The money’s running out

The new Cabinet is likely to discover that money is very tight

The Herald was informed on Tuesday afternoon that MFEM’s advice is likely to be that there is only sufficient monies to pay government staff wages but little money for anything else.
If that advice is confirmed, it would come as no surprise as in June 2009 and again in December 2009, MFEM threw out clear warnings that total expenditure is expected to outstrip revenue in the 2009/2010 year and beyond. The June 2009 warning was publicized in this paper.
The latest warning came in the Half Year Economic and Fiscal Update for 2009/2010 issued in December 2009.
The Update prepared by MFEM indicates that taxation revenue does not fully cover operating expenditure. According to the Update, taxation revenue makes up 85% of operating revenue and is projected at $82.2 million for 2009-10 or around 25.5% of GDP. Of this, 42% is from Value Added Tax receipts. Where does the balance of the money come from? That is not in the Update but most likely is from trading revenue and previous operating surpluses.
What does this all mean? It means government must find new revenue streams or make cuts in expenditure. No doubt the public would suggest cutting down on the number of vehicles, cutting down on the number of overseas trips and reducing the size of the public service which has grown in recent years to around 1,900 personnel.
Government could either find a new revenue producer or be bold and create one. It takes money to make money and perhaps government may need to consider some large development that will return a dividend. At present all the big money is ear-marked for major infrastructure works but while that may provide jobs in the interim, it does not generate a sustainable income.
This writer will be so bold as to suggest an idea right out of the box. Complete the Vaimaanga Hotel!
A proposal was submitted to Cabinet over a year ago by Developer Dan McEwan for government to underwrite a loan to enable the Hotel to be completed. That proposal was not approved due to the level of debts held by McEwan. In the region of $40m.
Completing the Hotel would be unpopular to some but it would provide much needed jobs and incomes for local builders at a time when the building industry is in a depressed state. On completion, the Hotel would provide ongoing employment for locals and tax revenues for government. Government can become a joint venture partner, accessing a cheap development loan from China and exit the enterprise when it has recovered its initial investment.
The following is an extract from the Update.
“1.7 Assumptions underlying the fiscal projections
Various assumptions must be made to forecast government’s fiscal position and performance in the outer years. Outer years refer to two fiscal years following the budgeted year as per the MFEM Act; this update refers to 2010-11 and 2011-12 fiscal years. Operating Revenues are forecasted on the basis of growth in nominal GDP that reflects expected growth in real GDP and general price increases through the consumer price index (CPI). Nominal GDP is expected to grow by 4.0% in 2009-10 and then moderate to 3.1% in 2010-11 and then 3.4% in 2011-12. Actual receipts may differ if growth in the economy varies from projections. The global economic crisis is still impacting on the world economy but most countries are now reporting a return to growth. New Zealand has recently reported that the downturn experienced there will not be as severe as first thought and Australia’s growth has picked up to the extent that interest rates are now increasing to contain inflation. The United States of America is now out of recession and unemployment figures are starting to decrease. We rely on these markets for tourism and any growth in those economies should translate into growth for the Cook Islands. A major obstacle to continuing growth is oil prices that have started to increase again in line with increased economic activity in the world. Real GDP growth is expected to increase by only 0.8% in 2009-10, 1.1% in 2010-11 and 1.4% in 2011-12. Operating Expenditure is forecasted mainly by movements in CPI and by average medium term rate of increase for personnel costs. Personnel costs are expected to increase by 2.0% in out years due to the slowdown in economic activity brought about by the global economic crisis. Other operating expenditures are expected to increase by 2.1% and 2.3% in 2010-11 and 2011-12 in line with anticipated reduction in inflationary pressures and the resultant decrease in CPI. Projections are based on current policy settings and do not take account of possible policy changes in the future.
On current projections, Total Expenditure is expected to outstrip Total Revenue in 2009-10 and in the out years. Under the new ratios developed by the Ministry of Finance and Economic Management, Government will not be in a position to raise current taxes so additional revenue streams will need to come from other charges. If additional charges cannot be identified, expenditure will need to be curtailed to allow the government to fund necessary services. Level of borrowings is based on average exchange rates in June 2009 at the time of the original Budget. While the level of borrowings is not expected to increase in the outer years, debt repayments will increase as present loans come out of their grace periods.”

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