Where did all the kina come from?

For the most part, the decrease in tax revenue has been offset by the government’s decision to transfer K600 million that was held in trust for equity in the gas project, into consolidated revenue. In the event that commodity prices fall further, expenditures will also be funded out of the almost K3 billion that has been held in other trust accounts, which currently hold unspent windfall revenues.

These trust accounts have played a central role in the government’s ability to manage the current decline in revenue. The 2009 Budget also continues to improve the transparency of these funds with the publishing of trust account details in the Mid-Year Economic and Fiscal Outlook and now the annual budget documents. However, unclear management responsibilities and governance arrangements still surround these funds. Given the amount of savings that are still held, the 2009 Budget also presents another missed opportunity for the Government to articulate a strategic vision concerning its plans to store, maintain, and utilise these revenues over a longer timeframe.

Where is all the kina going?

One of the biggest winners in the 2009 Budget are the district administrations, with District Support Grants totalling K356 million, building on the K900 million that those administrations received in 2007 and 2008.

In the past, the effectiveness of district allocations has been seriously undermined by a lack of accountability. Substantial evidence reveals that there has been widespread misuse of these public funds. However, there was no mention of improving accountability for these funds in the 2009 Budget, except to signal a shift in their management from the Department of Treasury and Finance to the Department of National Planning and Monitoring. Although no reason was given for this change, further separating financial and accounting controls from the Department of Finance is, at best, unlikely to improve the management or effectiveness of these funds.

The health sector appears to be one of the biggest losers in the 2009 Budget, with a minimal increase to its development funding. Although the Government injected some K46 million of recurrent funds for hospital management services, this was offset by a reduction of 17 percent in funding for the Department of Health, to K131 million. In addition, despite being an MTDS priority, domestic funding for HIV and AIDS activities has declined from K17 million in 2008 to only K5 million in 2009. Given that HIV and AIDS represent perhaps the single biggest threat to social and economic progress in PNG, this is a significant misallocation of government funds. Undoubtedly, the Government also understands that donors are likely to cover any funding shortfalls in this area, which leaves them to spend their money elsewhere.

In the education sector, the Government has maintained its K143 million Education Subsidy Program from 2008. However, total recurrent funding for educational services is well below past levels. Although, progress has been made in increasing gross primary school enrolment rates from 61 percent in 2005 to 80 percent in 2007, significantly more funds will be required if the Government is to even come close to achieving its target of Universal Primary Education (UPE) by 2015.

As always, much of the recurrent budget continues to be absorbed by the public sector wage bill, which is excessive considering the size and income of PNG. The 2009 Budget has made a modest attempt to reduce this expenditure, but much of the proportioning is simply hiding the government’s transfer of the full cost of superannuation liabilities to forward years. This highlights the need for further public sector reforms, both in terms of the wage bill and the sector’s performance orientation in efficiency and outputs.

For the first time, PNG has pledged more development resources to the MTDS priorities than donors.

While an important milestone, this allocation masks the fact that 87 percent of these funds have been allocated to just two priorities ― transport rehabilitation and maintenance, and income-earning opportunities. In reality, aid agencies continue to dominate funding in key sectors, such as health, education, and law and justice. A productive working partnership between donors and the PNG Government is likely to be best established when they all engage cooperatively in these development sectors on an equal footing. All of these parties have much to learn from each other. However, if parties continue to set apart or silo their contributions to certain development priorities, the 2009 Budget has the potential to undermine these objectives.

The Government falls well short of making substantial progress in key service delivery sectors such as health and education. The large injection of funds into the 2009 Development Budget also signals a significant decline in 2010, with development expenditures falling by 35 percent. With the commodity boom coming to an end, the Government needs to develop a more coherent strategy to manage the funds that remain in trust, before they are whittled away through unproductive expenditure.

Funding is important. However, implementation remains a key issue. The declining capacity of the public sector to implement the government’s fiscal strategies has continually limited the impact of government expenditure allocations. Key reform initiatives should continue to aim at improving the performance of public sector workers in order to improve the quality of their outputs and encourage efficiency.