A RESPONSIBLE BUDGET WITH A STRONG FOCUS ON INFRASTRUCTURE

 In Accountability, Budget, Get The Truth, National Development Plan, News

THE FijiFirst Government delivered its fourth budget on the 28th of June.

ANZ believes the government delivered a credible budget because it maintained its commitment to funding a strong pipeline of infrastructure projects.

In an election year, it was quite possible for the government to significantly cut spending to present itself as fiscally responsible and nullify opposition attacks as a bad economic manager.

However, the government was brave not to take the sledgehammer to spending, particularly to capital spending as it is easier to cut capex than to reduce headcounts.

At a time when private demand is soft, this is not the time for austerity i.e. to be fixated with returning the budget to balance.

And a focus on vital infrastructure projects, including water supply, roads and rural electrification projects is good for economic growth and jobs.

BUDGET BY NUMBERS

The 2018 budget projects another year of budget deficit (although an improving one) with at least one more year of deficit to come.

According to the budget papers, a deficit of FJD497.3m (-3.5% of nominal GDP) is projected for 2018/19, while a lower deficit of FJD368.3m is targeted for 2019/20 (-3% of GDP).

The reason Fiji has a budget deficit is because tax receipts, as a share of GDP, have only gradually increased over time (Figure 1).

Cyclone Winston induced an economic slowdown in 2016, which did not help.

Added to which, expenditure, boosted by infrastructure projects, lifted sharply over the last five years (Figure 2).

That was, however, driven by a surge in capital projects.

As the fiscal stimulus unwinds, we expect the government to return expenditure towards 30% of GDP – a level that generally produces the smallest level of budget deficits.

That said, we would also caution future governments to not let transfer payments get out of control.

Transfer payments, which include operating grants as well as pension and compassion allowances, will increase by FJD121m (16.9%) in 2018/19 due to significant allocations for the poverty benefit scheme, free education for Year 9–12 students, bus fare assistance and the social pension schemes.

While it is manageable now, there is a danger that if the proportion of the population receiving transfer payments becomes high, then any attempt to achieve significant savings in this area by cutting entitlements or tightening eligibility criteria is likely to encounter considerable community opposition.

Future governments should continue to show prudence in this area.

THE WINNERS AND LOSERS ARE?

In our view, budgets are not all about how the ‘pie’ is distributed. In other words, it’s not all about winners and losers. Growing the size of the budget pie is also important.

That being said, low-income earners, teachers, young parents, sugar cane farmers and first home buyers gain the most from this year’s budget.

As ever, smokers and alcohol drinkers will be worse off.

WHAT WILL THE BUDGET DO FOR THE ECONOMY?

With ample liquidity, we expect the government to be able to fund its deficit without crowding out private investment.

Hence, the borrowings and subsequent expenditure of the funds through the annual budget would add directly to aggregate demand in the economy and help create jobs.

 

 

Source: Ministry of Economy, ANZ Research.

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