2022 Budget Analysis, NRI

In a contextual analysis of the 2022 Budget, Acting Director of the Papua New Guinea National Research Institute (PNG NRI) Dr Osborne Sanida discusses some issues relating to understanding the 2022 Budget.

Dr Sanida highlighted the importance of increasing government revenue to fund its expenditure plan considering the deficit financing that has occurred over the recent past. Thus, it has become ever so important to focus on mechanisms that will increase Government revenue.

In order for Government revenues to be increased, two conditions are required. Firstly, the economy must perform strongly through the increase in Gross Domestic Product (GDP) or economic growth. GDP is the value of final goods and services produced within the PNG economy over a given period of time (usually one year). GDP represents the total value of production, total value of income and total value of expenditure in the economy for a particular year.

The second condition is that Government revenue should increase in line with GDP increase in order to finance the goods and services needed to improve the welfare of the people. In particular, the people must benefit fairly from the growing GDP generated by the development of resources in the country.

On average, Government revenue increased by about 5% per year between 2006 and 2020. So, Government revenue has increased in absolute terms between 2006 and 2020. However, focusing only on the increase in the absolute value of revenue does not give a full picture of what ought to be earned by the Government. To get the full picture, one has to look at Government revenue as a share (%) of GDP. In other words, this question should be asked: Out of what the country makes in a year, in terms of GDP, how much share is the Government taking in revenue. This is the revenue-to-GDP ratio, which is measured by dividing the Government revenue for a given year by GDP for that year and multiplying by 100 (to get the percentage).                       

An increasing revenue-to-GDP ratio is a good sign because it means that the Government is getting more and more from the GDP growth, vice versa. In PNG, the data between 2006 and 2020 does not show a good sign because there was a decline in the ratio. This statistic should be used to justify why putting in place mechanisms to generate more Government revenue from the resource developments in PNG is a step in the right direction, from people’s welfare perspective.

In 2006 and 2007, Government revenue was 25% of GDP. In other words, government earned about one quarter of the total income made in PNG in those years. However, thereafter, there has been a gradual decline in revenue-to-GDP ratio. In 2010, the ratio fell to 21% and declined further to 18% in 2015 and 16% in 2016 and 2017. Although the ratio increased in 2018 to 18%, it fell for the next two years to only 15% in 2020 and 2021. In 2022, the ratio will increase to 16%, which is an improvement.

The declining revenue-to-GDP ratio in light of the increase in absolute values of GDP and Government revenue, implies that Governments have not been getting enough revenue from the growing economy. This has resulted in shortfalls to meet the growing expenditure and borrowing to fund the deficits. This is a cause for concern and the trend of a falling revenue-to-GDP ratio must be reversed by devising strategies for the Government to increase its revenue from the strong GDP growth. In this regard, the emphasis by the current Marape Government for the country to get more income from the big resource developments is a step in the right direction. This will of course need to be done in partnership with the developers of projects and the landowners.

In his analysis, Dr Osborne said in light of the deficit financing in recent years, the calls to control expenditure or the “living within our means” rationale is expected. This is a noble argument but only if people’s wants and needs could be controlled by a switch of a button. However, the fact of the matter is that the population of PNG is growing at about 3% per annum. This means that there is growing demand by the population, which needs to be met by spending by the Government on public goods and services.

Considering the above, the Government will have to use deficit budgeting to finance the needs of the population. Having said this, the clear direction by the Government to reduce borrowing over time to return to a surplus budget by 2027 is a positive step. Another important point to note on the expenditure side is that the onus is on the people to control the population by having an optimum number of children they can afford to support financially.

Alternatively, the education system and the economic system must ensure that the supply of educated student graduates must be balanced by equal or sufficient demand for the services of these students by the private sector or public service. In other words, there must be jobs or business opportunities for students who complete education or even for those that leave the education system without completing.

Dr Sanida said, “We live in uncertain and trying times due to the COVID-19 pandemic, particularly in the context of the Delta variant and the new Omicron variant recently detected in South Africa and now spreading. The budget is a tool to generate revenue and spend on infrastructure and programs to address current needs and wants and also to work on mitigation measures to address potential new challenges and problems such as the COVID-19 pandemic.”

“The 2022 National Budget has been framed to grow the economy and address the social service delivery through increases in both the operational and capital expenditures. Various measures have been proposed to generate revenue and also build and maintain infrastructure and programs. Any measure would have both positive and negative implications. The challenge is to ensure that there is net benefit to the target population or the general population,” said Dr Sanida.

A budget is a future plan and to realize the benefits of the plan, the contribution of each stakeholder is needed for effective implementation and outcome, whether you are an individual or a family or a business or Government, from the National to the Local level.

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