Warning signs

Simen Bjornerud

Observing the development in the Government’s incomes and expenditures gives rise to concerns, of which some are briefly discussed below.

One concern is the frontloading of capital expenditures in which the Government aims to make big investments today in order to achieve strong growth and hopefully broad-based prosperity in the future. Although the idea intuitively seems reasonable, caveats in the implementation abound. One crucial condition for success is that you have the necessary administrative and institutional capacity to make sure every dollar is well spent. I note that appropriations of fresh money to the budget item “development capital” have come down quite a bit since the peak in 2012. I assume this has to do with declining execution rates and transfer of piled-up cash to the next budget year. Banging against the administrative constraint like this, I fear an increased likelihood of waste and poor projects.

Another, and maybe greater, concern is the acceleration of recurrent expenditures. Figures 1 and 2 show how these expenditures have ballooned compared with domestically collected revenues. Many recurrent expenditures are well justified, some are not. But that is not really the point. The point is that the development cannot be sustained. It is not affordable. These expenditures need to come down.

Figure 1: Enjoying the public purse

 

Figure 2: Closing the gap

Nationals with super high salaries have been the topic of some hot discussions lately. Figure 1 shows that expenditures to wages have increased, but the increase appears less dramatic than the increase in goods and services and public transfers. Still, super high salaries to a selected group of people could be seen as a symptom, a visible sign, of the wider lack of budgetary discipline.

In addition to contributing to the financing gap, the relatively weak development in domestic revenues also represents the lack of a “social contract” between the Government and the people. In a society where the citizens generally pay taxes, they will to a greater extent hold their Government to account. In Timor-Leste, relatively few people pay taxes and most of the budget is financed by oil money. The people of Timor-Leste probably feels less ownership to oil money than if it was his or her “own” hard earned tax contribution. That suggests that the Government to a greater degree can do as it pleases without being scrutinized by their constituencies.

In conclusion, there are clear signs that Timor-Leste is living above its means. Over time the Government’s budget constraint is defined by domestic revenues and the ESI from the Petroleum Fund. The Government has been spending much more than that for a while, the rationale being to “kick-start” the economy. Lately, the high spending has to a greater extent been driven by accelerating recurrent spending. As opposed to the frontloading strategy, it is hard to find a reasonable rationale behind this development. Be careful, if not dealt with, it could become nasty.