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?