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Dealing with debt,deficit and transparency: experts identify key 2015 Budget issues

The O’Neill government is preparing to deliver its 2015 budget, against a backdrop of rising government debt and rising expenditure. Business Advantage PNG asks what business needs and what it might expect.

With income from agriculture and the resources sector down, business leaders and analysts are expecting a tough 2015.

‘We have low commodity prices at the moment,’ says the Institute of National Affairs’ Paul Barker.

‘The old reliables that provided PNG revenues from-gold, copper and oil-these prices are largely significantly down and at the same time, we’ve had deficit Budgets in the last two years.

‘And then of course, we’ve had these extraordinary borrowings, basically share acquisitions and the UBS loan, basically putting PNG in a risky situation at a time when the global economy is somewhat uncertain.’

Recession claim

Former Treasurer Don Polye claims PNG is heading towards recession because the Prime Minister is on a spending spree.

Polye cites government debt levels, now above 35 per cent of GDP, and the K 3 billion (A$1.2 billion) loan from UBS to fund the government’s ‘Oil Search.

He says the UBS loan is outside this year’s Budget allocation and has called on the government to explain where the money to repay the loan will come from.

Prime Minister O’Neill has rejected Polye’s criticism, saying the Mid-Year outcome released by the Treasury shows that the country’s economy is on track to achieving growth results.

Government borrowings

Government borrowings, says Barker, are based on expectations of earnings from the PNG LNG plant.

‘It’s understandable that we’ve had deficit financing to provide fiscal stimulus, particularly in 2014, when there was an employment and economic downturn after the construction phase of the PNG plant.

‘But there’s a lot of false expectations about the LNG income. GDP is not revenue.’He says the quality of expenditure is also of concern.

‘There is more money going into getting kids into schools, but it seems they’re not learning a lot. The standards of the education system have really got to be ramped up. We’re getting more money into health and roads but it’s basic reliable access to ports, markets and services, with regular maintenance, that’s required–rather than some of the costly new constructions.’

Transparency

Barker also wants more transparency about the country’s debt levels.

‘There seems to be debt related to State-Owned Enterprises, so when you add it all together, our debt levels seem to moving into more dangerous territory.

‘When they’ve been making some money, they’ve been putting it aside and running a little investment programme. Clearly it would be better to bring that revenue into the government system.

‘There seems to be debt related to State-Owned Enterprises, so when you add it all together, our debt levels seem to moving into more dangerous territory.’

Also calling for more transparency is Greg Anderson, Executive Director, PNG Chamber of Mines and Petroleum, who’stold Business Advantage PNG, he’s predicting ‘a very tough year next year’.

Oil prices have fallen US$20 over the last few months, he says and I’m not expecting a pickup in mining until at least the end of 2015.

‘I don’t think certain parts of government understand the severe stress facing the mining industry. They don’t appreciate the current environment. Exploration is severely stressed.’

Deficit

‘The biggest concern though is the massive government deficit that we believe will show up in the Budget papers.

‘We have to re-establish fiscal discipline. And it must be associated with a realistic budget and meeting priority needs.’

‘There’s already K2 billion of government deficit we know about, but due to falling tax revenues from the resource sectors there are indications that the total deficit will be much greater than this.

ANU economist Stephen Howes also wants a more disciplined Budget process.

‘Comparing 2014 budget figures with 2013 actuals,’ he says, ‘the development budget is meant to grow 37% after inflation (more than K2 billion in 2014 prices), whereas the recurrent budget is actually cut by 4% (K 300 million) after inflation is taken into account.

‘This is not sensible budgeting.

‘Will the budget put the brakes on spending, or will we see another large deficit,’ he asks.

‘Clearly, there will have to be some hard choices made in the 2015 budget.

Spending cuts

‘The axe will need to fall on some areas of spending. Given the need for rebalancing, savings should be looked for first in the development budget.’

The INA’s Paul Barker believes the O’Neill government must be tougher and have a more consistent approach in managing the economy and the Budget.

‘We have the Fiscal Responsibility legislation which was basically sidelined or adjusted to suit the circumstances rather than the other way round.

‘We have to re-establish fiscal discipline. And it must be associated with a realistic budget and meeting priority needs.’

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