Yesterday, Papua New Guinea’s Treasurer Patrick Pruaitch presented both the 2016 National Budget and a Supplementary Budget for 2015. Both budgets – highly anticipated given the PNG Government’s need to address lower revenues – make cuts to projected expenditure and find additional revenue resources in order to keep the budget deficit under control.

PNG Treasurer Patrick Pruaitch

First, the good news. Government revenues are now expected to be K12.64 billion for 2015, compared to K11.85 billion in 2014, and the economy is expected to grow by 9.9%. The bad news? The government was expecting K14.14 billion in revenue and growth of 15.5%, and had already planned to spend K16.5 billion in 2015, incurring a K2.4 billion deficit in the process.

Global factors

The causes of the reduced revenue are largely out of the PNG’s Government’s control, as PwC’s commentary on the 2016 National Budget explains:

‘This is due to the contraction in the mine sector and lower than anticipated growth in other sectors in the economy—a result of low commodity prices, the adverse effects of the drought, and the shutdown of the Ok Tedi mine in July 2015.’

Left with little choice, the Government has responded to the challenge in a measured way.

‘The Government has reacted to the various levels of concern raised regarding the changed economic circumstances it finds itself in … while still seeking to funnel expenditure to the development priorities it holds dear,’ notes Deloitte PNG’s 2016 Budget Alert.

2015 Supplementary Budget

With the deficit looking set to blow out beyond the mandated 35% debt-to-GDP ratio allowed under PNG’s organic law, the Supplementary 2015 Budget has introduced some necessary K1.377 billion in cuts to expenditure for 2015 and an additional K1.1 billion in new revenue.

There were cuts across several broad-based areas of government spending, the largest of which were a K756.1 million cut in the Administrative sector, and a K285.4 million cut to the Economic and Infrastructure Sector.

2016 National Budget

A further K613.4 million in reductions are carried over to the 2016 National Budget, which anticipates K14.76 billion in revenue against K12.65 billion in spending, and predicts PNG’s economy will grow by 4.3% in 2016 (the International Monetary Fund predicts the global economy will grow by 3.6% next year).

That said, the Treasurer was keen in his speech to emphasise that cuts would not be across the board, telling Parliament:

‘Free education for our children, free primary health care, assistance for agriculture and SMEs are core programs that will continue to receive full Government support.’

Some K220 million is being allocated to address the impact of the current drought.

Overall expenditure on administration, education and transport will nevertheless fall from 2015 spending levels, according to the 2016 Budget, while expenditure related to health, the economic sector, utilities and provinces will rise. Expenditure on law and justice is set to be maintained at 2015 levels.

Previous forward estimates had PNG Government finances returning to surplus in 2017. This has now been pushed out to 2020.

Few tax changes

With the recommendations of PNG’s tax review only recently delivered and therefore yet to be digested by government, there are few changes to PNG’s tax regime, although PwC have welcomed as ‘potentially significant’ an Import GST Deferral Scheme which will be introduced as of 1 January 2016.

Sovereign Wealth Fund

However, there is more information on PNG’s Sovereign Wealth Fund, which is set to become operational in 2016. In 2016, the SWF’s Stabilisation Fund is set to receive K379.2 million, while its Savings Fund is set to receive K83.1 million. In both cases, these payments will come principally from mineral and petroleum-related revenue and taxes. The Government now estimates the SWF will receive K3 billion in payments in the four years commencing 2016.

State-owned enterprises, now reorganising under the government’s Kumul Consolidation Agenda, will in future pay their dividends directly into the SWF.

Sovereign Bond

The PNG Government is also exploring its options for the introduction of a Sovereign Bond, which would, in the words of PwC’s budget commentary, provide ‘a reduction in the Government’s heavy reliance on the use of short-term debt (Treasury Bills) to finance the Budget deficit’ among other benefits.