Tax take up-for now

Government has just released its Half Year Economic and Fiscal Update for 2009/2010 and which is for the half year to November 2009. Of major interest is that the tax take is ahead of forecast for now due to one off activities like the mini-games but is expected to fall back closer to forecast in the latter half of the financial year. There is also concern at the size of the public service which is seriously distorting operating expenditure to the extent that 67.5% of the operating budget is going on personnel while just 28% is going towards operating costs.
Government has reviewed its guiding ratios for expenditure on various items in relation to revenue and these are set out below in the extract from the Update.
Quote; “Within the 2009/2010 financial year, no Supplementary Budgets have been prepared and passed by Government to date. To this end, and in line with the principles of responsible fiscal management as outlined in the MFEM Act 1995-96:
• Operating expenses are budgeted to come in at $93.1 million, or 27.6% of Gross Domestic Product (GDP).
• Operating revenues are budgeted to come in at $96.0 million, or 28.4% of GDP.
• This provides for an expected operating surplus of $2.9 million.
Revision of revenue indicates receipts coming in slightly above estimates published in the original budget in June 2009. The operating surplus, which was estimated to be $2.9 million, is now estimated to be approximately $3.9 million. This is mainly due to increased economic activity in the Cook Islands, brought about by:
• The hosting of the South Pacific Mini Games;
• A larger than expected increase in visitor arrivals;
The re-introduction of additional cargo ships, and
• The reduced effect of the Global Financial Crisis
The 2008/2009 financial year ended with an operating deficit of $3.1 million due to reduced operating revenue. This shortfall was automatically funded through reserves. This placed the Government in a difficult position and while an operating surplus of $2.9 million was delivered in the 2009/2010 Budget, much capital works and other infrastructure projects were either put on hold or funded by loans anticipated from the Asian Development Bank (ADB) and the People’s Republic of China. This additional lending, on top of lending for construction required by the Pacific Mini Games, has increased the level of debt to 30.6% of GDP, still below the 45.2% of GDP in 2001-02 but reaching a level that may be unsustainable in the long term.
While government has undertaken further borrowings for much needed infrastructure, such as the roads and water articulation on Rarotonga, it is paramount that this borrowing should facilitate growth and consider cost recovery and be undertaken through the most favourable means possible for the economy over the repayment term.
The Ministry of Finance and Economic Management, with technical assistance from the ADB has undertaken a review of the fiscal indicators used to determine appropriate expenditure and lending levels for the government. The new and updated ratios include:
• Tax Revenue to GDP – to determine the appropriate amount of tax that should be levied on the people of the Cook Islands. Higher tax has the effect of stifling private sector investment. The global benchmark for tax revenue to GDP is around 20 – 25%. Tax Revenue should not exceed 25% of GDP, unless it is due to better compliance and efficiency;

• Public Sector Wages and Salaries as a percentage of Total Revenue – to determine not only the most appropriate size of the public sector but also to ensure that revenue is available to fund other operating requirements and capital. Wages and Salaries are the largest component of expenditure. This threshold is set at 44% of total revenue but should be reduced to 40% in the out years;
• Debt Servicing to Total Revenue – This is to ensure that government has the ability to service its debt from revenue collected. This includes both interest and principle repayments. Currently 4% of total revenue is used to service debt but this will rise to approximately 15% in the out years when payment on the loans from the People’s Republic of China and ADB begin. Debt servicing as a percentage of total revenue should not exceed 5%;
Overall Deficit to GDP - this combines the operating balance with the non-operating balance to determine the actual position of the overall budget in any one year. If the overall result is a deficit, it must be serviced through lending. In 2008 the government has an overall deficit of 0.8% of GDP. This rose to 11.2% in 2009 and is expected to increase to 16% in 2010. This rate of increase is significant and must be controlled to avoid the mistakes of the past. The overall deficit should not exceed 2%of GDP. Any additional demand for expenditure should be funded through a realignment of spending priorities or aid funds;
• Net Debt to GDP – This was first calculated as part of the Manila Ratios and was set at 47.3%. This ratio has been revisited to make it more appropriate to modern circumstances. Under the new threshold, Net Debt to GDP should not exceed 35%. “

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