The following provides a brief discussion on some of the key spending, taxation and new incentives from the 2013 budget. Rather than seeking to span the breadth of the budget content, this article extracts the key substance from the 2013 budget and provides a critical analysis.
1. Elections Office (F$11m)
The allocation of F$11 million to the Elections Office to prepare for the 2014 parliamentary elections signals a positive development. This provides certainty, to a large extent, that elections will be held in 2014 as promised. It should thus provide the environment for the foundation required to create confidence and faith in the future direction of our political system.
2. Health (F$167m)
An increase of F$15 million (compared to fiscal year 2012) to the Ministry of Health is absolute justifiable. This is an important government department that provides a vital service in any country. Any increase towards health should create positive spill overs. Nonetheless, Fiji’s health system will require more funding over the years to bring it to a higher standard. This cannot be achieved overnight and will need sustained higher levels of spending in the future.
3. Education (F$268m)
Education is another important component of any nation’s budgetary expenditure. Allocation for Ministry of Education takes care of primary, secondary and tertiary education. The budgetary allocation for Ministry of Education plays a critical role in Fiji’s human capital development, which is one of the fundamental factors of long term economic growth. The government has also assigned funding to further develop preschool education. While long overdue, this should boost the ability of those entering the primary school and give them a head start. Fiji is blessed with a good primary and secondary education system. However, efforts should be made to compare how our students perform in international assessments compared to other countries.
4. Fiji Roads Authority (F$422m)
Quality of government spending is always a concern. Provision of F$422 million for infrastructure is beyond doubt a quality spending. Infrastructure in Fiji has been falling apart and this injection should provide the much needed funds required to repair and improve roads and ageing bridges. No previous government in Fiji since independence has ever allocated more F$400 million (in real terms) for any reform or government department. This is indicative of the extent of the current problem in infrastructure. Spending in infrastructure development should thus provide positive externalities by making travelling to and from work and transporting goods more efficiently and thereby providing productivity gains.
5. Fiji Police Force (F$92m)
Rule of law and order is necessary to provide confidence in the workings of an economic system. There has been legitimate concern about the recent rise in crime, particularly violent robberies, and prison breakouts. It not only creates fear amongst the public but provides bad publicity for tourists and foreign investors. With tourism one of the most important industries and a nation in dire need of foreign investment for job creation, a well-equipped and efficient police force and a competent judiciary should be of utmost priority to the government. Thus the government has got its priority right by increasing the budget for Fiji Police Force compared to 2012.
6. Poverty Alleviation and Social Protection (F$32.3m)
Poverty is one of the most important problems facing Fiji today. While there has been significant reduction in poverty around the world in the last decade, poverty has actually increased in Fiji. Increases in funding for poverty alleviation, particularly welfare payments to the absolute poor (maximum of F$150 per month), only shows the failure of previous governments policies to reduce poverty. The government should ensure that strong economic growth is achieved to make a significant dent on poverty and improve living standards. This will, at least in the long run, take care of the welfare role that has come to be expected of the government. Any welfare program should be temporary as a culture of entitlement is usually politically difficult to break.
7. Tourism (F$23.5m)
Tourism is now Fiji’s foremost industry in terms of employment and foreign exchange earnings. There has been almost a 100 per cent rise (in nominal terms) in allocation for Fiji’s tourism industry during the last decade. In real terms, this represents almost an 80 per cent rise. While this sounds good on paper, the government should question the marginal benefits of additional funding. The argument regarding the multiplier effect of tourism is not good enough in this case. An independent study examining the costs and benefits of more funding would be the way to go.
8. Sugar Industry (F$15m)
Once regarded as the backbone of the Fijian economy, the industry was on the verge of collapse only a few years ago. The turnaround, with support from the government, has been notable. The budgetary expenditure for the sugar industry includes implementation of a quality cane payment system. While this would be probably one of the most innovative and long overdue measures to be implemented in the industry during the last decade, more systemic problems still plaque the industry. In particular, the current property rights in relation to ownership and usage of land has been one of the major factors for the downfall of the industry. Unless supply side constraints are resolved, there is not much hope for the industry. Government support through subsidies may revitalise the industry in the short term, but it may still find it difficult to survive in the long term if it does not lift overall productivity and competitiveness.
9. Taxes
Personal tax threshold has been increased to F$16,000. On paper it looks like this should provide relief to households that fall into F$15,600 (current threshold) to F$16 000. However, one also needs to look at how many in this bracket actually paid any tax at the time tax returns are finalised. By not charging taxes to people who tax were deducted but refunded at the end of the year, is not providing any real benefit to those households. Some better incentives include tax benefits to foreign firms that relocate headquarters to Fiji and 18.5 per cent corporate tax rate to newly listed companies on South Pacific Stock Exchange with 40 per cent local shareholding. In a small economy such as Fiji, the obligation to pay corporate taxes falls on shareholders is unlikely and that the ultimate burden of corporate tax falls mainly on labour. Higher corporate taxes thus results in lower investment in the economy and a smaller capital stock. This in turn leads to lower labour productivity of labour and, therefore, lower wages.
10. Investment Incentives
The decision to implement tax free zone from Korovou to Tavua for the agricultural sector is a welcome move. This should provide the incentives for new investment. Nonetheless, supply side constraints relating to land ownership and leasing that have crippled the agricultural sector may impede new investment decisions. The argument is not new and has been discussed before. The institutional structure of property rights relating to land needs major reforms if it is to respond to the needs of a modern Fijian economy.
Neelesh Gounder is a former Fiji academic, now based at the Griffith University, Brisbane