2019 Budget Strategy – Counting the chickens before the eggs are hatched
“There are many serious questions that the Treasurer needs to answer to restore any credibility to the governments so-called 2019 Budget Strategy. Let me focus on the two new elements to this strategy. The first is breaking with tradition and declaring the government’s views on what resource projects will start and when. Not only does this risk undermining trust with the potential release of commercial-in-confidence information, it also demonstrates that the government has not even learnt the lessons of its recent past. The second key difference is the move towards a massive Sovereign Bond issuance of up to $US1 billion. This is a reckless move, burdening PNG with an unacceptable foreign exchange risk” said the Hon. Ian Ling-Stuckey, Shadow Minister for Treasury and Finance.
“PNG has gone down a path before where budgets were based on excessively optimistic forecasts of growth driven by the resource sector. High economic growth forecasts then lead to higher expectations of taxes from areas such as wages and goods during the construction phase, and the minerals themselves during the production phase. The lesson learnt from such experiences in the early 1990s leading to a major economic crisis in 1995, as well as the most recent economic crisis stimulated by rosy expectations of revenues in 2012 under the new PNC government, is that the prospect of new projects should not get into the forward budget calculations before there is a final investment decision. There are good reasons for that – including that the government often has access to confidential information when negotiating fiscal terms. These are recognised as providing a possible “upside” to any forecasts, but it is best not to count the chickens until the eggs have hatched.
“Unfortunately, the Treasurer has broken that sensible practice with this sudden decision to include some prospective resource projects into the forecasts. Specifically, the Treasurer has now included the LNG 3rd train into the forecasts – even though no gas is expected to flow until 2024 – and Pasca but not the P’nyang field. He has now included Wafi-Golpu, but not Frieda Copper. So based on an assumption that such resource projects will proceed, he has suddenly lifted the growth forecast for the non-resource sector from 3.3% up to 5.0% in 2021 and 5.9% in 2022. So why would the Treasurer take such a risky strategy? The only feasible answer is that the PNC is concerned that they don’t have an inclusive growth strategy, and are now trying to steal the Alternative Government’s policy. For getting to a 5% growth rate by 2021 in the non-resource sector was the policy approach that I outlined in my Budget reply back in November last year. On reflection, trying to steal our idea is probably actually a complement!
“However, the PNC have stolen the idea but they don’t know how to implement it. This is most clearly indicated by the total failure of the 2019 Budget Strategy to build the higher economic growth assumptions into its budget revenue numbers. So if economic growth rates are lifted, then any economist will tell you the expectation is that taxes will also increase. However, the Budget Strategy shows that tax collections in 2021 are expected to be lower than earlier forecast. This makes no sense at all unless the government was including planned tax cuts in its fiscal strategy – but there are no signs of this at all. One is left with the impression that someone in the Prime Minister’s Office had a “thought bubble” that it would be convenient to steal the 5% economic growth target but then forgot to get it factored into the revenue forecasts.
“The second mistake is that the PNC is backing the wrong type of growth. The drivers for increased growth invented for the 2019 Budget Strategy are all about the resource sector. The Alternative Government’s approach to growth is very different and focuses on a more inclusive form of growth based around building up our agriculture sector and linking into the trading opportunities of being at the centre of the Asia-Pacific region including labour mobility options – a very different approach to the protectionist and inward-looking views of the PNC government” said Mr Ling-Stuckey.
“The second major unexpected component of the 2019 Budget Strategy is the suggested sudden move to raise up to $US1 billion in the Sovereign Bond. Why is this necessary? Such a borrowing, even if the interest rates look cheaper than domestic borrowing, must consider the full costs including the high fees charged by international finance brokers for such a borrowing, and the foreign exchange risks. Indeed, if our currency had to devalue at some future point in time, the extra foreign exchange costs could greatly exceed over one billion Kina. The need for such a large bond now seems most likely driven by the failure of the PNC to secure the often talked about but not delivered budget support from the World Bank. Such a loan is still not on the World Banks’ Board of Directors meeting schedule – I thought it was expected months ago. Another fake promise. Given the way the World Bank has been downgrading PNG’s ratings on economic management, it is not surprising that they are becoming reluctant to provide direct budget support assistance without better policies” said Mr Ling-Stuckey.
There are many other weaknesses of this 2019 Budget Strategy:
- The document is late as it should have been released before 6 August according to the Fiscal Reponsibility Act;
- Inconsistent figures are used for 2018 expenditure and revenue – some tables use the old 2018 budget figures and some use the updated MYEFO figures – this lack of accuracy is embarrassing;
- The Treasurer says the Sovereign Bond should be completed by the end of September when financial reporting by Reuters indicates that the earliest for any tender would be October;
- The debt to GDP ratio of 35% is likely to be exceeded according to the Budget Strategy when new National Statistics Office figures for GDP are included (so 35.1% in 2018);
- Even with a Sovereign Bond, interest costs (excluding fees) are expected to increase from K1,864.7m in 2018 to K2,323.6m in 2022 (Table 5) – so over K450m more a year on interest costs
- In addition to playing games with growth forecasts for public relations purposes, the government is also retitling its “100 Day Plan” – released more than a year ago – to its “25 Point Plan”.
- Even then, it fails to acknowledge implementation failures such as it removing in Point 19 the deadline for SOEs having to lodge audited accounts by 30 June 2018 (which didn’t happen), but then assuming SOEs will provide more than another K428m in 2019 relative to the 2018 Budget estimate;
- The assumption that concessional loans can be increased from K337m in 2018 to K1,389m in 2022 – so an extra K1 billion – looks wishful given the way the WB and ADB are marking down PNG’s economic management. Possibly the figures represent an assumed large increase in funding from China although such loans are often much more expensive than WB or ADB loans;
- The government is excessively optimistic in its gas forecasts for economic growth. For example, the government claims that gas and oil production only declined by 5.9% in the first six months of 2018, yet Oil Search in its half yearly report to shareholders says the reduction was 31%. Unfortunately, I must admit I am more inclined to trust Oil Search’s reporting to its shareholders than Treasurer Abel’s reporting to the people of PNG.
- The “risks” section of the document (pages 21-22) make some very interesting observations
- “fiscal risks have emerged from complacent fiscal management, including failure to control PE”(Personnel Emoluments or public service wage costs) – even the document admits to “complacent fiscal management” from the PNC government
- the revised PNG National Statistics Office numbers for GDP – so the massive drop in nominal growth in 2015 from the Treasury number of 9.8% down to the NSO number of only 0.7% – mean the “prescribed debt/GDP ratios which are likely to exceed the 35 per cent limit” (page 22) – this is indeed the case if one uses the 2018 claimed public debt level, and then grow NSO nominal 2015 GDP by the nominal GDP growth rates from 2016 onwards contained in the 2018 Budget one ends up with the 2018 Debt to GDP ratio being 35.1%, up from 34.7% in 2017. This is embarrassing for the government – no wonder they left this comment to the very last page and are refusing to provide details on the 2015 and 2016 GDP numbers!
The Treasurer should respond to the above issues and errors in his so called 2019 “Budget Strategy” document as it currently undermines any remaining economic credibility in the lead-up to APEC” said Mr Ling-Stuckey.
Shadow Minister for Treasury & Finance
14 September 2018
Details and Sources
2019 Fiscal Strategy is late:
Fiscal Responsibility Act – note Clause 6 which states the Treasurer shall release publicly and table a Budget Strategy Paper at least three months before presentation of the Budget to the National Parliament
Growth based on selective choice of resource projects
These extracts show the explicit assumptions driving up the growth forecasts between resource projects. Note that resource projects starting are driving up the growth estimates – not expected improvements in other areas of the economy such as agriculture or tourism.
Government figures different from private companies
Earthquake decline of 5.9% vs 31%
Oil Search detail showing half-yearly production since the first half of 2016 of 14.89, 15.35, 14.81 and 15.5 – an average of 15.14mmboe. Production in the first half of 2018 is shown as 10.24mmboe. The next graph shows the “guidance” to shareholders is between 24 and 26 mmboe. This would require production of between 13.76 and 15.76 mmboe – with 14.76 being the mid-range of the guidance. This is slightly less than the average for the previous four halves, and even at the very top end of the guidance, is only 1% greater than the level achieved in the second half of 2017 – the time when the budget was being prepared.
Change in economic growth assumptions doesn’t feed through into revenue forecasts
The next two tables provide the revenue forecasts from the 2019 Budget Strategy as well as the revenue forecasts from the 2018 Budget. Note that the 2019 Budget Strategy should show significantly higher increases in taxes flowing from the assumed significantly higher economic growth rates. This is not the case, although the story changes slightly according to the year and type of tax. However, note that by 2021, total taxes are actually now expected to be less than at the time of the 2018 Budget (K12,568m down to K12,499m), despite the higher growth rates and the expected extra revenues included in the 2018 MYEFO. The 2019 Budget Strategy talks of much higher mineral and petroleum taxes, but the overall level of taxes on “incomes, profits and capital gains” is actually expected to be lower in 2019 than was initially forecast. The biggest change in overall revenues is from non-tax revenues – these are K428m higher expected in 2019. There is no real explanation for where this major increase would come from. There is reference to point 19 of the now retitled “100 Day Plan” concerning SOEs lodging audited accounts, but these accounts were due by 30 June 2018 under the original 100 day plan. This deadline has been dropped and this increase is at best highly speculative. This is very important because one of the greatest risks to the 2018 budget and future budget strategy is the large dividend payments expected from SOEs. On the second last page of the Budget Strategy, there is an admission of “Dividend collections and tax compliance revenue projections failing to meet end 2018 projections (p21). So in one of the areas of greatest risk to the 2018 Budget, and even though the deadline has been dropped from the “25 Point Plan”, there is a very poorly explained assumption/hope of an extra K428m in dividends from 2019 onwards.
So where does this K428m go? Because the deficit figure stays unchanged, it means that all this extra money is planned to be spent. However, apart from further increases in estimated interest costs since the last budget, the tables do not indicate where the money goes. Surely the purpose of the strategy is to outline in broad terms where expected new funds would go – not the details, but at least the priorities, including the option of using any extra revenues to reduce pressure on debt levels.
Inaccurate and inconsistent figures.
On the accuracy of figures, compare the 2018 figures from the following three tables – Table 1 is correct on both revenue and expenditure, Table 3 is incorrect on both revenue and expenditure, and Table 5 is incorrect on 2018 MYEFO expenditure. Accuracy is important for building trust in other numbers.
Complacent Fiscal Management – see third dot point from page 21
It is not only his own document that is concerned about ‘complacent fiscal management’. The World Bank continues to downgrade PNG’s economic management ratings which is why the World Bank and the Asian Development Bank have both moved PNG’s rating down to being a “Fragile Situation” state. These are not fake news stories on social media as claimed by the Prime Minister last Friday – these are facts from documents available from the World Bank sites and presented for scrutiny in media releases – see http://www.opposition.gov.pg/wp-content/uploads/2018/08/MEDREL-PNGs-FALL-TO-FRAGILE-STATE-WORLD-BANK-AND-ASIAN-DEVELOPMENT-BANK.280818.pdf
which includes links to the World Bank site – http://pubdocs.worldbank.org/en/892921532529834051/FCSList-FY19-Final.pdf
Debt to GDP likely to exceed FRA limit of 35% in 2018
Much of the document produces claims that PNG’s public debt is under control, arguing that it will be 32.2% in 2018. But then the document lets slip, on its very last page where the Treasurer hoped no-one would read, that this will not be the case. For the government is concealing the fact that the National Statistics Office estimates the actual size of the economy was over K5 billion in 2015 than estimated by the PNG Treasury. Consistent with previous arrangements, the NSO figures are considered more robust, reliable and accurate. The Abel government has suppressed the detail of these NSO figures and is using the old, excessively high Treasury GDP numbers.
The following calculations indicate why this is the likely outcome – using PNG’s National Statistic Office actual estimate for GDP in 2015 leads to a debt to GDP ratio in 2018 of 35.1%.