Fiscal Policy Response - PICsFiscal Policy Response - PICs

Paresh Kumar NarayanParesh Kumar NarayanProfessor of FinanceProfessor of Finance

Deakin UniversityDeakin UniversityMelbourne, AustraliaMelbourne, Australia

AimAim

• To examine the key issues in fiscal policies for selected PICs

• To discuss the main fiscal policy challenges

• To give an overview of the key implications of the global financial crisis on fiscal space of PICs

Key IssuesKey Issues

• There are a number of issues that impact on PICs fiscal policies and the success of such policies– Slow economic growth rates: historically PICs

economic growth performance has been poor, and over the most recent decade the annual average growth rate has been around 3 per cent.

• not attracted any meaningful private investments, depriving PICs of tax income.

Key IssuesKey Issues

• Persistent budget deficits: – in the face of growing demand for public

services and a stagnant revenue base, the PICs have had to rely on borrowing to finance their budget deficits.

• led to escalating debts. • This has been a drain on fiscal policies and their

success.

Key IssuesKey Issues

• Increasing civil service wage bill: – this has been a growing concern for many

decades. – The bulk of government expenditures in many

of the PICs goes to paying wages and salaries for the civil servants.

Key IssuesKey Issues

• Political instability and democracy: – Over the last decade, a number of PICs have

experienced political instability in the form of civil unrest and coups.

– Political instability is a fiscal cost to the PICs. – There is loss of economic activity and loss of

government revenues from political instability.

Some Data – tax revenueSome Data – tax revenue

Import/customs

duties as per cent

of tax revenue

Vanuatu PNG Fiji

1990 66.0 29.3 34.5

1999/2002/2006 41.1 24.4 16.9

Taxes on int. trade

as a % of tax rev.

Vanuatu PNG Fiji

1990 51.3 19.5 31.6

1999/2002/2006 33.6 26.4 15.9

Some Data – Wage Bill, 2006-7Some Data – Wage Bill, 2006-7

Public wage bill per

cent of GDP

Public wage bill as a

per cent of total

expenditure

Public employment

as a per cent of total

employment

Vanuatu 12.1 53.0 26.9

PNG 9.2 29.4 -

Samoa 8.3 24.5 -

Solomon Islands 9.7 24.5 27.9

Fiji 11.5 40.6 28.2

Asia 5.3 20.0 17.2

Middle income

countries

6.0 22.1 -

Political Environment- 1990-2006Political Environment- 1990-2006

Changes in

number of

government

Changes in

number of

governing parties

Fiji 3 4

PNG 6 6

Samoa 2 0

Solomon Islands 5 6

Vanuatu 11 5

Business cost & governance Business cost & governance constraintconstraint

Starting a business (cost in per cent of income per capita)

Dealing with licenses (cost in per cent of income per capita)

Enforcing contracts (rank out of 175)

Kauffman’s rule of law index (from -2.5 to 2.5)*

NZ 0.2 27.2 15 1.93

Australia 1.8 13.8 7 1.83

Palau 4.9 6.8 151 0.77

Mauritius 8.0 13.7 109 0.82

Seychelles 9.1 51.3 73 -0.03

Tonga 10.3 174.6 126 0.18

Marshall Island 18.1 37.6 103 -0.22

Fiji 25.8 41.7 86 -0.09

PNG 28.2 110.0 88 -0.76

Samoa 45.5 105.1 54 0.84

Kiribati 50.0 545.2 136 0.36

Solomon Islands 68.9 501.1 102 -1.01

Micronesia 135.9 21.3 139 0.44

Global Financial Crisis - ImpactGlobal Financial Crisis - Impact

• The Impact of the GFC on the fiscal space of PICs will most likely be felt through three channels:– Tourism– Remittance– Official Development Assistance

Global Financial Crisis – Global Financial Crisis – Responses?Responses?

• The bulk of government spending goes to civil service wages and salaries – How to reduce this?– Fiji Model: reduce the retirement age?– Role of trade unions

Global Financial Crisis – Global Financial Crisis – Responses?Responses?

• Income tax reform– The poor will be most affected

• So raising the income tax threshold for the poor and increasing the marginal income tax rate for the high income earners

 

Income Tax ReformIncome Tax ReformTax ratesTax rates

Personal income

tax

Corporate

income tax

Sales or VAT

Solomon Islands 40 30** 15***

Fiji 32 30 12.5

Kiribati 35 25 0

PNG 47 30 10

Samoa 29 29 12.5

Vanuatu - - 12.5

Tonga 10 30 15

ConclusionConclusion• Comments/suggestions?