By Ross Verne

RELEASED in November, Papua New Guinean Treasurer Patrick Pruaitch’s first Budget has lofty ambitions, but has come in for some criticism from a former treasury advisor.

Speaking at the launch of the 2015 budget in the PNG Parliament in early mid-November, Mr Pruaitch said the PNG economy was expected to grow by 8.4 per cent in 2014 on the back of the early production start at the PNG LNG project.

These were some of the factors which saw Mr Pruaitch stand by the government’s 2013 budget plan – to implement deficit budgets until 2017 with the expectation that new sources of revenue would see the budgets move into surplus the following year.

Speaking with PNG Resources on the sidelines of the 13th PNG Mining and Petroleum Investment Conference, former PNG treasury advisor Paul Flanagan was scathing of what he saw as inconsistencies and potential development impacts of a budget that “really does lack credibility”.

Mr Flanagan, a visiting fellow at the Australian National University and former executive at the Australian treasury, said the government’s intention to bring the budget back into surplus by 2017 would require cuts of more than 25%, with health and education in the firing line.

“I don’t think cuts at that level are credible or appropriate for the people of PNG,” Mr Flanagan said.

“I don’t think such large cuts are appropriate for a government with its commitment to the delivery of basic services.”

The start of PNG LNG production and a re-bound in the nation’s non-mining sectors would lead to the historically high growth rate of 15.5% for 2015, Mr Pruaitch said in November, noting it would nonetheless be a downward revision from the 2014 budget forecast of 21.2%.

But Mr Flanagan said under “realistic” expenditure growth of 10%, the proposed budget would lead the country into “very difficult fiscal territory – some would even say towards a financial crisis”.

He said under such conditions PNG would move to a “very high” deficit-to-GDP ratio and a debt-to-GDP ratio that was nearly double that set out by the Fiscal Responsibility Act.

Mr Pruaitch said at the conference that the government was focused on fee-free education and free basic health services as spending priorities, with K605 million allocated to the support of tuition fee-free policy, plus additional funding in trust accounts.

A total of 18,232 PNG schools are set to be beneficiaries of this program. The Government would also spend K20 million to subsidise free health care in 2015, while additional funds would be provided for hospital works.

Mr Pruaitch said in his budget speech that the rise in expenditure for 2015, total revenue and grants was anticipated to be 10% higher at K13.9 billion – driven by tax receipts on income and profits, domestic goods and services and international trade.

“The 2015 Budget will result in a deficit of around K2.3 billion, or around 4.4% of gross domestic product, and is largely driven by a 7.2% increase in nominal Government of PNG expenditure,” he said.

Concerns over Sovereign Wealth Fund

Treasurer Pruaitch said the economic growth rate of 15.5% on the back of the first full year of LNG production would be among the highest in the Asia Pacific.

“This will bring the average five-year growth rate from PNG’s gross domestic product to an unprecedented 9.6% annually,” he said.

Debt had been reduced by the sale of equity in the LNG project to landowners, the government said, leading to a fall in debt by K228 million to K14.26 billion by the end of 2012.

Mr Flanagan warned that the country’s proposed Sovereign Wealth Fund (SWF) – intended to mitigate negative impacts of volatile commodity prices on the economy – may not exist in an effective form in the 2015 Budget, with funds from the dividend stream and the mineral tax stream diverted.

Mr Flanagan put the amount diverted at K3.3 billion, adding that there was little sign of where these funds had been diverted to.

“Presumably it is going to pay for items such as the loan costs around the Oil Search share purchase [but] governments should not speculate on share purchases such as this,” he said.

In his speech, Mr Pruaitch said the SWF would have one governance framework but two funds – one for savings and the other would “ensure a steady stream of revenues to the government budget for social and developments spending,” he said.

The government needed to question how it prioritised its spending in a number of areas, Mr Flanagan said.

“We know the 2015 Pacific Games has been a very, very significant expense, and the APEC meeting will be even more,” he said.

“The estimated cost of the Pacific Games has increased to about K2 billion – is that a priority expenditure or not?”