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How will government increase revenue? Labour Party Edition

Today we speculate on what options he has and what measures he might undertake to deal with the crisis facing him. And what are people’s expectations from the Budget.

Undoubtedly, his most glaring problem is the management of liquidity. Liquidity in the banking system fell to a record low of $286m at February-end. Since then it has improved slightly to around $300m but is still low enough to force banks to clamp down on lending.

Fiji has been warned that any further reduction in levels of liquidity will push pressure on the banks to raise interest rates. Well, at least one bank has already announced hikes in its lending rates.

To relieve the liquidity situation, we understand banks are putting pressure on the Economy Minister to force the FNPF to bring in $300m of its monies invested offshore.

FNPF has been the cash cow used to bail everyone out of their financial predicaments except the members themselves who have had their pensions as well as the rate of annuity slashed by 50%.

When FSC is in trouble, FNPF is forced to buy the Corporation’s properties to relieve its cash flow problems. Unwanted tourism properties are bought by the FNPF. Just recently it spent $300m to purchase the Sheraton Hotel. Members have already lost close to $700m of their FNPF funds in failed tourism projects including money lost initially in the Natabua and Momi Bay ventures.

The second issue is the precarious state of government finances. Ministries and departments are bracing themselves for a cut in their allocations for 2019/20 or at least a status quo as of last year. Officials of the Ministry of Works are already warning people they may just have to put up with existing road conditions because of the unlikelihood of funds being provided for maintenance projects in this Budget.

It is clear that the Fijian economy is in recession. Usually at such times government’s embark on an expansionary budget to stimulate economic activity through public works. However, the Economy Minister has been cautioned by the IMF and other financial institutions to cut back on its public expenditure.

If Fiji does not heed such warnings and take precautionary measures, we may end up facing the same bitter IMF medicine as Greece and Ireland.

So if Minister Sayed-Khaiyum is to take timely heed of these warnings, he will have to undertake fiscal consolidation.

And Labour Leader Mahendra Chaudhry has warned that ‘fiscal consolidation’ means a drastic cut back in government expenditure. It means living within our means.

So what are Khaiyum’s options? How can he hope to stimulate economic activity? And how does he increase government revenue? He can raise VAT. But that is likely to be a highly unpopular measure because our people are already groaning under very high cost of living.

He can raise other forms of indirect taxes. Currently indirect taxation accounts for some 63% of government revenue.

But this is already very high – Just through the Environment and Climate Levy (10%), VAT (9%) and the Service Turnover Tax an individual is paying 25% in indirect taxes. This excludes such other indirect taxes as Customs Duty on imported goods, Stamp Duty and service charges imposed by the government such as the 1% telecommunications levy. There is also the 20c charge on plastic bags. The Departure Tax is also very high at $200.

Or he can raise direct taxes. Currently the company tax is 20% and income earners above the $30,000 threshold are taxed at 20%, with a phased out increase thereafter for high income earners. A social responsibility tax is imposed on those earning $270,000 and more.

Or he can look at other innovative ways of raising government revenue just as he did with the plastic bag levy introduced two Budgets ago. Whatever form it takes, raising taxes whether directly or indirectly will be very unpopular in the current recessionary climate and with the cost of living so high.

People are expecting some relief from the high cost of living but it is highly unlikely that the Minister will be able to offer much in this regard.

His last Budget was a populist, vote-buying venture. He will now have to consider serious policy incentives and measures to increase primary production and revive the flagging economy, undertake fiscal consolidation and at the same time meet the expectations of the people.

Will the Economy Minister be able to rise to the challenges facing him? Or will it be business as usual?

Extracted from Fiji Labour Party Facebook page.

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