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Aug 19

Budget Analysis - Part 1

  • Saturday, 19th Aug 2017

Opinion piece on the 2017 - 2018 national budget by Party Leader, Mr. Savenaca Narube

Any good political analyst will tell us that, while the national budget is a financial plan, a political plan determines its priorities. There is a 4-year political cycle to our national budget. The Fiji Government has decided that it is time in that 4-year cycle that the national budget handed down on Thursday 29th June for the year 2017 to 2018 put priorities on expenses that make people feel good. It is predictable like clockwork. We must accept that this prioritization is entirely the prerogative of the Government of the day. Every Government does it. One can confidently predict that the opposition parties will do exactly the same thing when they get into Government. The national budget is a political tool.

But the budget is also the single most important tool that a country uses to achieve its development and social aims. Ultimately, everything needs money which is not enough to go around. Political agendas must therefore be balanced with national responsibilities. We have witnessed in the Pacific and around the world the heavy price that people pay when political agendas were allowed to drive national budgets. From global examples, there are two major reasons of a financial crisis. The first is that the Government borrows too much too quickly. The second is that the quality of spending from the borrowed funds is poor. This opinion piece analyses the first reason and subsequent articles will address the second.

Let me clarify here that I share the relief of the civil servants especially the hard-working nurses, doctors and law enforcement officers that work long hours who are now taking home a larger pay packet to their families. These additional monies will go a long way to help the family pay for essential expenses like food, rent, transport and education. I also fully support the increases in welfare support to the vulnerable members of our communities.

However, while this budget is long on feel-good expenses it is very short on specific strategies that are crucial for financial stability in the medium-term. Medium-term strategies in the budget documents are too general and, more importantly, I found it difficult to relate them to the budget numbers. Many of us know that one of the golden rules in budgeting is that short-term financial focus should be consistent with medium-term financial stability. This budget is heavily skewed towards the short-term without a credible medium-term plan for financial stability.

We should ask the question: Is Government borrowing too much too quickly? The answer is a resounding yes. The rapid rise in the level of debt in dollar amounts is not contestable. But I accept the government’s counter argument that debt should be measured as a percentage of the economy or Gross Domestic Product (GDP). GDP is the value of all goods and services produced in Fiji. This is a universally accepted measure of the level of debt in a country. Fiji’s debt at 47% of GDP means that for every dollar that we earn from the goods and services that we produce, we are borrowing nearly 50 cents. The Government is right that this level of debt is tolerable and that some countries are way above this level. However, there are two important factors that are missing from this argument. The first is that a good financial manager should always build a cushion for possible bad years. The second is that Government must have a believable plan to slow down the rate of increase in debt. Let us examine the first.

Again from global evidences, countries that have suffered from debt crisis did not adequately provide for the risk of hitting a bad patch. When a country is borrowing heavily, normally everything is honky dory because government is pumping borrowed money into the economy. This reflects our current situation. But we all know that bad years will come. This is exactly what happened to Greece. For Fiji, the possible causes for these bad years are: a global economic depression that will reduce tourism arrivals which is our main foreign exchange earner; a financial crisis that will weaken the Fiji dollar and raise debt and import payments; a rise in the price of fuel which will hike up the cost of living; or a series of natural disasters that will devastate our tourism plants and sugar cane crop. Remember, this is not doomsday planning. We have experienced these in the past. Good financial management dictates that we build this risk into our financial strategies and the budget numbers. I don’t see this cushion in the budget.

Before discussing the second factor, lets clarify the question: What determines the rate of increase in debt? The shortfall between revenue and expenditure which is called the net budget deficit determines how much new money Government needs to borrow to balance the ledger. In smart budgeting, a Government determines how much revenue it can realistically get and tries to fit the expenditure into this revenue envelope. It is clear to me that this is not the way that this budget has been put together. It looks like the Government firstly determines how much it wants to spend based on its pollical and economic priorities and then searches for revenue and, if insufficient, borrows the balance. This strategy endangers long term financial stability.

The second factor that is missing from the budget analysis is that Government must slow down the rate that debt is increasing. The national debt at 47% of GDP is already above the benchmark of 40% for a country like Fiji. Some will ask: Why 40%? International norms put 50% of GDP as the debt benchmark for middle income developing countries. But we must reduce this benchmark to reflect the nature of Fiji’s economy. The benchmark of 40% recognises the vulnerability of a country like Fiji which is our small size with limited natural endowments and our reliance on a few products like tourism and sugar. Obviously, the debt benchmark of 40% is not written in stone. The Government is free to deviate from it. It is encouraging that the Government states its intention to reduce debt to this benchmark of 40%. But if I was debating the budget, I would ask for the time it would take to achieve this and more importantly the specific measures that the Government aims take to bring the debt level back to the benchmark.

The Government will say that it has a plan—and it does. What is that plan? The Government is adopting a very risky position by relying entirely on its good economic growth projections to reduce the debt level as a percentage of GDP. For example, the reduction in debt as a percentage of GDP from over 50% in 2016 to 47% this year is entirely due to the growth in the economy—not from government reduction in the rate of borrowing. In fact, with a very large net deficit, Government intends to borrow much more in this budget than it did last year. Is this plan sustainable? As mentioned above, there are risks to these economic projections. If for some reasons the economy performs poorly than projected, our debt position is likely to spike to well over 50% of GDP which will reduce revenue, squeeze cash flows and seriously weaken our ability to service debts. Therefore, relying solely on economic growth to reduce the debt ratio towards its benchmark is not sufficient. Government must also adjust the budget numbers themselves.

Therefore, to help slow down the rate of growth in debt, Government must reduce the budget net deficit. The net deficit at 4.5% of GDP is way above the benchmark of 2% of GDP. Again, if I was debating the budget, I will ask about the measures that Government aims to put in place to reduce the deficit and help moderate the rate of increase in debt.

So, what options does Government have to reduce the deficit? The options available to Government are considerably restricted. Why? First, the potential for Government to raise taxes is limited because tax revenue to GDP is already high at close to 24%. Second, the ability of Government to reduce operational spending is limited because the salary increases are now permanently locked into the budget unless the government reduces the number of civil servants in future. Third, Government can sell assets to pay for the deficit which it is doing but these receipts are one-off—they will not be there in future years. Ultimately, Government may have to revert to the option of cutting back on the purchase of goods and services and reduce capital expenditure with adverse flow on effects to development and essential service delivery. As global lessons have taught us, future budget adjustments to correct past excesses always come at a price which is entirely borne by the people. Undeniably, Government has the prerogative to determine how it uses taxpayers’ monies. But for the same reason, Government owes it to the taxpayers to assure us that our financial position is secure in the medium-term. Unfortunately, in my opinion, the 2017/18 budget does not pass this test.

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