Monday, 16 November 2015

Some Pros and Cons of the 2016 Budget: Khaiyum, Walsh, Prasad, Barr and Narsey

It's been two weeks now since Minister of Finance, Aiyaz Sayed-Khaiyum delivered the 2016 Budget A Strong Fiji, A Fair Fiji, A Healthy Fiji.and sufficient time for its implications to be understood and commented upon.
The main elements are:

  • The budget allocates $3.4billion met from Government revenue of $3.1bn and an estimated $2.6bn  from taxes though Fiji Revenue and Customs Authority.
  • Inflation, 1.3% in 2015, was expected to increase to 3% in 2016; and the balance of payments to widen slightly to 4% of GDP.
  • VAT to be reduced from 15% to 9% but basic food items, kerosene and some medicines will no longer be exempt from tax. 
  • Government expects to recover $108m lost revenue from the VAT reduction by the removal of the VAT exemptions, a  further $127.5m from an increase from 5% to !)% of Service Turnover Tax and a new environment levy of 6%, and increased domestic bond borrowing.
  • Education, health, housing assistance   and most other areas of government expenditure will be at least modestly increased
  • Economic growth is expected to be sustained at  between 3-4% and the net overall effects of the budget are expected to give the "average" person a 4.5% increase in spending money.

 RFMF $93.6m, up $11.9m on 2014, and down $9.4m revised 2015.
Police $126.3m, up $5.8m
Education $432.2m, up $30.6m
(Special schools grant for special needs children, doubled to $500 p.a).
Health $280.1, up $11.3m
Housing $30.3m, up $3.1m
Women, Children, Poverty Alleviation $52.2m, up $6.4m
Youth and Sports $22.5m, up $5.8m
Higher Education $76.6m
Agriculture $76.2m, up $11.2m
Fisheries and Forests $26.3m, up $2.3m
Industry, Trade and Tourism $58.9m, utp $9.4m
Sugar $23.8m, uip $12m
Infrastructure and Transport $122.2m, up $9.2m
Details by ministry can be obtained from this link

Chapter 2 on Government's policy framework is important reading. 

Public Enterprise reforms with more private sector partnership/ownership in ports, ariports and electricity

Other tax reforms:
Increased taxes on  imported old vehicles. No more vechiles older than 5-8years. All must be compliant to Euro4 standard (see Dr Biman Prasad's criticism beloiw)
Increased taxes on tobacco and soft drinks.
Zero import taxes on plant, machinery. raw materials

The Minister noted that the tax amnesty on untaxed overseas incomes had been generally successful,  but that a significant number of Fiji companies had paid no tax for six years, and that of the 263 registered hotel companies only 68 had paid tax in 2014. Personal and corporate taxes had been lowered, rural and maritime province development was being encouraged, exports promoted and efforts were being make to make more land available for production,


Fr Barr and women squatters
Fr Kevin Barr in a letter to the Fiji Times welcomed the VAT decreased ("VAT of 15% in a country with so much poverty and inequality is immoral and unjust") but thought the removal of VAT exemptions on basic foods and medicine "was like giving with one hand and taking back with the other hand.  A tricky move!" that would make life harder for poorer families. If other countries "such as Canada, the US, Australia, the UK and NZ can exempt VAT on basic food, why can’t we? It is true that the Budget allows exemptions for some categories of the poor but it looks rather messy. Only the worst cases of poverty are captured in social welfare programs."

 "The need to exempt at least some basic foods and medicines is imperative in view of the fact that:
(a) About 72% of our population is earning below the tax threshold (most of them below the poverty line);
(b) When our currency was devalued by 20%, food increased by 36%
thus dramatically increasing the cost of living. (Fiji Bureau of Statistics).
"The reason given for exempting basic food items was that not only the poor but the well-off would benefit from these exemptions.  This could easily be remedied by reducing VAT to 10%, leave exemptions on basic food items, and increase the taxes of the wealthy and corporations by just 2%.
"The high percentage of revenue accruing to government just from VAT is somewhat scandalous.  VAT is a regressive tax which everyone has to pay irrespective of income so it impacts heavily on the poorer section of the community. However progressive taxation based on the principle of the more you earn the more you pay is much more just and should be the backbone of government’s revenue."

"Is there any truth in all the rhetoric about concern for all our citizens or is it just nice words?"

NFP leader and Opposition MP Dr Biman Prasad considered it the "deceptive budget of a confused government," noting that the VAT reclaimed from the rich by removing the exemptions will not help the poor, and a number of inconsistencies: notably the reversals on VAT, and vehicle import regulations, previously relaxed but now tightened. (See the new Euro4 standard and age restrictions noted above).  He thought 5% economic growth "very ordinary" (NZ  forecasts 2.4% for 2016). 

Dr Wadan Narsey   provided a fuller criticism, also published in the Fiji Times. Earlier he had dismissed the A-G's competency, telling him to keep to law and leave economics to economists.  Wadan should note that John Maynard Keynes who The Economist described as "Britain's most famous 20th-century economist" had only studied economics for eight weeks when he was at Cambridge and he never sat an exam in the subject, In 1999, Time magazine included Keynes as one of the 100 most important people in the 20th century. "His radical ideas that governments should spend money they don't have may have saved capitalism."  (Google) Keynes was seeking to increase employment and production though government deficits and social spending. Some have called him the father of the Welfare State.
In  publishing all of Wadan's article I have taken the liberty to include some of my own comments in bold parenthesis.

'U-turns' in 2016 Budget

Professor Wadan Narsey
Saturday, November 14, 2015
If you listened only to the first 10 minutes of the 2016 National Budget speech by the Minister for Finance, you might think the Bainimarama Government has been following a consistent strategy for Fiji's economic growth and development, right from 2006 when they took over.
You might even be convinced that the "unprecedented last four years of annual 4 per cent economic growth" proves the great confidence of the private sector, in the Bainimarama Government policies.
But the major tax policy U-turns in the 2016 Budget reveal that the Bainimarama Government is not consistent in its budgetary strategies and is now giving mixed signals to the private sector.
The Minister for Finance is not talking about the four years of stagnation between 2007 and 2011, while he is not admitting that the last four years of economic growth is due largely to the massive public sector increases in investment, not that of the private sector, although there is some private sector investment taking place. (See Keynes note, above).
There continues to be a large number of situations where the Minister of Finance and FRCA officials have discretionary authority to grant waivers or tax exemptions, a recipe for corruption. (and other areas where the window for corruption has been narrowed).
U-turn on VAT
In the 2011 budget, the Bainimarama Government increased VAT from 12.5 to 15 per cent, with a few basic items exempted.
VAT is generally regressive as it is paid on consumption, hence for poorer people, a fixed percentage of VAT usually represents a larger proportion of their income than it does for richer people. (Total agreement. See also Fr Barr's comment, but it is part of the new economics favoured in the West that seeks to reduce personal and corporate taxes while maintaining government revenue )
In the 2016 budget, however, the minister is boasting about the large reduction of VAT from 15 to 9 per cent.
This is a complete U-turn from the 2011 budget and would have been expected to reduce government revenues by more than $300 million.
But, the really strange thing is that the detailed 2016 budget estimates reveal that VAT revenues for 2016 will only be $48m less than the 2015 receipts, not the $300 million loss of revenue being bandied around.
Apparently, the removal of the exemptions on the basic items which the poor consume more (and which will now be taxed at 9 per cent instead of the previous 0 per cent) will offset a large proportion of the lost revenue because of the reduction from 15 to 9 per cent.
FRCA needs to release their detailed calculations as the numbers just do not add up. But without a doubt, Government has to find large amounts of additional revenues.
U-turn on corporate taxes
In the 2012 budget, the Minister for Finance reduced corporate tax, quite needlessly, from 30 to 20 per cent, losing FRCA an unknown amount in taxes (possibly up to $150m).
The business sector gleefully applauded the "wisdom" of the Bainimarama Government and most promptly exported their increased after-tax profits.
However some businesses are not applauding this time as the Minister for Finance has doubled the Service Turnover Tax from 5 to 10 per cent, expected to raise an extra $60m in revenues. A new 6 per cent environment levy is expected to raise another $70m. (Some sort of environmental levy would seem desirable to protect the environment, not to mention the tourism industry.)
No surprise that one prominent hotel representative looked quite sick on TV while another business tycoon pleaded on FBC TV that it would be simpler for the Bainimarama Government to just increase corporate taxes from 20 to 25 per cent (yes, this is not a typo).
The public needs to remember that for some businesses, corporate tax can always be reduced by creative accountants taking advantage of numerous tax loopholes (such as SLIPS and Half SLIPs) granted by successive governments, whereas straight turnover taxes cannot be easily avoided. (Government is well aware of this. See the note above about the tax amnesty and companies not paying tax. Major changes in behaviour sticks and carrots and time.)
Mixed economic signals
If a Minister for Finance with seven years' experience on the job knew what he was doing with the annual budget, there would be little need for major taxation policy changes year after year. ( Why not? A nimble mind makes changes as situations change, and no one gets it right all the time.)
The private sector has to be worried when they see the Minister for Finance one year reduce corporate taxes, income taxes, levies, allowances and tax thresholds, while exempting basic items from VAT, here and there.
Then the next year, while claiming that all is hunky dory, increases some corporate taxes (but not all), brings in new levies, changes allowances and tax thresholds, and removes the VAT exemptions on basic items, here and there.(The private sector reaction has been mixed but generally supportive)
The public should note that every time a government policy is reversed with great fanfare (as is happening virtually every month in education), it is also implying that this same government has been doing the wrong thing for the previous eight years. (Not at all. Government's education policy has progressively improved the lot of the poor: free or heavily subsidised transport, meals, books and stationery, fees; reserved places at boarding school for children in remote and rural areas; doubling the grant for special needs children; more teachers and slowly improving student-teacher relations; more career-orientated tertiary education, and so on.)
The private sector must be excused for thinking what else is going to be changed next year?
It is comical however, that there are two powerful media organisations who keep praising the Bainimarama Government year after year, even if they keep reversing their policies.
IMF praise
The Minister for Finance announced the IMF's calls for economic reforms and greater private sector development, was "music to his ears".
Mr Khaiyum's ears were however closed to the IMF a few years ago when it offered a loan of $500m at only 2 per cent interest, which was rejected by the Bainimarama Government.(It was rejected because the loan was conditional of IMF demands that govenment could not accept. (In fairness, why didn't Wadan mention this?)   Instead, the current Minister of Finance accompanied ANZ on an international jaunt selling bonds costing 9 per cent in foreign exchange, now apparently reduced to 6 per cent after refinancing.
Nevertheless, Fiji taxpayers will have needlessly paid more than $100m in interest, because our Minister for Finance did not like the IMF music in 2012.(Interest and repayment spread over several years.)
This Bainimarama Government does not wish to release a Bureau of Statistics report that shows that for the first four years of the Bainimarama Government the private sector was not investing, and there was economic stagnation while employment declined.
This Minister of Finance does not acknowledge that the bulk of the economic growth for the past four years has been driven not by private sector investment (which may have increased a bit through construction of housing), but by the massive increases in public sector spending on roads and water, funded by increases in public debt, and increases in consumption driven by remittance receipts. (Yes, it does. Read the budget.)
Other budget stories
There are many other budget stories deserving in-depth investigation not possible here.
There is the continued excessive allocation of more than $600m to the Fiji Roads Authority, which by September this year has apparently spent only 36 per cent of its allocation (so wait for a last minute wasteful splurge as the allocation is desperately used up). (Expenditure is notoriously difficult to estimate and is not confined to Fiji. Financial year-end binges are typical in many overseas budgets. Government has acknowledged and expressed frustration on this issue and is now imposing strict time limits. See  Did this not happen under previous governments? )
This year again, the deficits are shown to be artificially low because of plans to sell off very profitable public assets (effectively farms selling their cows in order to balance their books). (Maybe, but the downscaling of public assets and their sale to the private sector, and joint government-private sector ownership, is a central pillar of modern economics in many Western countries. Come to NZ where it is much more extensive. Wadan also knows this.)
There is the creeping extremely unhealthy increased FNPF ownership of critical sectors of the economy.
There are the special favours granted to some businesses, through increased duty protection for false industries (apparently, Fiji is now a local manufacturer of "electrical junction and mounting blocks").
There are continued discretionary powers granted to tax officials to waive duties and taxes, a recipe for corruption and bureaucratic nightmare.
And much more.
Annual hype
If a government truly had in place a consistent economic and budget strategy, there would be little need for the hundreds of the annual tinkering that goes on with taxes and government expenditures as currently.
There would be no need for the massive hype given by the minister's budget speech, in front of the annual carnival of who's who of Fiji; ambassadors, donors, business tycoons, NGOs, socialites and government hangers-on, all reported by an excited, less than investigative media, pretty much like the hype around the Melbourne Cup..(Hyperbole that detracts from his argument)
If Fiji achieved all the glorious objectives that the Minister for Finance stated in the first four pages of his 2016 Budget, our people will be in heaven by the end of 2016 and we are already half-way there.
But the statistics on suicides, crime and violence against women and children, suggest otherwise, as do the dismal data on real production in the economy.
* The views expressed are those of the author and not of this newspaper.


Economic and Fiscal Supplement to the Budget

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