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CI Times Weekly | Current Issue 273 | 20 October 2008

DPM issues caution notice on Expenditure

On Friday the Office of the Deputy Prime Minister and Minister for Finance issued a cautionary letter to all government agencies to watch expenditure.
This action was expected and follows the release of government’s report on the economy for September 2008. The report is a wake up call for Cook Islanders to start taking notice of what is going on and to be aware of the threats posed to our economy by events occurring on the other side of the world.
Visitor numbers for the year to date are down compared to the same period last year. Total visitor numbers have been down for the last four months compared to the same period last year. For the quarter ending September, the number of visitors from NZ are down 31.3% compared to the same quarter last year.
The following are some of the highlights of the Economic Update for September 2008.
The two main indicators available for assessing the performance of the local economy are Visitor Arrival figures and VAT revenue figures.
How do Visitor Arrivals and VAT figures reflect the performance of the economy?
Visitors inject money into the local economy during their stay in the Cook Islands through expenditure on accommodation, food, transport and crafts among other things. Increased visitor numbers, therefore, translate to more money injected into the economy and more income for the total population.
One way to look at it is that economic growth creates more job opportunities. As the number of visitors increase, there must be a corresponding increase in our service capacity to accommodate for the increase.
More workers are employed, providing income for those working who previously were unemployed or supplementary incomes for those undertaking double employment.
Declining visitor numbers adversely affect our economy. As tourism is our main industry, a declining trend of visitor numbers is valid grounds to be cautious.
Particularly concerning is a situation of prolonged decline in visitor numbers against previous years. Such a situation exposes the tourism and hospitality industry to heightened pressure stemming from a lack of business in the face of continued costs. Eventually, a time will come when it would no longer be economically viable to employ as many staff and redundancies would eventuate.
Value Added Tax (VAT) is a tax on the sale of goods and/or services of 12.5% collected by Government.
VAT figures provide an indication on the level of activity or transactions within the economy.
VAT revenue on the rise suggests consumer spending is up and that the economy is robust. The value of transactions during the relevant period is above expectations and, though not always, the number of transactions is up.
An economy struggling can be expected to show VAT revenue coming lower than expectations, indicating less consumer spending in the economy.
Economy @ a Glance
* Current year performance against the same period 2007.
Tourism
Visitors (September) ↓ 1.3%
Visitors (2008 Year-to-date) ↓ 3.2%
The number of visitors is again lower than in the previous year. Visitors in September 2008 are -1.3% lower than September 2007. This is the fourth consecutive month of lower figures when compared to the previous year. On a year-to-date basis, the numbers for 2008 are presently 3.2% lower than the same period in 2007.
These visitors numbers indicate that the global financial turmoil is beginning to bite and will have an effect on our local economy. The numbers from all of our markets are down when compared to last year, on both the monthly arrival numbers and the September quarter figures. On a quarterly basis, New Zealand arrivals are down 31.3% while Canada arrivals are down 72.5% when compared to the same quarter in 2007.
Taxation revenue for the month and Year-to-date is coming in as expected and is close to the budget estimates for this time of year.
Departure Tax is down but this is to be expected with the decline in visitor numbers.
While taxation revenue is presently on schedule when compared to the budget estimates and is ahead of last year’s figures, Government must exercise care over the short term to ensure that these figures are maintained. With the current economic slowdown affecting the world around us, it is prudent to ensure that any excessive expenditure is kept to an absolute minimum until such time as we are sure that the effects of the global slowdown does not adversely impact on our ability to fund initiatives.
The Global Economy
The global financial market is presently going through a period of sustained turbulence. Pressure resulting from the meltdown on Wall Street is now affecting the world and, although the American Government have passed a rescue package for the US economy, this may not be enough to save most economies from an extended recession. The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s.
A recession in developed economies will result in less demand for goods from those economies not originally affected, such as China. China has already indicated a production decrease through a reduction of iron ore purchases. A deep, protracted world recession will result in a contraction in the local economy. As a result, it is prudent for the government to delay any additional expenditure proposals until such time as the full effects of less shipping, less competition, less visitors and the global uncertainty are more clearly understood.
The New Zealand economy is already in recession, as is the USA. France has just announced a recession and England will not be far behind. Australia has already seen a significant reduction in commodity prices which will affect their economy in the short to medium term. These are present and potential tourist markets for the Cook Islands and a recession in these regions will mean fewer tourists to our shores and less spending by those tourists that come here.
While the Cook Islands are now 3rd on the list of islands to visit in the pacific by Australian tourists, there is likelihood that travelling Australians will restrict themselves to their own country in times of economic uncertainty.