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FLP Budget 2000: just who is paying for the dinner? [The Fiji Times, 8 Nov 1999]

29/03/2012

  Surprisingly, the 2000 Budget pleased everyone.

Business representatives (including the previous Minister of Finance) are pleased, as also are NGOs.  What’s going on?

The usual budget items were there

The detailed budgetary allocations and reallocations of expenditure were as expected.  There were the desirable and praiseworthy “goodies” like the very significant increases in the budget for education, health, and social welfare, and especially their capital expenditure components.

And Government had to keep some of its election promises like the removal of VAT from basic items, converting the loan to sugar farmers into a grant, and providing $20 millions for exiting ALTA farmers.

  But who is paying for all the goodies? 

Somebody has to.  If “everyone” out there is happy, you know that “everyone” does not understand where the money is coming from.

The business community is happy because of what this Labour-led Government is not planning to do:  not increasing corporation tax, or income tax at the higher levels; not introducing capital gains tax, death duties, gift duties, nor higher duties on new cars.  Government is not increasing penalties for evading taxes.

In fact, bold statements of Government’s development strategy reassured the businessmen, especially on policy issues that Labour Governments are feared for, the world over.

To tackle poverty, Government is focusing, not on redistribution, but on making the economy grow- making the pie bigger. Government will “not kill the golden goose”; they will provide relief on personal taxes and not increase corporate taxes; and have a low tax regime that “encourages effort, entrepreneurship and hard work”.   All SVT stuff.

Employers were happy

Employers were happy to hear Mr Chaudhry say that “excessive wage increases are a major contributor to inflation” and that productivity improvements must drive the demands for wage increases.  Obviously minimum wages of $120 per week are out, unless matched by productivity.  All SVT stuff.

Contrary to the election campaign rhetoric, there is a more selective attitude to public enterprises and privatisation.  Public enterprises will be expected to deliver better services and realise their commercial objectives.  Government will not allow public enterprises to continue making a loss and will take hard decisions if necessary (closing down? selling off?).

Voluntary redundancies will be acceptable if managed properly after consultation with unions.  And Government will seriously look at the option of contracting out of services suitable for the private sector.

Government may lose 165 jobs (PWD and Government Shipyard), according to the Detailed Budget Estimates (p 362).

Are these numbers (or any establishment numbers in the Budget Estimates) to be believed?  Or is PSC not co-ordinating with the Ministry of  Finance?

Privatisation will continue

And Government will continue to sell its shares to the private sector, for instance partial sale of the hardwood plantations to a strategic partner, and further sale of ATH shares.

Thus privatisation and redundancies will continue, but on a more selective basis than the SVT’s indiscriminate “free for all” which both NFP and Labour were critical of, before the elections.

Trade policies?

Government now sees the need to compete for trade and investment in a global competitive environment.   In trade policy, Government will maintain the upper limit of 27% on tariffs.  There will not be excessive protection of local manufacturers.

However, Government is still not differentiating between those local manufacturers (like the packaging and assembly types) who contribute very little value added (and employment) to the economy, and those who do.

The former, even with a 27% duty protection will still have a much higher effective rate of protection which unnecessarily takes money from the pockets of consumers and puts it into the pockets of businessmen who contribute little to the country, apart from false images of “industries”.

  So what of the measures to help the poor? 

Undoubtedly, the higher allocations to education, health, and social welfare means that there will be some redistribution of the national cake towards the lower income people, through the expenditure benefits.

One new and desirable change in taxation (which some employers are whining about) is the 0.5% levy for occupation health and safety purposes.  This will generate some $4 millions for much needed worker benefits in safety at the work-place (where workers continue to die and lose limbs with pathetic frequency).

Yes, there are changes in the taxation regime which can help alleviate poverty.   But some of these measures are not well focused, not well-targeted on the poor.

The removal of VAT from some items (because of the election promises), will lose Government between $30 to $40 millions this coming year (and every year the loss will keep increasing).  Of this loss, at most $10 millions will return to the poor while $30 millions will go back to the well-off.   (with unknown costs in trader compliance and VAT evasion).

Government would have been miles better off not removing the basic items from VAT, but “ear-marked” the entire $40 millions for the poor.  Imagine what Government could have done socially, with another $40 millions in revenue?

Similarly with the removal of 10% VAT from water charges.  Only 25% of water billed by the PWD is for basic household consumption, and only 5% is probably consumed by the really poor.  Thus 95 percent of the reduction in the water bill will go to the well-off and the corporate users of water (like tourist hotels).  Not what this Government wants, is it?

There is a token reduction of duties on used car imports.  Low and middle income people will continue to pay more than 100% duty on used cars, while the wealthy will continue to pay only 35% duty on new car imports, as reduced by the previous SVT Government.

The Minister claimed that used car imports should be discouraged to protect the environment and improve road safety.  Really?  Just compare the quality of most used car imports, and the derelict junks that already clutter our roads with impunity.

The 2000 Budget has introduced some changes which can add about $2100 to the allowances and deductions for income tax purposes.  But the tax savings depend on your marginal tax rate.

Income below $6500 pays no tax, so receives no benefit from the additional allowances. With marginal tax rate of 25% between $7000 and $15,000 then the savings amount to $520.  At a tax rate of 35% above $17,000, the extra savings will be $735.

And Government has not touched the significant tax benefits that the wealthy usually enjoy because of allowances for subsidised company car, housing, and travel.

But Government will raise an extra $8 millions roughly, because of the increase in excise duties on tobacco and alcohol products (the two luxuries that the poor stubbornly insist on enjoying- oh dear).

All in all, Total General Revenue of Government is expected to decline by $34 millions, while total expenditure is still increasing.

  Three sources for the extra spending: “miscelllaneous”, public debt, asset sales

These three main income sources explain why no one is unhappy with the 2000 Budget.

Firstly, there was indeed some “slack” in the previous SVT Budgets (also pointed out in Parliament).  There is a fascinating budget line called “Miscellaneous Services”, a veritable “bag of tricks”, containing a variety of items, some probably legitimate, and some questionably vague.

Large amounts were allocated for supplementary provisions, special funds, lending and on-lending; grants to statutory bodies, funds for anti-corruption and crime, health fund, Poverty Fund, micro-finance and sugar rehabilitation, etc.

By just reducing this “miscellaneous” line from $106 millions to $50 millions for 2000, provides an “extra” $56 millions for this Government

  But Government is still spending $70 millions more than it will be receiving. The Net Deficit is still negative, at $70 millions.  And therefore the Public Debt is rising yet again, by another $70 millions.

This is the second important explanation for the extra spending on the goodies. Of course, “everyone” today will not feel the pinch, because the future generations will be paying for this extra $70 millions of Public Debt, which helps pay for the current expenditure and benefits.

The third major source of the extra spending, is through the same old Ah Koy strategy (which both NFP and Labour were so critical of in the previous parliament): further sales of Government shares is expected to raise another $75 million dollars for Government revenue.

Again, “everyone” today won’t feel the pinch from the assets sales.  But Government will receive less dividends in the future, and future Governments and generations will have less to spend, because of today’s sales of Government shares.

And last, remember that the previous Government used a large part of the revenues from sale of ATH and NBF shares to reduce Public Debt?  Therefore, finance charges for Public Debt in year 2000 are also correspondingly reduced, giving this Government  more money to spend on its areas of priority.  How ironic!

Some disappointments but perhaps next year…

To conclude, it is a bit disappointing that the 2000 Budget does not spell out how it will tackle key problem areas such as the restructuring of the sugar industry and agricultural diversification from sugar.

There is also a marked absence of new initiatives on small businesses and generation of employment.  The small token allocation on micro-finance is a carry-over from the previous Government and equally unlikely to create the 9000 jobs over the next three years, as claimed by the project designers.   Perhaps the planned review of the FDB may set in train other initiatives.

The 2000 Budget seems like a “damage control” budget, intended to calm the corporate nerves after five months of unnecessary jangling.

It is a budget where no one today will feel any extra pain, because the buck has largely been passed to the next year.

No doubt we can expect more when the Government has had more time to devote to the bigger picture, and less to the trivial problems highlighted by the media in recent months.

 

THE 2001 BUDGET

  

Basics

                                                                                                                                  Change

1999      2000      2001                     99/00                  99/01

Direct taxes                                                  270        288        220                       + 18                     – 50

Indirect taxes                                                518        414        490                       -104                     – 28

Sale of Govt shares                                         20                     85                                                   + 65

TOTAL RECEIPTS                                    1004      853        952                       – 151                    – 52

  

Expenditure

  Departmental Operating                               664        634        678                       – 30                      + 14

Pensions                                                            32          35          36

Finance charges Public Debt                          98         111       110

Total Operating                                            794        780       824

Total Capital                                                 173        137       204                       – 36                      + 31

TOTAL EXPENDITURE                           1028      985       1097                     – 43                      + 69

  

Net deficit                                                       78           70        145                      – 7                        + 67

Debt repayments                                                         116       121       108

Gross deficit                                                 194       191       253                      – 3                        + 59

To be financed by loans                               194       191        253

Central Govt Debt                                      1370      1466      1615                     + 96                     + 245

  

Expenditure Items

  Education                                                      153        165        164

Health                                                           81         82            82

Military                                                        47         61            55

Police                                                            39         37            38

Social Welfare                                                7            11           12

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