2 Responses

  1. Pacifigeek
    Pacifigeek December 27, 2011 at 8:35 am

    Thanks for a really interesting post. Great to have some commentary on this stuff. I would, though, have a slightly different analysis of the Fiji budget.

    Firstly, I’m not sure that there are many efficiency benefits from the tax hhere. The income and corporate tax reductions are to be partially financed through the new Social Responsibility Levy: an additional tax of 23 percent – 29 percent of total income for those earning more than $270,000. This is estimated to provide additional revenues of $9.8 million. The introduction of this levy seems likely to introduce very high marginal tax rates for high income earners, potentially offsetting many of the possible efficiency benefits of the lower income rates, and certainly creating strong incentives for evasion. Tariff and excise measures and new taxes on credit card and telecommunication transactions seem opportunistic, distortionary, and possibly difficult to enforce. The various changes to tariffs and excise also seem to lack a consistent policy intent. Overall, this looks a bit like populist redistributional rejigging, rather than sensible economics.

    I also think there are some big questions about fiscal sustainability, and I would say that this budget is heading in the wrong direction – It is not clear how substantial corporate and income tax reductions have been reconciled with a projected 0.5 percent increase in direct tax revenues as a proportion of GDP. The projected increase in VAT revenues of 2 percent of GDP is presumably driven by increased incomes in households with a higher propensity to consume – but this seems fairly optimistic. Some boost to revenue is expected from improved compliance. However, even the Budget Supplement notes an “optimistic outturn”, and my cynical take is that these fiscal outturn projections are politically influenced and not likely to be realized. If Fiji wants to engage in deliberate deficit-financed expansion to get over a bad patch, I think they should be transparent about it and have a credible plan for dealing with the underlying structural issues. I’m worried, though, that this budget is about the spending without the transparency or the plan.

    I think you are absolutely right to point out that civil service reform is the elephant in the room – but I guess my take would be towards seeing this budget as populist politics, aimed at retaining the support of the middle-class and public service, rather than sensible economic reform.

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