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“Budget 2020-21: the Good and the Bad” (ed. in FT 25/7/1920)

25/07/2020

“Budget 2020-21: the Good and the Bad” (ed. in FT 25/7/1920)

No doubt there are many good measures in the 2021 Budget, especially for businessmen and employers (which I call “Good Measures” below) and some for the unemployed or underemployed by COVID-19.

But, there are also just as many bad measures which indicate that the Minister for Economy ignores the lessons of basic economics and shows a lack of real concern for the future of retirement funds for workers, and the budgetary nightmares for future governments.

  1. despite the massive reduction expected in government revenue, he is NOT tackling the biggest problem facing his government: which is the task of reducing the largest item of government expenditure: salaries at the top end
  2. takes retirement funds from workers to give to employers and businessmen
  3. he gives bad price signals to give to the market
  4. callously reducing allocations to the really needy while sparing the rich.
  5.  No plan to reduce Public Debt?

The Good Measures

Undoubtedly, there are a number of very good measures in the 2021 Budget.

A good measure is Government’s support of those who are fully unemployed due to COVID-19 (they will continue to receive 220 dollars per fortnight) and those whose working days or hours have been reduced will receive 44 dollars per fortnight for every day they are no longer working. This will amount to some $100 million much valued by the newly unemployed or those with reduced employment.

It is positive that a massive range of complex duties have been removed, so as to reduce the discretion given to customs officers, and thereby reducing the opportunities for corruption. But note my comments below.

It is positive that business licensing has been made so much simpler- this should be of great benefit to SMEs to get registered and obtain the tax benefits that businesses all obtain.

A good measure is the reduction or removal of duties and taxes on machines and tools, which must lead to an increase in productivity right across the economy both for businesses and households. This will last long into the future.

It is positive that some overseas missions are being closed, such as the ones in Washington DC (NY will be open), Port Moresby, Brussels and Kuala Lumpur will be closed permanently, But why will the one in Ethiopia, Abu Dhabi and Jakarta be left open?

But responsible members of the public need to think about the following five headaches  that are hidden away beneath the great marketing language of the Minister for Economy.

1. Not reducing civil service salaries bill at the top end

The Minister for Economy admits in his 2021 Budget speech, that the largest item of government expenditure is salaries but that apart from a few top executives, civil service salaries will not be cut. The salaries bill will

The Budget Supplement noted that personnel costs will reduce only slightly from $1,017 million (2019-20) to $987 million (2020-21).

Any private sector company that sees a massive two thirds reduction of its revenue MUST and WILL cut its expenditure accordingly.  It would be wrong for Government to lay  off workers.

BUT as many economists have advised, government could have had salary cuts at the top end (say above $30,000) to save some government expenditure for essentials.

OR even better, Government could have put a temporary COVID surcharge on all top salaries in the country, including the public enterprises and the private sector.

This would not only have helped to reduce government expenditure, but also raise a bit of government revenue, while ensuring that all well-off working people in Fiji share the burden of COVID-19.

But no, the Minister has ever so easily easily passed the buck to future generations through a massive increase in Public Debt, while spouting all the right rhetoric in his speech.

2 Continued Massive Gift of Workers’ retirement funds to employers

I have previously pointed out that it was not right in the previous COVID response budget to reduce employers’ contribution to workers’ FNPF by 5% as this was simply gifting a massive from workers’ retirement funds to employers’ pockets.

That measure has sadly been continued in the 2021 Budget, effectively transferring more than $130 million from workers’ retirement funds to employers.

In an 18 month period, the workers of Fiji will have been forced by this Bainimarama Government to transfer more than $200 million of what would have gone to their FNPF retirement savings, to employers pockets.

Of course, today’s workers don’t feel it immediately, because it is coming out of their retirement funds in the future. But sadly, that money is gone forever from their retirement savings, in addition to what they have lost already.

[I sincerely hope that union leaders fight tooth and nail to stop this measure and don’t shoot the messenger. I write this because one very prominent union leader wrote to me a few weeks ago, and told me off “Its one thing to sit in the comfort of your home and criticize and quite another to be here on the ground trying to be heard. You are not helping.”  The union leader was clearly not being listened to by the Bainimarama Government and he thought that the media were also censoring his views.  I hope that this unionist (and others) understand that this voice is trying to help his cause and that of the hundreds of thousands of powerless workers through the  medium he best understands and where he does have a voice, however irrelevant in some people’s views.]

3. Wrong price signals

A basic lesson in economics is that consumers react to changes in prices: reduce the price and they will consume more.

So why has the Minister reduced the prices of alcohol products (domestic and imported).

What does the Ministry of Health and Women have to say about increasing alcohol consumption in Fiji with all the impacts on health of the men, and the health of the women who become great victims of domestic violence which has increased massively since the COVID-19 began.

What does the Minister for Agriculture have to say about reducing duties and taxes on imported consumer food goods for which there are domestic substitutes available, and whose increased demand was probably leading to increased employment in agriculture?

Why did the Minister reduce duties and taxes on a whole range of imported luxury goods and white goods which the well-off buy, worsening the balance of payments problem for the RBF, while leading to a loss of government revenue at the same time that the Minister is reducing spending on charitable areas (see below).

It would seem to be a good measure to reduce protectionist measures on inefficient local manufacturing so as to give consumers cheaper and better quality goods.

But the Minister’s speech also qualified, that for some large local manufacturers “so long as these companies are hiring large numbers of people and producing high quality goods, we will be flexible”. In other words, go to the Minister if you want him to be “flexible”

There is another strange example of the wrong message given to businesses. While claiming that Government’s high penalties for late tax payments has led to a “a culture shift towards more timely payments” at the same time he claimed that “we’re now at a point where we can comfortably ease up on penalties” and “the late tax payment is being slashed from up to 300 per cent to 15 per cent annually.”

How astonishing given that in the Budget Supplement , there is a table which shows that FRCS is grappling with a severe problem of rising tax arrears which have grown to over $200 million this financial year.

The Minister for Economy clearly does not believe in the management advice “if it ain’t broke don’t fix it”. I can hear the canny businessmen laughing: HA HA HA.

  1. Callously reducing welfare

There is a lot of statistical evidence that one of the successes of the Bainimarama Government has been to increase the enrolment of children in primary and secondary education.

But of most benefit to low income families, the allocations to early childhood which has seen enrolment of five year olds rise from 35% in 2004-05 to 82% in 2015-16.

Primary enrollments have increased from 96% to 99% and secondary from 82% to 88%.

These are significant achievements leveling the playing field in education for children from poor families.

Why on earth then would the Minister for Economy reduce the free education grant for Early Childhood Education, primary and secondary by 20%, when the Minister for Education would know only too well that this will affect the poorest families?

Why remove the motherhood grant of  $1,000 of such great benefit to the poorest women in the country.

Why is the Fiji Government continuing to spend $800 thousand dollars on Qorvis when there are any number of Permanent Secretaries and an entire Ministry of Information who ought to be able to speeches for the Prime Minister, and if they cannot, maybe they should not be there?

Why does the Prime Minister even need a speechwriter?

Why is Minister for Economy removing the tax from “fringe benefits” given by employers” since only high income earners will benefit?

What was the great urgency in  building the new Office Complex for the Prime Minister, just because it was “shovel ready” (what a euphemism for saying “because it is for the Prime Minister”).

I would suggest that the Prime Minister who has given a grand speech recently about “leading by example” cancel this project ($10 million? $20 million?) until the finances of Fiji return to “normal”, if ever.

And why cannot the Prime Minister stop using the services of Qorvis? Can he not spend the $800,000 on some other worthy project in Fiji?

5  No plan for reducing Public Debt

To his credit, the Minister for Economy makes no bones about the massive amounts of revenue that he is “giving away” with all the tax cuts to: Service Turnover Tax, Environment and Climate Adaptation Levy, Reduced departure tax, Stamp duties, reduction of customs and excise duties.

These will lose the government more than $600 million of revenue, and more I suspect, given that company taxes and VAT will be seriously reduced even for 2019-20.  These reductions of revenues will amount to more than one billion for 2020-21.

BUT government expenditures are continuing as before.

Table 4.4 in the Budget Supplement points out that the Net Deficit is expected to grow from  Minus $419 million in 2018-19 to Minus $2 billion in 2020-21. The Gross Deficit, which takes into account debt repayments, is even larger.

Strangely, there is not a single table in the Budget Supplement which shows a forward plan for reducing the massive Public Debt that is currently being built up, which can only be done if Government begins to make a surplus on its budget.

But with all the massive “give a ways” being granted to businesses in the country,   when and from what revenue item, will Government raise its future revenues, to pay for its continuing expenditures, and make surpluses with which to pay down the huge increase in Public Debt.

The sixty four thousand dollar question remain: will the businesses which have been given all the incredible tax benefits increase their investment and employ more workers as the Government pleads with them to do?

Or will the smart businessmen take the money and run?

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