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“The 2016 Budget U-turn” (edited article in Fiji Times, 14 Nov. 2015)

15/11/2015

The 2016 Budget U-turn

If you listened only to the first ten minutes of the 2016 Budget Speech by the Minister of Finance, you might think that the Bainimarama Government has been following a consistent strategy for Fiji’s economic growth and development, right from 2007 when they took over.

You might even be convinced that the “unprecedented last four years of annual 4% economic growth” proves the great confidence of the private sector, in the Bainimarama Government policies.

But the major tax policy U-turns in this 2016 Budget reveal that the Bainimarama Government is not consistent in its budgetary strategies, and is now giving mixed signals to the private sector.

The Minister of Finance is not talking about the four years of stagnation between 2007 and 2011, while he is not admitting that the last four years of economic growth is due largely to the massive public sector increases in investment, not that of the private sector, although there is some private sector investment taking place.

There continues to be a large number of situations where the Minister of Finance and FRCA officials have discretionary authority to grant waivers or tax exemptions, a recipe for corruption.

The Minister of Finance is still experimenting with taxpayers’ funds.

The U-turn on VAT

In the 2011 Budget, the Bainimarama Government increased VAT from 12.5% to 15%, with a few basic items exempted.

VAT is generally regressive as it is paid on consumption, and hence for poorer people, a fixed percentage of VAT usually represents a larger proportion of their income, than it does for richer people.

In the 2016 Budget, however, the Minister is boasting about the large reduction of VAT from 15% to 9%.

This is a complete U-turn from the 2011 Budget and would have been expected to reduce government revenues by more than $300 million.

BUT, the really strange thing is that the detailed 2016 Budget estimates reveal that VAT revenues for 2016 will only be $48 million less than the 2015 receipts, not the $300 million loss of revenue being bandied around.

Apparently, the removal of the exemptions on the basic items which the poor consume more (and which will now be taxed at 9% instead of the previous 0%) will offset a large proportion of the lost revenue due to the reduction from 15% to 9%.

FRCA needs to release their detailed calculations, as currently, the numbers just do not add up.

But without doubt, Government has to find large amounts of additional revenues.

U-turn on corporate taxes

In the 2012 Budget, the Minister of Finance reduced corporate tax, quite needlessly, from 30% to 20%, losing FRCA an unknown amount in taxes (possibly up to $150 millions).

The business sector gleefully applauded the “wisdom” of the Bainimarama Government, and most promptly exported their increased after-tax profits.

But some businesses are not applauding this time, as the Minister of Finance has doubled the Service Turnover Tax from 5% to 10%, expected to raise an extra $60  million in revenues.

While a new 6% environment levy is expected to raise  another $70 million.

No surprise that one prominent hotel representative looked quite sick on TV while another business tycoon pleaded on FBC TV that it would be simpler for the Bainimarama Government to just increase corporate taxes from 20% to 25% (yes, this is not a typo).

The public needs to remember that for some businesses, corporate tax can always be reduced by creative accountants taking advantage of numerous tax loopholes (such as SLIPS and Half SLIPs) granted by successive governments, whereas straight turnover taxes cannot be easily avoided.

The mixed economic signals

If a Minister of Finance with seven years experience in the job knew what he was doing with the annual budget, there would be little need for major taxation policy changes year after year.

The private sector has to be worried when they see the Minister of Finance, one year, increase VAT, reduce corporate taxes, income taxes, levies, allowances and tax thresholds, while exempting basic items from VAT, here and there.

Then the next year, while claiming that all is hunky dory, reduce VAT, increase some corporate taxes (but not all), brings in new levies, changes allowances and tax thresholds, and removes the VAT exemptions on basic items,  here and there.

The public should note that every time a government policy is reversed with great fanfare (as is happening virtually every month in education), it is also implying that this same government has been doing the wrong thing for the previous eight years.

The private sector must be excused for worrying, what else is going to be changed next year?

It is comical however, that there are two powerful media organizations (who are not “watch-dogs” but “lap-dogs”) who keep praising the Bainimarama Government year after year, even if they keep reversing their policies.

The IMF praise?

The Minister of Finance announced that the IMF’s calls for economic reforms and greater private sector development, was “music to his ears”.

But Mr Khaiyum’s ears were closed to the IMF a few years ago, when it offered a loan of $500 million loan at only 2% interest, which was rejected by the Bainimarama Government.

Instead, the current Minister of Finance accompanied ANZ on an international jaunt selling bonds costing 9% in foreign exchange, now apparently reduced to 6% after refinancing.

Nevertheless, Fiji taxpayers will have needlessly paid more than $100 millions in interest, because our Minister of Finance did not like the IMF music in 2012.

This Bainimarama Government does not wish to release a Bureau of Statistics report that shows that for the first four years of the Bainimarama Government the private sector was not investing, and there was economic stagnation while employment declined.

This Minister of Finance does not acknowledge that the bulk of the economic growth for the last four years has been driven not by private sector investment (which may have increased a bit through construction of housing), but by the massive increases in public sector spending on roads and water, funded by increases in public debt, and increases in consumption driven by remittance receipts.

The other budget stories

There are many other budget stories deserving in-depth investigation not possible here.

There is the continued excessive allocation of more than $600 millions to the Fiji Roads Authority, which by September this year has apparently spent only 36% of its allocation (so wait for a last minute wasteful splurge as the allocation is desperately used up).

This year again, the deficits are shown to be artificially low because of plans to sell off very profitable public assets  (effectively farms selling their cows in order to balance their books).

There is the creeping extremely unhealthy increased FNPF ownership of critical sectors of the economy, with an FNPF Board that makes no mention of a democratic election of Board Members, with or without the assistance of an obviously “choosy” Supervisor of Elections.

There are the special favors granted to some businesses, through increased duty protection for false industries (apparently, Fiji is now a local manufacturer of “electrical junction and mounting blocks”).

Power-hungry and ego-driven Ministers of Finance like nothing better than have special interest groups approach them year after year, for this favor or that, allegedly for this advice or that.

There are continued discretionary powers granted to the Minister of Finance and tax officials to waive this duty and tax or another, a recipe for corruption and bureaucratic nightmare.

And much more.

The annual hype continues

If a government truly had in place a consistent economic and budget strategy, there would be little need for the hundreds of the annual tinkering that goes on with taxes and government expenditures as currently.

There would be no need for the massive hype as given by the Minister’s Budget Speech for the 2016 Budget, in front of  the annual carnival of Who’s Who of Fiji: ambassadors, donors, business tycoons, NGOs, socialites and government hangers on, all reported by an excited, less than investigative media, pretty much like the hype around the Melbourne Cup, where the distinguished and not-so-distinguished guests appear to see and be seen, or, just have free nibbles, tea and cakes.

If Fiji achieved all the glorious objectives that the Minister of Finance stated in the first four pages of his 2016 Budget, our people will be in heaven by the end of 2016,  and indeed, by all accounts, we are already half-way there.

But the statistics on suicides, crime and violence against women and children, suggest otherwise, as do the dismal data on real production in the economy, which the Minister of Finance carefully avoids quoting.

More importantly for Fiji’s economic future, the U-turn on major tax policies by this Minister of Finance, indicates that this lawyer, who is definitely not an economist that he and his Fiji First Party colleagues take delight in despising, is still experimenting on Fiji tax-payers, in the process creating a nightmare for FRCA who are expected to deliver the revenues, required to reduce the deficits resulting from uncontrolled expenditures.

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