The 2001 budget was delivered yesterday by Finance Minister Hon Kubuabola.  This budget was eagerly awaited by Fiji’s business community because it was supposed to steer the country from the economic, political and social turmoil that it is embroiled in now.  A national budget provides a number of signals to a number of parties both within and outside Fiji.  Overall, it reveals economic ideology of the government. In doing so, it details out plans it has in store for uplifting the quality of life of the general population. This budget also comes under great scrutiny because it comes at a time when the democratically elected government has been deposed illegally, and the economy is bracing for –8.2% growth, investment is at an all time low with a bleak chance for any significant positive growth next year.  Given such a scenario, with numerous demands, one being Blue Print for advancement of indigenous Fijians and the Indo-Fijian farmers becoming landless, the question that everyone is attempting to answer is how has the government faired under this situation? Has it lived up to its expectation of a state under whose eyes everyone is same immaterial of its race, religion or gender?

To answer the above question, lets examine few key indicators, this being the size of the government, government revenue base, expenditure financing, investment enhancement, sectoral allocation, poverty alleviation and affirmative action policies.

Size of Government and Financing of Government Expenditure

Size of government has always been a contentious issue, particularly in an era globalization.  The size of government, in terms of its expenditure has decreased by 2.1% over last year in nominal values. This is equivalent to 30.1% of 2001 GDP (Table 1).  In 1999 and 2000, the expenditure was 30.9% and 29.1% of GDP respectively.  In effect what it means is that more GDP is expected to be generated by the public sector next year relative to 2000.  This is expected given the poor response from the private sector.  Furthermore, this is not too high relative to other countries, particularly where market is playing a greater role.  However, the question then that arises is how will this expenditure be utilised.  The nature of expenditure is very important, as it will determine the size of economic growth in the country in the longer run.  While maintaining the level of government expenditure within the confines of government revenue is important to avoid excessive debt burden on the current and future generations, there are some good aspects also of reasonable borrowing over your revenue.  One is that, with an annual inflation rate of around 4 to 8%, it will be a net gain to the debtor in real terms.  However, the money borrowed should provide a rate of return that is higher then the cost of borrowing.  This would happen if this expenditure were utilized for capital projects.  Overall, capital

Table 1: Budget Analysis, 1991-2000.

Data source: Fiji Government National Budget (1991-2001), Ministry of Fiji, Government of Fiji, 1999.

 expenditure is 18.5% of the total government. While this is same as previous years, raising this figure significantly will be difficult given the fact that the public sector is the major employer. The expenditure allocation could be further examined.  Apart from general administration allocation, there are three functional categories, the social, economic and infrastructure sector.  Relative to the 2000 budget, the 2001 budget reveals a reduction in the proportional allocation to all these three sectors, economic (10.3 to 9.1%) and infrastructure (13.5 to 12.9%) and social services (9.7 to 7.1%). The economic sector is key to sustained long-term growth of any economy.  Reduction in allocation to this sector is certainly not a good move by any government.  Similarly, given the state of poverty, unemployment and lack of social security for a large number of the elderly in the population in this country, the case for much higher allocation for social services is fully justified.  Unfortunately this sector has also seen a reduction in allocation.  Interestingly, the capital component of the social sector has been reduced.  One must realize that economic services and infrastructure development plays a direct role in creating employment, raising income, lowering crime and other social ills, which in fact is a long-term solution.  Therefore, a much-balanced approach to budgetary allocation to these sectors would have been a much better way ahead.  The allocation to economic, infrastructure and social services could have been increased if the operating expenditure for general administration is reduced.   At the moment, general expenditure budget takes a major chunk of total expenditure (20.16%).  This is a logical approach to promote long term economic growth and income redistribution in Fiji.  Not only the current generation, the future generation will also benefit from the returns to capital expenditure.

 Another interesting issue that needs to be examined is the financing of government expenditure.  While government plans to spend  $1,096.8m, its forecasted revenue, under a very optimistic scenario, is only $951.7m, leading to a deficit level of $145.1 m.  This budget deficit is a 107% increase over the 2000 figure.  Allowing for debt repayment leaves us with a gross deficit of $253.1m, an increase over 2000 figure by 33.2%. The net deficit is equivalent to 4.0% of GDP while the gross deficit is 6.9% of GDP.  Reducing the deficit level is one of the major priorities of any government.  The 2000 budget forecasted net deficit level of 1.9% of GDP, a reduction from 2.6%, was a positive signal about governments concern to reduce the debt burden.  However, the current forecast for 2001 of 4.0% is a serious matter for the government.  The increasing budget deficit requires increased borrowing.  As I have said before, increasing amount of borrowing may not be a bad idea if this borrowing is utilized to finance capital projects.  In this case, only 18.5% of the total expenditure are channeled towards capital projects.  Therefore, what this government is doing in essence is financing the current generation consumption expenditure by borrowing extensively which will be paid by the future generations.  Secondly borrowing from the domestic private sector may crowd out of private sector investment.  There is only a limited pool of resources that is available for the private sector to play with and thus governments proposal to borrow extensively from it may not be good in the longer run when government is going to great lengths to promote investment.  The increasing deficit levels add up to government debt and as such, the raising interest payments are also becoming a serious problem.  As a rule of thumb, debt level greater then 40% of GDP is unsustainable.  Even the interim government acknowledges this in their budget address.  However, despite this acknowledgement, the debt to GDP ratio is around 44.8% for 2001.  The previous budget forecasted a debt to deficit ratio to be below the critical point of 40%.  This raises serious question of the right of this government to borrow extensively to raise consumption of the current generation while putting repayment burden on the shoulders of future generation.  Apart from the repayment of the principal sum, significant proportion of government finances is also channeled towards interest payments.  For 2001, it is estimated that finance charges of Public debt will be $110.2m alone, more than the repayment amount of $108m for next year.  Government needs to seriously examine its expenditure allocation, both operating and capital and also needs to examine revenue collections. 

 Government's revenue collection arm needs through review if government expenditure is to be generated from government revenue.  In 1998, the actual operating revenue collected was far lower than what was collected.  My initial computation reveals a shortfall of $92 million for 1998 with respect to direct income tax alone.  When we add the evasion of indirect taxes, particularly VAT, this figure may double.  If we add the dues of other years, then we will note that a substantial amount of income that could finance government expenditure is being withheld from government quite strategically.  While some measures outlined by the government look promising more needs to be done with respect to staff numbers and training.

The budget also reveals a move towards the Ah Koy era.  First it talks of sale of government capital assets.  As I have said before, this move to make the sate asset-less will make the state very vulnerable to external shocks.  A state should have a strong finance and asset base.  Selling of government asset, returning of Sate land to NLTB and the whole process of privatization will haunt the government in the near future.  On one hand, government wants to re-assert its role to uplift the standard of living of the indigenous community by allocating more financial resources. On the other hand, it wants to sell its revenue generating assets, and adopt a user pay system with respect to the use of public sector resource.  There is lot of contradiction in its objectives and the approach being adopted. 

 Promotion of Investment

Investment is at an all time low in Fiji and it will continue to be in that state unless and until the private sector confidence builds up.  Potential investors need to be confident that they will be able to harness the returns from their investment.  Therefore, the solution to this lies outside the budget. That of political stability, law and order and the protection of rights of all the people in the country.  The investment package, tax concessions and allowances provided by the government in the 2001 budget will not attract new investors, but will increase profits for the existing businesses in Fiji.  These money, now lost on tax breaks and concessions, could have been better used on targeted measures to help the poor and needy.  There are also some very serious implications that arise out of this move of government.  One is that what this government has done is very damaging to the country in future because once these allowances, tax abolition and concessions are given, it will be very difficult to bring it back. Secondly, the message that existing investors and business community have got from this and the post 1987 budget is that to get major tax breaks and concessions, coups and political instability is the answer!!.  

 Tax Changes, Poverty Alleviation and the Poor and Landless

The personal income changes, though very small, are welcomed.  However, the changes reveal that lower income bracket people get less reduction while higher income bracket people get more reduction.  For example, married couple with one child earning $12000 will get a reduction in tax of $5.77 while a family of same size with an income of $30000 will get a rebate of $26.55.  In short, this governments proposal is that poor (lower income bracket people) get less tax cuts, while richer (higher income bracket people) gets more tax cuts.   While VAT has been reinstated with a simultaneous reduction in tariff duties, this does not necessarily imply that there will be no price change.  My initial calculation shows that there will be marginal increase in prices, which will affect the lower income bracket people most. The reason put forward by the government that all benefits from VAT reduction and that’s why it is removed is contradictory because one of crucial monetary policy objective of the government is to reduce inflation in the country and that is for all and not for the poor only.  Furthermore, the government states that it is losing $40m of valuable tax income by removing VAT but then in the next page it states that tarriff rates will be reduced to accommodate reinstatement of VAT which will inevitably reduce government revenue which it wants to save.  So again government contradicts on its justification.

 Positive allocations have been made in the area of poverty alleviation.  Hope this allocations are made available to the respective ministries immediately at the beginning of next year to plan for targeted measures.  It should also be noted here that the allocations made to various measures should be examined carefully because of double counting as presented in the budget supplement. Allocations shown under Affirmative action policies are again shown under Poverty alleviation allocations. While government has shown some remorse with respect to allocations for rural development projects and poverty alleviation, their approach to deal with the landless and the Indo-Fijian community is a matter of great concern, to say the least.  On one hand, government allocates $28.65m for the advancement of the indigenous community for affirmative actions policies while the Indo-Fijians are left out.  However, some hope is seen from the allocation of  $7.5m for other ethnic groups which Indo-Fijians could benefit.  The most appalling is the allocation for ALTA resettlement, which is both inadequate, and also a ploy to force farmers to accept the new lease legislation.  Of the allocated $5m, $2.5m will be available to cater for the outgoing tenant farmers.  At a rate of $10000, this will only cater for 250 farmers.  Next year alone, 1494 Indo-Fijian cane leases will expire and therefore this allocation only caters for 16.7% of the farmers.  What the government should have done was to give the farmers a choice of whether they would want to be resettled or take a cash payout. Instead, what this government is doing is to give the farmers an alternative of either accept the resettlement option or make they way out without anything.  The rice farmers are also going to face tough time due to reduction in tariff rates on imported rice.  While government may argue for consumer sovereignty, what plans do government has in place for these farmers who have made their life long investments in these industries?  The treatment given to the farmers who are predominantly Indo-Fijians by the interim government in this budget reflects the states position on them.  This is indeed a sad day for the descendants of Girtmityas in Fiji.

  In summary, the government has gone berserk with regard to its fiscal policy at a time when they should be very cautious and prudent in the use of taxpayer money.  The allocation of the government expenditure is not based on principle of equity and efficiency, but rather on emotions and racism in disguise of affirmative action for Indigenous Fijians.  The state, on whom, was the last hope for the population at large, in particular, the poor, downtrodden and the landless, has failed.  Is this the beginning of a new era of states role in the development of contemporary Fiji?

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Last update: August 27, 2001