It has been a controversial few months in Timor-Leste Fiscal Policy. After much debate and discussion, the Parliament finally approved the Budget for 2016, only to have it vetoed by the President just before the end of 2015. Then last week, the Parliament reconsidered the budget, and decided unanimously to make no changes (see ETAN TLGov post, Jan 9th). The ball is now back in The President's court...
I'll leave the constitutional and political aspects to others, but will make a few comments on the economics.
There are several potential criticisms of how the budget is allocated, but here is a few that I hear often. The President’s Press Release focuses on points 3 and 4.
1. Overall spending is unsustainable - in recent years, drawings on the Petroleum Fund have well exceeded the pre-determined "sustainable level". At this rate, this Fund will run out within 10 years or even sooner.
The budget papers acknowledge this, and refer to it as front-loading spending - overspend now to invest in key projects, with the hope that they will generate future economic activity and revenue, that will 'kick-start' the economy. They acknowledge this front-loading cannot be sustained, and suggest it will stop in a few years. That’s going to be tough politically – expense-cutting governments are rarely popular!
Currently the budget (and most of the economy) is financed by Petroleum Fund reserves. If spent at the “sustainable rate”, these reserves would be available for many years into the future, even if income from new Oil and Gas royalties stopped now. Put simply, the looming “post-oil economy crisis” is not a problem of revenue: it is largely one of spending above sustainable levels.
2. The Veteran's Pension takes too much of the budget. Numbers here are quite substantial: over $100m of the $1.4billion budget is spent funding these regular payments to those approved as veterans. This exceeds the total Health and Agriculture Ministries’ budgets combined. All other social transfers (aimed at children, families, elderly, etc) are tiny in comparison with this one.
What is the rationale? The veteran's payment are seen as compensation for past contribution to building the nation, and are a key strategy in retaining stability and peace now. Timor-Leste’s story of peace and stability is indeed a miracle. But I wonder how much the Veteran’s Pension can take credit for that, and what else that money could be used for?
3. Big spending on major projects of dubious economic value. We are all familiar with the criticism of projects like the Oecusse ZEESM, Suai Supply Base, airport and port developments, etc. A big share of the budget expenditure is going to these kinds of initiatives. The key question from a budgeting point of view is: will they will produce the boost in economic growth that justifies the expense?
4. Not enough spending on the basics that affect the vast majority of the population - especially health, education and agriculture (which links to food security, basic livelihoods). Why is there so little of the budget allocated to these Ministries, and why is it declining this year compared to previous years?
One response could be that the government is prioritising long term investment in the infrastructure that underpins a prosperous, post-oil economy. Then there will be ongoing funds to support public investment in health and education, etc. There is also a concern that simply allocating more money to these areas will not necessarily deliver the ultimate outcomes (better education, health and agricultural productivity); the critical issue is not money, it is greater capacity to design and implement effective programs.
Where do you sit on these issues? Are you persuaded by the arguments on either side? There is much detail and analysis to be done on each issue. The Parliament and key political leaders see things very differently to those in the President’s Office and many others in civil society. How does a society promote healthy public debate about these and so many important issues?
Too many questions…
I note you haven't mentioned the large number of dual citizens on significant (> $200,000 pa) who simply temit these payemnts to countries like Australia. While there is $100 Mil going to the veterans doing something like this won't be popular until these usually nepotic salaries are dealt with.
ReplyDeleteThanks for this blog and this posting.
ReplyDeleteThe President promulgated the budget on 14 January.
La'o Hamutuk has posted detailed analysis of the budget, along with documents and partisan statements, in English, Tetum and often Portuguese, to our website at http://www.laohamutuk.org/econ/OGE16/15OGE16.htm. An English translation of the President's veto message, which has more specifics than the press release discussed in this article, is at http://www.laohamutuk.org/econ/OGE16/veto/PresLetter29Dec2015en.pdf.
The huge spending on certain projects is very concerning. "Front loading" does not seem like sensible rationale when the Government is still learning how to invest and administer its finances. I work alongside Govt and see issues with the system of implementing the finances. Increasing budgets may not be effective without mentoring on how to plan out the year's activities and spend one's budget line in an appropriate manner.
ReplyDeleteHi Brett, very interesting and thoughts provoking. Yes, anyone in the position of the government would have to do something and the immediate to do would be to invest the Petroleum Fund in the country so as to stir-up the economy and create jobs (By the way, Jeffrey Sachs was the one promoted this idea and here another professor questioning it). However, what worrying most is poor result of the budget execution and often it creates capital flights and poor Timorese remain as spectators. again, on veterans payment, it is alarming as the PF might end up being transfers but more saddening is the pensions to the former office holders or so called Pensaun Vitalicia. Indeed, more discussion should be done to which the money would be better invested in strategic areas and benefits the people.
ReplyDelete