The Papua New Guinea Government has tabled its 2020 Budget, forecasting a big deficit designed to stimulate growth in the non-resources sector of the economy. David James explains the changes for business taxation and capital expenditure.

Parliament House. Credit: PNG Parliament

Papua New Guinea’s gross domestic product is set to grow by just 2 percent in 2020 and 2.8 percent in 2021, according to the 2020 National Budget presented yesterday by Treasurer Ian Ling-Stuckey. This compares with 2.9 percent for 2019.

Non-mineral GDP is expected to grow by 3.3.%, up from 2.9% this year.

The 2020 Budget forecasts a projected deficit of K4.63 billion, up from an adjusted 2019 deficit of K3.5 billion. This is a 32 per cent jump firm described in KPMG’s analysis as ‘eye-catching’.

So .. that loan to #PNG from Australia is directly displacing a loan from China’s Development Bank. Page 102 of the budget papers… pic.twitter.com/3MsThkDV12

— Shane McLeod (@ShaneMcLeod) November 28, 2019

Total expenditure and net lending in 2020 is budgeted at K18.7 billion of which, K16.4 billion is funded by the Government, with the remaining K2.3 billion financed by concessional loans – most notably a K1 billion loan from Export Finance Australia, the Australia Government-owned export credit agency – and government securities.

Notably, the Treasurer said that the government was exploring an International Monetary Fund staff-monitored program as a way of ensuring transparency in government finances.

With negotiations on the P’nyang gas project due to be resolved this week, the Treasurer made made no mention of its status.

Shift to capital expenditure

K12.7 billion has been allocated for operational government expenditure and K5.98 billion for capital investment expenditure.

There will be a shift in government expenditure away from employing public servants and towards improving infrastructure in PNG, according to the Treasurer.

‘Wages and goods and services expenditure will be reduced from 16 per cent of non-resource GDP down to 10.6 per cent – a very major reduction,’ he told Parliament.

On the other hand, capital spending is projected to almost double from the K4.7 billion announced in the 2019 Supplementary Budget to K8.58 billion by 2024.

‘We will invest in economic growth corridors through the Connect PNG Program with critical enabling infrastructure forming the spine of the corridors. This network of growth corridors will connect rural PNG farmers to urban and international markets.’

‘An on-going priority will be to develop strategies to lift revenue. I believe that we can do this, especially by enforcing greater compliance.’

Ling-Stuckey said funding for this program in 2020 would come from an initial instalment of over K200 million.

‘This is just a down payment,’ he said. ‘We will direct more and more of the growing capital program in the budget to the Connect PNG program. We will also seek support from other international agencies and donors to support this historic initiative.’

‘The planned increase to this year’s capital budget and repayment of arrears is expected to have a multiplier impact on the construction, and retail and wholesale sectors, in addition to information and communication being boosted by the new fibre optic cable starting in January 2020.’

Tax changes

Changes for taxation aimed at increasing the government’s revenue take were also announced in the Budget. This is the main cause of the budgetary stresses – Sam Koim, the Acting Tax Commissioner of the Internal Revenue Commission (IRC) estimates that tax compliance is only running at 9 per cent in PNG.

‘Unfortunately, our major revenue areas are personal income taxes; the company income tax and the GST have shown very little growth over the last five years,’ said Ling-Stuckey. ‘This is despite a more than trebling of wage funding for the IRC.’

The Treasurer said the current strategy has total revenue increasing from K13 billion in 2019 to K14.09 billion in 2020, and 18.83 billion by 2024.

‘This is not enough,’ he said. ‘This still represents a decline in the share of revenue to GDP from 15.4 per cent down to 14.9 per cent. An on-going priority will be to develop strategies to lift revenue. I believe that we can do this, especially by enforcing greater compliance.’

A key strategy appears to bring small and medium-sized businesses (SMEs) into the formal economy.

Ling-Stuckey acknowledged that small businesses in PNG face ‘daunting paperwork’ and a tax rate on any profits of 30 per cent. ‘No wonder they become discouraged and decide to stay out of the formal revenue system.’

‘Revenue collection by the IRC will continue to be an area of focus and pressure for 2020.’

In response, the government will introduce what it says is a simplified and cheaper tax regime for small businesses. Businesses with an annual turnover of less than K250,000 will pay tax of two per cent on the turnover (sales revenue). There will also be simplified accounting and tax rules for small and micro businesses. The aim, said Ling-Stuckey, is to ‘help migrate 50 per cent of the population to some form of [formal] business by 2030’.

So many interesting things in this tough #PNG budget. One that struck me is expected govt revenue over lifespan of PNG-LNG project. Don’t think this has been made public before. Buying equity stakes in resource projects through lending makes govt benefits very lumpy… pic.twitter.com/XsqGRrd6oi

— Jonathan Pryke (@jonathan_pryke) November 29, 2019

According to a KPMG report, there will be an annual flat tax of K400 (paid annually) on businesses whose turnover is less than K50,000. ‘Revenue collection by the IRC will continue to be an area of focus and pressure for 2020.’

Parents of school-age children are the big losers in the Budget, with the government re-introducing school fees up to the end of secondary school. Tertiary education will be subsidised through interest-free student loans.

Resetting Expectations?
Read our summary of the PNG 2020 Budget.

Winners? Retiring government employees who don’t smoke or drink but are in the market for a new car. #pwcpngbudget. https://t.co/BfY3gnlFhx

— Ryan Jones (@ryan__a__jones) November 28, 2019