the 2017 Supplementary Budget. The 2017 Supplementary Budget and 2018 Budgets are Points 1 and 2 in this Plan.

The Accord also operationalises the longer term development plans based on Vision 2050 and StaRS. These will be articulated against specific indicators and sectoral interventions in the upcoming Medium Term Development Plan 3, according to the National Planning Act, 2016. There is a specific focus on reinvigorating growth through SMEs and the tourism and agricultural sectors that will underpin broad based and inclusive economic growth structures.

In the 2018 Budget the Government will establish in the commercial banks a dedicated SME fund of K100.0 million for concessional lending, and an agricultural commercialisation fund of up to K100.0 million. Furthermore, a number of key policies associated with the 2018 APEC agenda will be progressed, such as advancing financial inclusion through financial literacy programs, adopting digital financial services and spreading mobile banking capabilities.

Importantly, the Government will continue to invest in key national infrastructure programs in 2018, particularly, the Highlands Highway, coastal jetties, the missing link roads program, hydro and gas power generation stations, and the international submarine cable project. These are important transformational projects that will reduce the cost of doing business, improve market access for rural farmers, and improve and lower the cost of communications for businesses and consumers.

The Government’s key policy priorities and programs, such as the Services Improvement Program, tuition fee free and free health care programs will be maintained to ensure the board- based consumption and delivery of goods and services to our people.

The 2018 National Budget Expenditure envelope is set at K14,718.0 million against a revenue projection of K12,731.0 million. This translates into a fiscal deficit of K1,987.2 million, or 2.48 per cent of GDP. This is expected to maintain the total debt-to-GDP ratio at just above 32 per cent of GDP, which is well within the approved range of 30.0 per cent to 35.0 per cent of GDP prescribed in the Fiscal Responsibility Act (amended 2017).

The 2018 Budget is consistent with the stringent and prudent fiscal anchors established in the new MTFS 2018-22 which comprise:

  • Lifting the total revenue (excluding grants) to GDP ratio to 14.6 per cent in 2018 and to target 14.0 per cent by 2022;
  • reducing government expenditure from 18 per cent of GDP in 2018 to 16 per cent in 2022;
  • reducing the government debt to GDP ratio to 30 per cent by 2022 and ensuring the sustainability of the debt profile, including the shift towards external financing through budget support loans from the World Bank and ADB and through an inaugural US Dollar bond issuance program;
  • maintaining the non-resource primary fiscal balance on a trajectory that will achieve a zero annual average balance over the medium term (to 2025);
  • ensuring that Personnel Emolument costs are contained and brought down from 49 per cent of total non-resource revenue in 2017 to 31 per cent by 2022; and
  • ensuring that two-thirds of primary expenditure is allocated to key MTDP Enablers and that the public investment to GDP ratio is lifted from 4 per cent of GDP in 2017 to at least 6 per cent by 2022.

To fund the adjustment costs and lift the economic growth momentum, yet stay within the set medium term fiscal anchors, the 2018 Budget will focus decisively on revenue through the first ever Medium Term Revenue Strategy which has been developed with the International Monetary Fund.

The Strategy has had substantial input from the Government’s 2015 comprehensive Tax Review and recent technical assistance from an International Monetary Fund team. Some of the key initiatives to be implemented in 2018, include the establishment of a large taxpayers’ office to improve compliance and tax service, a number of tax measures to raise additional revenue and the announcement of the drafting of a new Tax Administration Act to modernise and simplify tax administration.

The Government is also introducing legislation per the 100 Day Plan compelling all statutory authorities and other government agencies collecting non-tax revenue under statute to remit the collection of those funds to the Consolidated Revenue Fund. The Government has also commenced the process of transferring trust fund balances and assets back into the Consolidated Revenue Fund and enhancing the dividend flows from state-owned enterprises.

Financing the 2018 Budget will be critical and much will depend on the portfolio shift towards lower-average cost external debt and this will be achieved by seeking highly concessional World Bank and ADB budget support funding that will be combined with a US Dollar commercial bond program. The portfolio shift will also: firstly, relieve pressure on the tight domestic security market allowing the development of the less risky, longer term domestic bond market; secondly, increase the level of credit to the private sector; and, finally facilitate the extinguishment of the foreign exchange imbalance.

There are important adjustments to the tariff regime and housekeeping tax legislation.

Overall, the 2018 Budget is a forthright step towards strengthening the resilience of the PNG economy to withstand future economic shocks. It lays the groundwork for fiscal consolidation and it will reignite the economic growth momentum and boost optimism for the future. It will provide the platform to showcase the best of PNG to the world at the upcoming APEC summit.

It is “Time to pull our socks up and go for it”.
I commend the 2018 Budget to the Honourable Members and to the people of Papua New

Guinea.

……………………………………
HON. CHARLES ABEL, MP
DEPUTY PRIME MINISTER AND MINISTER FOR TREASURY

http://www.treasury.gov.pg/html/national_budget/2018.html

 

 

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