government update overview

The Government’s fiscal position remains sound.

The Government has run operating surpluses each year since 1999-2000. The supplementary budget brought down in September provided for an operating surplus of $1.8 million in 2005-06, down from the projected surplus of $3.4 million in the original 2005-06 Budget.

Events since the supplementary budget have significantly strengthened the fiscal outlook for 2005-06, with tax receipts considerably higher than expected in the five months to November 2005. The operating surplus is now expected to be $4.5 million in 2005-06, reflecting revised revenue projections.

Notwithstanding these favourable movements in tax receipts, it will be necessary to ensure a tight rein on expenditure in 2006-07. The decision in November 2005 to remove most import levies from 1 July 2006 will have an annual cost to revenue of around $6.3 million. In the absence of exemptions or increases in the rates applying to other taxes, operating revenue for 2006-07 is projected at $78.7 million. This is $0.6 million less than the revenue projections for 2005-06 in the supplementary budget (on which the current level of expenditure is based), or $3.1 million less than the current revenue projections for 2005-06. While this estimate is very preliminary, there would appear to be limited scope for increases in operating expenditure in 2006-07.

In terms of borrowings, previous updates have noted that Government debt is now at prudent levels. The commitment by the Government in the 1998 Manila Agreement not to undertake new commercial borrowings for seven years unless certain conditions were met expired in September 2005. This increases the scope for Government to borrow to finance high priority infrastructure projects. While there are some infrastructure needs that do not meet the criteria for donor funding, it is important to ensure that rigorous business cases are developed and transparent processes adopted for any projects funded through commercial borrowing.
With the expiration of the commitments in the Manila Agreement, the principles of responsible fiscal management in the Ministry of Finance and Economic Management Act 1995-96 will be important in ensuring continued fiscal stability. These involve:

• Ensuring that unless Crown debt is at prudent levels, operating expenses will be less than op-erating revenues (ie there will be an operating surplus).
• Achieving and maintaining levels of Crown net worth that provide a buffer against factors which may impact adversely on net worth in the future.
• Managing prudently the fiscal risks facing the Crown.
• Pursuing policies that are consistent with a reasonable degree of predictability about the level and stability of tax rates for future years.

This policy framework should serve to create the conditions for continued macroeconomic stabil-ity and encourage economic development led by the private sector.

Complete report: MFEM, Half Year Economic and Fiscal Update