Entire economy at risk
13 April, 2019, 11:01 am
Through taxes and expenditure, Government has a huge impact on our daily lives. Government does not have money of its own to spend.
It taxes us for its income.
Total government revenue has increased from 26 per cent of GDP five years ago to over 30 per cent.
Government has grabbed an additional $400 million from our pockets to fund its insatiable expenditure appetite.
Government expenditure has risen to a historical record of $3.7 billion a year and now account for 35 per cent of our GDP.
This is huge.
Prudent financial management requires government taxes to be as low as possible leaving the spending and savings decisions to the people.
In my view, government revenue should be about 25 per cent of GDP and expenditure less than 30 per cent of GDP.
Our current position indicates in my view that the Government is clearly over taxing the people, so it can continue to increase expenditure.
In its assessment of Fiji’s economy, the IMF said, “Government revenue increased sharply in recent years and are relatively high compared to other economies in the region”.
While Government has reduced VAT to 9.5 per cent, it increased VAT on essential items from zero to 9.5 per cent.
Government is now charging licensing fees on the poor rural people who fish in their own rivers and coast lines.
The hotel industry which is our mainstay, is being taxed close to 30 per cent in aggregate. Our departure taxes are one of the highest in the world.
There are taxes on top of taxes.
In my view, the main reason the EU has blacklisted Fiji was because of the preferential treatment granted to the rich local and foreign companies while the ordinary small taxpayers pay their taxes and penalties in full.
This is most unfair.
On the expenditure side, the main guiding principle is that Government must spend our monies wisely.
Let me give you a few examples of our monies not being spent wisely.
Obvious priorities for us are health and education.
Have you seen the state of our hospitals lately?
There is lack of medicine and not enough beds.
I have seen expectant mothers sleeping on the floor.
On the other hand, the Government sees fit to hand out millions of dollars to those that were not affected by cyclones and flooding.
This, obviously, was a political gimmick.
Moreover, Government sees fit to spend $26 million to bring a rugby game and a golf tournament to Fiji while those affected by Severe Tropical Cyclone Winston remain in makeshift shelters.
Government will tell us that those two events promote tourism, but has anyone sighted any statistics to back their claims?
Another important principle is that Government must get our money’s worth through a rigorous and objective procurement processes.
I believe that procurement is where the risk of corruption is the highest.
And sure enough, the IMF is concerned about due processes and rule of law on procurement not being followed.
Many of us are aware of instances where tenders have been awarded but then overturned by political intervention.
When we combine the four issues — high taxes, low priority spending, low value for our money and political interference — the impact can be devastating for the country.
The IMF can cite numerous examples of countries that have gone over the financial cliff because of high spending on low priority areas which leads to unsustainable debt positions.
Some of these examples are closer to home in our Pacific neighbors.
In dollar terms, government debt has tripled since 2006 to $6 billion. This is huge.
The danger that I see is that some of this debt is not being spent on expenditures that will help us grow in the medium to long term.
Therefore, our ability to repay that huge debt in future is seriously weakened.
We run the risk of going over the financial cliff as some countries have done.
The IMF had assessed whether we can repay our debt in future.
It noted that due to higher spending, the debt to GDP ratio was now rising again from 46 per cent of GDP in 2014 to 51 per cent.
The IMF estimated that the expenses because of Severe TC Winston were only a small part of that increase.
They confirmed that “… there was also a sizeable increase in current spending”.
The IMF wants our debt to come down to 44 per cent of GDP which is a reduction of $770 million. I would go further.
For a small vulnerable country such as Fiji, our debt to GDP ratio should be 40 per cent of GDP.
To achieve this aim, we need to reduce the budget deficit which is the difference between revenue and expenditure.
The budget deficit has more than doubled to over 4 per cent of GDP from 1.4 per cent in 2015.
The IMF recommends that government brings that down to only 1 per cent of GDP in four years.
That is a reduction of $330 million. How can we do this?
After assessing all the components of our economy, the IMF states that the only answer is for government to reduce current spending.
They did not say that we should slow down the growth of expenditure. They also did not say that we should increase taxes.
The IMF warned that “… the current spending is expected to grow by 18 per cent in 2018/19 which is too fast and should be avoided”.
This must be crystal clear to government. It must now cut back spending. The IMF stressed that the “Fiscal space is at risk”.
To reduce spending, Government must cut out political expenditures and low priority spending.
Of serious concern was that the IMF does not seem to be convinced that Government would be able to reduce current expenditure.
They said, “Under current policies, fiscal buffers would not be rebuilt, putting the debt position at risk”. As a result, they did not see debt coming down from 51 per cent of GDP.
could jump to 56 per cent of GDP in the medium-term putting our ability to repay debt at risk.
Finally, the IMF is concerned about the very low fiscal transparency.
It recommends that public corporations must produce reports in a timely manner.
I would add that we should not allow public corporations to pay bonuses to their CEOs when the organisation is making losses.
Moreover, we should not pay expatriate CEOs extravagant salaries like the half million dollars to the LTA CEO when locals can do similar and possibly even a better job.
Since this is the last article in this series, I repeat that:
- Government current spending has risen to record levels which have raised our deficits to well above where they should be;
- As a result, our debt is already high at 51 per cent of GDP and projected to rise further to 56 per cent which seriously threatens our financial stability unless government reduces the deficit by cutting current expenditure;
- Foreign reserves are declining very fast due to our widening trade deficit fueled by higher government spending and rising oil prices;
- The world economy is weakening which may reduce tourist arrivals, put further pressure on our foreign reserves and reduce economic growth;
- We are most vulnerable because we do not have buffers to protect us from financial shocks and natural disasters; and
- Our cost of living is rising as our Fiji dollar depreciates.
In summary, Fiji’s economic and financial position has been put at a great risk from poor economic and short-sighted fiscal management.
Government must now change tack to protect our future.
The 2019/20 budget must start this change.
Government must heed the advice of the IMF.
Otherwise, this government is putting the entire economy and its people at a very precarious position. If we do not change, at the end of the line, the poor pays.
- Savenaca Narube is the former Governor of the Reserve Bank of Fiji. The views expressed are the author’s and not of this newspaper.