Fiscal data has been collated from successive budgets and from BPNG (2007) for earlier years. In the boom years, a significant amount of funds were allocated to trust funds for later spending. From 2005 to 2011, these funds were counted as expended when they were placed in a trust fund, rather than when they were actually spent. We have adjusted official expenditure figures to correct this.
Government expenditure and revenue as a share of GDP are shown in the figure below. Both are highly volatile. Revenue is on a downward trend. 2020 saw the largest ever gap open up between revenue and expenditure as a proportion of GDP, due to the impact of COVID-19.
Data notes on fiscal data
The weak revenue growth can be explained by the poor revenue performance of the resource sector and by declining foreign aid, both shown in the figure below. The reduction in aid/GDP is hardly surprising, though it should also be noted that there was shift from budget support to project aid over the 1990s, which means that the decline in total aid underestimates the fiscal shock from the change in aid policy over this period.
Resource revenue to GDP was about 3 per cent for most of the 1990s. Resource revenue exploded in the 2000s reaching almost 10 per cent of GDP, as high copper prices coincided with high copper exports. This is the primary explanation of the economic boom of the 2000s. However, copper production declined, and commodity prices fell with the global financial crisis. While some fall in resource revenues was expected, their almost complete disappearance was a surprise, especially given high gold prices.
The picture is even starker if we show resource revenue as a percentage of resource value added or GDP, and non-resource revenue (excluding aid) as a percentage of non-resource GDP as in the figure below. The former, albeit volatile, is on a declining trend, while the latter is on an increasing trend. Whatever the reason, PNG has become less effective at raising revenue from the resources sector and, therefore, is having to tax the non-resource sector more to meet expenditure needs.
Poor revenue performance has no doubt been a factor behind PNG’s tendency to run deficits: as seen from the figure below, they are observed in 36 of the 44 years for which we have data. However, the deficits have mainly been mild: 19 of the 36 have been below 2 per cent of GDP, and only eight have been above 4 per cent. Most of the surpluses (six of the eight) were in the boom years, between 2004 and 2010. However, these surpluses were modest, just 2.6 per cent on average. In hindsight, PNG should have run much larger surpluses in the boom period to avoid the fiscal squeeze it is currently experiencing. In more recent years, we have seen record high deficits: of the eight above 4 per cent of GDP, five have been after 2012.
As a result of large recent deficits, debt/GDP is now almost back at its record pre-boom level. However, since revenue is falling, it is more useful to measure either debt/revenue or interest/revenue, which are also shown below. Debt/revenue is back at a record level, while interest/revenue is at its second highest level ever.
Not only has government debt doubled as a share of GDP since independence, but also its composition has greatly changed. For the first decade of independence, only about 20 per cent of PNG’s government debt was domestic. By the mid-1990s that figure had reached 50 per cent, and, by 2012, around 70 per cent. That shift reflected major changes in the PNG banking sector, as discussed in the next section.
One of the policy challenges confronting PNG is the management of volatile resource revenue, and the need to save revenue in good times to spend in bad. From independence through to 1999, PNG used the Mineral Resources Stabilisation Fund (MRSF) to stabilise resource revenue. However, the MRSF came to be seen as ineffective in preventing macro-economic and fiscal crises, and was abolished in 1999. Then, a few years later, when the resource boom began, PNG started using a system of trust funds to park surplus revenue. The figure below summarises PNG’s experience with trust funds (including the MRSF) from independence onwards. The MRSF (the blue line up to 1999) accumulated a positive balance that increased from 2 per cent in the 1980s to 6 per cent in the late 1990s. However, this was a period of acute fiscal stress and, as mentioned, the MRSF was abolished, and the proceeds used to pay off domestic debt. The new trust funds quickly accumulated significant value, reaching 10 per cent of GDP in 2008, but those balances were spent down very quickly, and exhausted just a few years after the boom ended. Not enough was saved during the boom period. Expenditure increased from around 20 per cent pre-boom to 25 per cent of GDP in 2012–14, just a few years after revenue hit this rare high (2006 and 2007). By this time, however, revenue had already retreated to below 20 per cent. The result has been large deficits and the accumulation of arrears.
It is fair to say that stabilisation of resource revenue remains an elusive goal. While there is a new Sovereign Wealth Fund in place, it is not active. In hindsight, the abolition of the MRSF just before the boom began was incredibly bad timing.
Data notes on fiscal data
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