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Fiscal Policy Responses Pacific
Fiscal Policy Responses Pacific
Fiscal Policy Responses Pacific
Fiscal Policy Responses Pacific
Fiscal Policy Responses Pacific
Fiscal Policy Responses Pacific
Fiscal Policy Responses Pacific
Fiscal Policy Responses Pacific
Fiscal Policy Responses Pacific
Fiscal Policy Responses Pacific
Fiscal Policy Responses Pacific
Fiscal Policy Responses Pacific
Fiscal Policy Responses Pacific
Fiscal Policy Responses Pacific
Fiscal Policy Responses Pacific
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Fiscal Policy Responses Pacific

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  • 1. Fiscal Policy Response - PICs Paresh Kumar Narayan Professor of Finance Deakin University Melbourne, Australia
  • 2. Aim • To examine the key issues in fiscal policies for selected PICs • To discuss the main fiscal policy challenges • To give an overview of the key implications of the global financial crisis on fiscal space of PICs
  • 3. Key Issues • There are a number of issues that impact on PICs fiscal policies and the success of such policies – Slow economic growth rates: historically PICs economic growth performance has been poor, and over the most recent decade the annual average growth rate has been around 3 per cent. • not attracted any meaningful private investments, depriving PICs of tax income.
  • 4. Key Issues • Persistent budget deficits: – in the face of growing demand for public services and a stagnant revenue base, the PICs have had to rely on borrowing to finance their budget deficits. • led to escalating debts. • This has been a drain on fiscal policies and their success.
  • 5. Key Issues • Increasing civil service wage bill: – this has been a growing concern for many decades. – The bulk of government expenditures in many of the PICs goes to paying wages and salaries for the civil servants.
  • 6. Key Issues • Political instability and democracy: – Over the last decade, a number of PICs have experienced political instability in the form of civil unrest and coups. – Political instability is a fiscal cost to the PICs. – There is loss of economic activity and loss of government revenues from political instability.
  • 7. Some Data – tax revenue Import/customs Vanuatu PNG Fiji duties as per cent of tax revenue 1990 66.0 29.3 34.5 1999/2002/2006 41.1 24.4 16.9 Taxes on int. trade Vanuatu PNG Fiji as a % of tax rev. 1990 51.3 19.5 31.6 1999/2002/2006 33.6 26.4 15.9
  • 8. Some Data – Wage Bill, 2006-7 Public wage bill per Public wage bill as a Public employment cent of GDP per cent of total as a per cent of total expenditure employment Vanuatu 12.1 53.0 26.9 PNG 9.2 29.4 - Samoa 8.3 24.5 - Solomon Islands 9.7 24.5 27.9 Fiji 11.5 40.6 28.2 Asia 5.3 20.0 17.2 Middle income 6.0 22.1 - countries
  • 9. Political Environment- 1990-2006 Changes in Changes in number of number of government governing parties Fiji 3 4 PNG 6 6 Samoa 2 0 Solomon Islands 5 6 Vanuatu 11 5
  • 10. Business cost & governance constraint Starting a Dealing with Enforcing Kauffman’s rule business (cost in licenses (cost in contracts (rank of law index per cent of per cent of out of 175) (from -2.5 to income per income per 2.5)* capita) capita) NZ 0.2 27.2 15 1.93 Australia 1.8 13.8 7 1.83 Palau 4.9 6.8 151 0.77 Mauritius 8.0 13.7 109 0.82 Seychelles 9.1 51.3 73 -0.03 Tonga 10.3 174.6 126 0.18 Marshall Island 18.1 37.6 103 -0.22 Fiji 25.8 41.7 86 -0.09 PNG 28.2 110.0 88 -0.76 Samoa 45.5 105.1 54 0.84 Kiribati 50.0 545.2 136 0.36 Solomon Islands 68.9 501.1 102 -1.01
  • 11. Global Financial Crisis - Impact • The Impact of the GFC on the fiscal space of PICs will most likely be felt through three channels: – Tourism – Remittance – Official Development Assistance
  • 12. Global Financial Crisis – Responses? • The bulk of government spending goes to civil service wages and salaries – How to reduce this? – Fiji Model: reduce the retirement age? – Role of trade unions
  • 13. Global Financial Crisis – Responses? • Income tax reform – The poor will be most affected • So raising the income tax threshold for the poor and increasing the marginal income tax rate for the high income earners
  • 14. Income Tax Reform Tax rates Personal income Corporate Sales or VAT tax income tax Solomon Islands 40 30** 15*** Fiji 32 30 12.5 Kiribati 35 25 0 PNG 47 30 10 Samoa 29 29 12.5 Vanuatu - - 12.5
  • 15. Conclusion • Comments/suggestions?

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