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Debt Imposes Many Limitations That We Must Respect

Debt Imposes Many Limitations That We Must Respect
According to the Unity Fiji Party, Government is on a spending spree
June 02
11:00 2018

This is a statement issued by the Unity Fiji party leader Savenaca Narube. The views and opinions expressed in the article are those of Mr Narube and Unity Fiji party and not of the Fiji Sun.

The issue of debt and its sustainability is an election issue.

Considering the many statements that they have heard on debt, some of them conflicting, people are keen to learn the truth about the topic.

People heard Prime Minister Voreqe Baini­marama saying that his Government had paid for debts raised by past governments.

They have also heard the Minister for the Economy saying that the current level of debt is sustainable.

On the other side, some of us say that the debt overhang is already excessive, and we run the real risks of getting into a debt crisis.

Facts on debt

I therefore understand the confusion that ordinary people face on our debt level.

Here are some facts:

Fact 1: Government is on a spending spree. Debt is incurred when Government spends more money than it receives. Its revenue is simply not enough to fund all its spending. It is living way beyond its means. Government spending is the high­est ever and still growing.

Fact 2: Because of the spending spree, the rate of debt accumulation by this Govern­ment is the highest ever in our history.

The debt level at the end of 2006 was $2 billion. This is the debt accumulated over the past 48 years since independence.

But in only 12 years of this Government, our debt has nearly trebled to $6 billion.

This Government is piling up debt like there is no tomorrow. It has borrowed more than $4 billion since 2006.

Fact 3: All governments will pay for the debt accumulated by past governments be­fore it. It is true that this Government is paying for past government’s debts.

But spare a thought for the new incoming government who must repay the $6 billion of this government’s debt. It is not respon­sible for Government to pile up debt for fu­ture governments to pay.

Fact 4: Our youths and their families will pay for the high debt level. Fiji cannot af­ford to default on its loans. Government debts must be paid.

The next government may have to severe­ly cut back spending on essential services like education, health, and infrastructure in the future to allow room for debt repay­ments.

Debt payments including principal and interest are already around $550 million a year. They are already crowding out essen­tial spending.

Fact 5: We have increased our borrowing from overseas very quickly. At the same time, the composition of our foreign debt has shifted towards foreign governments rather than international banks.

Traditionally, we had borrowed from in­ternational banks like the Asian Develop­ment Bank (ADB) and the World Bank. Since 2006, we have increased the borrow­ing from foreign governments.

Borrowing conditions vary significantly from where we borrow from. Payments of loans from abroad require foreign exchange while domestic borrowing do not.

Capacity to repay debt

The capacity for a government to repay loans is determined by the revenue that flows to the government in taxes as the economy grows.

The economic logic goes something like this— the government pumps up the econo­my through higher spending which it funds from borrowing. Debt rises rapidly.

In turn, as the economy grows, the Govern­ment waits at the roundabout to collect more taxes to help service its debt.

The key difference between my analysis and the Government is the assumption that growth will be high enough for the govern­ment to collect enough revenue to pay the debt. This critically depends on the quality of spending by government.

Quality of government spending

Government is spending a lot on infrastruc­ture. The budget allocation to infrastructure has quadrupled from below $200 million to now about $800 million.

The side effect is that debt is rising rapidly. There is nothing much wrong with this ex­cept that there is so much wastage in our spending on roads.

The $45 million per kilometre of the Nadi International Airport road to the Wailoaloa junction is unbelievable.

We see roads in Suva opening up a few months after being freshly tar sealed; roads that are dug up when there did not seem to be anything wrong with them; and roads that are taking more than three years to build. These are obvious signs of wastage.

Handouts

The handouts that Government is giving as the election nears is contributing to debt. Handouts are around $60 million and grow­ing. Where is the money coming from in the budget?

It must be from the contingency allocation (Head 50), which has a massive allocation of over $600 million compared to the normal amount of less than $100 million.

This is a misuse of the purposes of Head 50 and the Auditor-General should examine this immediately.

Financial cliff

The wastages on roads and the massive handouts severely limit the impact of gov­ernment spending on the economy, which is vital in getting revenue to repay debt.

This is worrying. If that expected revenue does not eventuate, we are headed for a finan­cial cliff. Moreover, we have not established buffers or cushions that will help us when that happens. This is dangerous.

Debt is therefore an important issue for us. It limits many things like government spend­ing and the rate of growth of the economy. We must respect these limitations.

The only solution that I see is that Gov­ernment must do two things: first, limit the amount of spending in a year; and second, reduce wastage.

If we don’t change the direction of our pub­lic financial management, we are heading for a financial cliff.

The cost of clawing our way back up will be enormous and borne for a long time by our youths and their families.

Source: Unity Fiji

Edited by Naisa Koroi

Feedback: jyotip@fijisun.com.fj

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