The 2005-06 supplementary budget provided for operating expenditure of $77.5 million, an in-crease of $2.1 million compared with the original budget.
After a period of moderate growth between 2001-02 and 2003-04, budgeted operating expenditure has increased considerably in the last two financial years. After adjusting for changes in the clas-sification of some items, the 2005-06 supplementary budget provides for an increase in operating expenditure of some 14.3% compared with the 2003-04 supplementary budget. While the econ-omy has been growing strongly this is nevertheless a large increase over a two year period, and is unlikely to be sustainable over the longer term.
The removal of most import levies in 2006-07 will force a reversal of this trend. As noted above, operating revenue is projected to decline by around $3.1 million in 2006-07. Nevertheless, the decline is much smaller (around $0.6 million) when compared with the 2005-06 revenue projec-tions in the supplementary budget, on which the current level of operating expenditure is based.
It is too early to provide detailed estimates of the likely implications for expenditure in the 2006-07 Budget. Nevertheless, the projections assume that expenditure will be maintained at $77.2 mil-lion, around its current level. Even with no growth in expenditure, the operating surplus is estimated at only $1.5 million.
Preliminary indications suggest that after taking into account the stronger than expected taxation revenue so far this financial year and depreciation, this may be just sufficient to finance non-operating outlays such as capital expenditure, loan repayments and increases in reserves. Nevertheless, there will be limited scope for increases in operating expenditure in 2006-07. There is also clearly no scope to have another supplementary budget in 2006-07. If taxation revenue continues to exceed budget projections for the remainder of this financial year, there may be scope for modest increases in expenditure in 2006-07.
On the other hand, if the economy slows or there is a cyclone this season, it is very likely that expenditure would need to be cut. It will be a major challenge to limit overall government expenditure while increasing expenditure on core government services. There is considerable evidence that the education and health sectors are key drivers of economic and human development, and a strong case can be made for increasing funding. Issues relating in part to funding in these areas have recently attracted significant public comment.
At the same time, it is important that any additional funding is used effectively to achieve better outcomes for the community. The Ministry of Education has developed a draft 15 Year Education Strategy Document and has a sound framework for strategic planning. The Ministry of Health is currently developing a Health Strategy for 2006-07 to 2009-10. The 2005-06 Budget includes an allocation for a review to analyse the quality and cost-effectiveness of services provided by the Ministry of Health, but unfortunately this review appears to have stalled.
A review of the Cook Islands Police Service is expected to commence in early 2006. This review will analyse the performance of the Service and should give an indication of the level of resources needed to provide high quality policing that meets the needs of the community. Meeting necessary expenditures in critical areas may require increases in other taxes or revenues to compensate for the loss of revenue from import levies, reductions in government expenditure in other areas, or a combination of both.
Previous updates have also highlighted the prudent financial ratios established following the Ma-nila Agreement between the Government and Asian Development Bank. The most notable of these is that the ratio of wages, salaries and supplements to GDP for the general government sec-tor should be no more than the 2001-02 level of 13.4%. While formal commitment to this and the other ratios expired in September 2005, it is nevertheless a useful guide for policy-makers.
The ratio is projected at 13.1% for 2005-06, slightly below the level in 2001-02. Nevertheless, in dollar terms personnel costs have increased by around $8.3 million over the period. Clearly, some growth in personnel costs over time is necessary to enable the public service to attract and retain high quality staff.
However, there is evidence that in some government agencies, excessive personnel costs as a result of overstaffing are squeezing the operating budgets. It is important that Heads of Ministry look at this issue to ensure that they are using their resources efficiently to achieve the desired outputs and outcomes.
Complete report: MFEM, Half Year Economic and Fiscal Update