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THE 1997 MAGICIAN’S BUDGET: the NBF chicken coming home to roost

13/03/2012

[The Fiji Times, 9 Sep 1996]

The Budget speech by the Minister of Finance conveys the message that, as a result of this Government’s policies over the last decade, theFijipublic is now doing extremely well, and will be even better off by 1999.

The Government lists as its achievements, a “tremendous increase in income”,  “successfully reduced” inflation, and substantial growth in employment over the last ten years.

But this is a magician’s budget with sleight of hand text and numbers.  The achievements are illusory, and what little there are, owe little to Government policy.

The reality is that the important numbers behind the 1997 budget show that at last, theFijipublic will begin to pay for the Government’s previous blunders.

Government will borrow much more (with massively increased public debt), in order to spend much more.  However, most of the extra expenditure will pay for the NBF disaster, and not go towards development.

While there is a rhetoric of concern for social needs such as the alleviation of poverty and good health, these objectives will not be getting any extra cake (since the Government is unable to reduce any one else’s share).

Most unfortunately, Government has not presented in this Budget, any concrete strategies and ideas to help the economy grow into a bigger cake.

The 1997 Budget is essentially a stay-put budget, designed primarily to accommodate the NBF disaster.

Increased Government Expenditure

While the Budget Speech claims that Government wants to be smaller, actual Government net expenditure will be increasing relative to the GDP, rising from 31 percent in 1996 to 34 percent in 1997 (even though the percentage is expected to go down thereafter).

Government expenditure will increase significantly, from $894 millions to $1036 millions (an increase of 16 percent).  However, the normal Operating Expenditure will increase by a mere 2 percent (which is less than the rate of inflation).

The public debt payments will increase by 8 percent.  While the Budget presents the Capital Expenditure to increase by 80 percent (or by $110 millions), some $133 millions will go towards the NBF bailout, and other payouts by the Government.

The rest of the actual Capital Expenditure will decline by 17 percent- hardly desirable for development objectives.

There is no increase for poverty alleviation, or for health.  There is some increase for education (with good proposals for improving incentives for rural teachers and fee subsidies) but otherwise unlikely to have much effect, given the pervasive problems in education.  Institutions like FIT and USP continue to be squeezed.

But this is all to be expected.  With increased Government expenditure on the public debt and the financial disasters, other sections have to be squeezed, especially since there is a dramatic increase in Government deficit.

Increased Government Deficit

Government revenue, with little change in Government policy, is expected to increase by a mere 3 percent.

The net deficit is therefore expected to balloon out from the $92 millions estimated in 1996, to $220 millions estimated for 1997 (a massive increase of 138 percent).

Increase in Public Debt

The Budget Speech by the Minister of Finance admonishes theFijipublic that the Fiji Government, like “every family and every household”, should not-over spend, but learn to live within their means.

This “balanced budget” advice is the current fad everywhere in the world.  If it were really correct, no firm, household, or country, would ever borrow money.  Surely, the more important issue is the actual use of the borrowed money.

A firm may borrow money to invest and make more profits; a household may sensibly borrow money to pay for items over the long term; a country may borrow money to pay for economically productive infrastructure like hydro dams or highways.

However, Fiji’s public debt is increasing now in order to pay for past mistakes, not for development purposes.

Fiji’s debt will rise from $992 million in 1995 to $1420 million in 1998 (an increase of 43 percent).  In terms of the economy’s “capacity to pay”, the Debt:GDP ratio will rise from 42 percent in 1995 to 52 percent in 1997.  Thus a much larger percentage of the country’s labour over the next ten years will go towards paying off the public debt.

It is quite dismaying, in fact, that most of the negative developments seem to be hidden by “sleights of hand” in the Budget Speech and the Supplements.

Sleight of Hand 1

Unusually, the 1997 Budget Speech, instead of focussing on estimates for 1997, continuously refers to what the Government will achieve in 1999 (who knows what stateFiji’s public finance will be in then?).

The Budget Speech makes the risky claim that Government expenditure in 1999 will be lower than forecast for 1996.

The reality is that the actual revised estimate for the 1996 expenditure ($976 millions) is considerably higher than the original estimate of $894 millions given by the Minister in the last Budget ($80 millions for the NBF).

While the Actual 1995 Operating Expenditure was also higher than estimated, and the overall reduction in total expenditure for 1995 was at the expense of lower capital spending and lower public debt charges.

Again, with respect to future revenues, the 1997 Budget Speech refers to the $100 million plus they expect to raise in 1999 (although only a small increase is expected for 1997).

The 1997 Budget goes on to claim a significant Government “first” for the current generation: a budget surplus for 1999!

It then comes back to reality, acknowledging that in the short term the deficit will shoot up, but the language is again strange.

Sleight of Hand 2

The Budget Speech states that while Government is unfortunately increasing Government expenditure in the short run, this “mainly relates to the Government’s bold and decisive measures in resolving the NBF crisis”.

While elsewhere referring to the unacceptably high level of debt arising out of the NBF bailout, there is reference to the NBF being restructured “with minimum cost to the taxpayers of this country”.

It is extremely unfortunate that there is no acknowledgement that the increased costs to theFijipublic are due, in the first place, to mismanagement by Government.  On the contrary, vices are here being presented as virtues.

This criticism is not made merely because of a wish to see Government admit fault.

The real problem is that there is no indication (despite the few cases now trickling into court) that Government will learn from past mistakes and that similar disasters are not going to recur over the next decade, with other public institutions.

The Budget Supplement points out, in fact, that the Fiji Government’s Contingent liabilities add up to a massive $2.3 billions, including one billion dollars for FNPF and $691 millions for public enterprises and statutory organisations other than NBF (which still has a $461 million contingent liability).  What trust can the public have, that Government will not repeat its mistakes?

Thus while Government talks of less Government involvement and subsidies of public enterprises, at the same time, it wants to pump in an additional $5 millions into PAFCO, merely to reduce PAFCO’s debt. There is no guarantee that PAFCO will continue to survive without further injections.

Sleight of Hand 3

There is a strange view being put across by the Government (Budget Supplement, p 54) that Government financing of the NBF by borrowing in the local market, is not expected to have any negative impact on financial markets and interest rates.

The Supplement suggests that the immediate effect on liquidity may be minimal, and that all that is happening is that some 70 percent of Government’s contingent liability is being turned into a real liability, on the Government’s balance sheet.

The unspoken implications are grossly misleading, implying that the financial markets will not lose and that the Government (and the taxpayers) are having a “free lunch”.

It is clear that the effects are not being felt at the current moment because there is substantial liquidity in the economy, with potential investors not willing to borrow.  This will not be the case forever.

It is preposterous to convey the idea to theFijipublic that Government can borrow an extra $200 millions domestically, without any negative impact on potential private sector borrowers and interest rates.  Especially when the Government loan is to be thrown down the well for past mistakes.  Why not go the whole hog and let Government borrow every single cent in the financial markets?

Any Budget Strategies?

The Government rightly states that sustained economic growth is necessary for the long term improvement of the welfare of our people. However, Government seems to fold its hands and leave it all to the free deregulated, globalised market.

But the free market is not going to create agricultural diversification in the sugar belt or elsewhere, nor is it going to give rise to a range of medium-sized Fijian owned tourism enterprises, or other desirable economic developments inFiji, such as highly-skilled manufacturing of quality products for niche export markets.

It is quite surprising to put together the Government’s Budget statements on agriculture, surely one potential growth area forFiji.  The Budget speech admits that sustained efforts in agriculture over the last two decades (in rice, cocoa, beef, citrus, vegetables, coconut) “have borne limited fruits” (why?).  It claimed that the output of subsistence agriculture rivalled that of the (much assisted) sugar industry and thatFiji’s agriculture needed more competition!

The Budget Supplement states that Cabinet had approved a an agriculture sector revitalisation plan with projected investments of $71 millions over the next 4 years, but then also states that growth in the agricultural sector was “anticipated to be marginal” over the period.

What mustFiji’s farming sector make of all this?

Strange Measures?

The 1997 Budget seems to have thrown up some unusual recommendations, which could have undesirable effects.

The Employment Taxation Scheme will allow employers to deduct 150 percent of the wages of newly hired school leavers or “first-time” workers.  How will the Government stop employers from laying off regular adult workers, in order to obtain the tax benefit of the new employees (who might even be paid less).  And what of casual workers of whom Government has no trace?

Will not Government’s lower increase in excise taxes on local tobacco (and higher increase on imported tobacco) further encourage the use of and higher production of tobacco by the local industry?

And why does Government, in its belt-tightening, also hit revenue-generating ministries, like Inland Revenue, which could probably raise more money for Government through a little bit if extra funding?

[Appeared as “The Magician’s budget: NBF chickens coming home to roost”, The Fiji Times, 9 November 1996.]

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