15 Jun 2018
Budgets are not all about how the pie is distributed - growing the size of the pie is also important. A larger pie means more to go around.
Fiji’s 2018/19 budget has struck the right balance while also helping low-income earners, teachers, young parents, sugar cane farmers and first home buyers with new measures. As ever, smokers and alcohol drinkers will be worse off.
"Growing the size of the budget pie is also important - as a larger pie means there is more to go around.”
“The government aims to maintain a low, reasonable and equitable tax structure to incentivize private sector investment,” Ravendran Achari, Chief Financial Officer, Pacific & Fiji at ANZ says.
Importantly, the budget maintained Fiji’s commitment to funding a strong pipeline of infrastructure projects. In an election year, the government could easily have significantly cut spending to present itself as fiscally responsible and nullify opposition attacks as a bad economic manager but it stayed the course.
The Bainimarama 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 (or fixated with returning the budget to balance).
According to Achari, measures to improve health facilities in the budgets will ensure Fijians have options for high-quality medical services in line with international standards.
“The initiative to reduce duty on fruits and vegetables to zero… helps improve wellbeing,” he said.
He also praised infrastructure spending as well as moves to expand telecommunications infrastructure which will ensure more people have access wifi services driving digital initiatives.
“With the 40 per cent of the budget allocated towards capital expenditure the Fiji government continues to invest heavily on roads, bridges and improve access to isolated islands,” he said.
“It is to further ensure the overall public transportation system in Fiji is safe, efficient, reliable and environmentally sustainable with tax deductions for investment on electric buses.”
The budget papers showed transfer payments in Fiji, which include operating grants as well as pension and compassion allowances, will increase by $F121 million (16.9 per cent) in 2018/19 due to significant allocations for the poverty benefit scheme, among other things.
While it is manageable now, there is a danger 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.
Another year of deficit
Fiji’s latest budget assumes another year of real GDP growth making it the ninth consecutive year of economic growth. ANZ Research agrees. As stated in June, ANZ Research expects Fiji’s economy to grow by 3.3 per cent in 2018 and 3.1 per cent in 2019, supported by strong private and public sector investment.
Household consumption expenditure, the largest contributor to gross domestic product, is forecast to increase by an average of 3.3 per cent a year over the next two years, driven by employment growth and remittance inflows.
Fiji’s economy is now 25 per cent larger (in real terms) than its previous peak in 2008 and nearly 100,000 jobs have been created over the last 10 years.
However, Fiji’s 2018-19 budget projects another year of budget deficit (although an improving one) with at least one more year of deficit to come. A deficit of $F497.3 million is projected for 2018-19 while a lower deficit of $F368.3 million is targeted for 2019-20.
With ample liquidity, ANZ Research expects Fiji’s government to be able to fund its deficit without crowding out private investment. Hence, borrowings and subsequent expenditure through the annual budget would add directly to aggregate demand in the economy and help create jobs.
The reason Fiji has a budget deficit is because tax receipts, as a share of gross domestic product, have only gradually increased over time. Cyclone Winston induced an economic slowdown in 2016, which did not help.
Conversely, expenditure, boosted by infrastructure projects, lifted sharply over the last five years (see below). After averaging around 30 per cent in the 1990s and 2000s (as a proportion of GDP), it shot up early this decade and is expected to reach 34.4 per cent in 2017/18 before pushing higher to 38.7 per cent in 2018/19.
As the fiscal stimulus unwinds, ANZ Research expects the government to return expenditure towards 30 per cent of GDP – a level which generally produces the smallest level of budget deficits.
Kishti Sen is an International Economist and Tom Kenny is a Senior Economist at ANZ
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
15 Jun 2018
14 Mar 2017