1. Life Impact | The University of Adelaide University of Papua New Guinea Economic Development Lecture 20: Fiscal Policy

2. University of Papua New Guinea Slide 1 Lecture 20: Fiscal policy Michael Cornish Overview Introduction Taxation Public administration State-owned enterprises –Case study: TNI Privatisation Defence spending

3. University of Papua New Guinea Slide 2 Lecture 20: Fiscal policy Michael Cornish Introduction Tax and spend Stabilisation policies and structural adjustment loans Limitations on monetary policy… –AD / AS model

4. University of Papua New Guinea Slide 3 Lecture 20: Fiscal policy Michael Cornish Average tax revenues (% of GDP)

5. University of Papua New Guinea Slide 4 Lecture 20: Fiscal policy Michael Cornish Taxation Direct v indirect taxation Progressive taxation Purpose of taxation / taxation concessions: –Revenue! –Stimulate targeted sectors –Encourage FDI

6. University of Papua New Guinea Slide 5 Lecture 20: Fiscal policy Michael Cornish The Laffer Curve

7. University of Papua New Guinea Slide 6 Lecture 20: Fiscal policy Michael Cornish Taxation Predicting revenue: –GDP per capita –Level of income inequality –Importance of relative sectors –Distribution of power –Capacity of the government

8. University of Papua New Guinea Slide 7 Lecture 20: Fiscal policy Michael Cornish Taxation Income tax –Tax the poor? –Tax the rich? Property tax Corporate tax –On average, approximately 10% of revenue in developing countries –Transfer pricing

9. University of Papua New Guinea Slide 8 Lecture 20: Fiscal policy Michael Cornish Taxation Customs duties –Taxes on imports and exports –Tariff v customs duty –Largest source of developing country revenue –Easy to assess and collect –Transfer pricing –Balancing an open economy with government revenue

10. University of Papua New Guinea Slide 9 Lecture 20: Fiscal policy Michael Cornish Taxation Customs duties (cont.) –Which goods to target? Few importers Inelastic demand High income elasticity of demand –‘Sin taxes’ Excise duties

11. University of Papua New Guinea Slide 10 Lecture 20: Fiscal policy Michael Cornish Taxation Tax administration –A balancing act… Special economic zones –Free market orientation, tax concessions –Benefits: Attracts FDI Stimulates domestic industry Economics laboratory!

12. University of Papua New Guinea Slide 11 Lecture 20: Fiscal policy Michael Cornish Public administration Capacity of government -> limiting factor Fractured ‘Bottom-heavy’ Internal politics Doctrine of the separation of powers Political will

13. University of Papua New Guinea Slide 12 Lecture 20: Fiscal policy Michael Cornish State-owned enterprises Utilities, transportation, telecommunications… Profit motivation? Natural monopolies Strategic industries Plugging the savings gap Employment Taking risks Bail-outs

14. University of Papua New Guinea Slide 13 Lecture 20: Fiscal policy Michael Cornish State-owned enterprises Improving SOEs: –Address inflexible employment practices –Accountability –Transparency –Privatisation: the social objective test

15. University of Papua New Guinea Slide 14 Lecture 20: Fiscal policy Michael Cornish Case study: TNI Tentara Nasional Indonesia (armed forces of Indonesia) 400,000 under arms Runs wide range of commercial businesses 1520+ business units Estimated US$200m / yr profit ‘Yayasan’ Profit motivation?

16. University of Papua New Guinea Slide 15 Lecture 20: Fiscal policy Michael Cornish Case study: TNI Why? –Limited defence budget… but is it? Problems: –Payments for security services –Freeport: human rights abuses + others… –Abuse of influence –A political problem

17. University of Papua New Guinea Slide 16 Lecture 20: Fiscal policy Michael Cornish Protest against Freeport

18. University of Papua New Guinea Slide 17 Lecture 20: Fiscal policy Michael Cornish Case study: TNI Attempts at reform: –2004 legislation Suggestions for future reform: –Proper defence budgeting process –Bring TNI businesses under government umbrella –Finding and enforcing political will

19. University of Papua New Guinea Slide 18 Lecture 20: Fiscal policy Michael Cornish Privatisation Income inequality issues How to sell them? …and for what purpose?

20. University of Papua New Guinea Slide 19 Lecture 20: Fiscal policy Michael Cornish Defence spending Increasing in the developing world Opportunity cost –Money –Human capital Higher military spending = higher growth?? Defence spending as insurance The conflict trap: Paul Collier, The Bottom Billion

21. University of Papua New Guinea Slide 20 Lecture 20: Fiscal policy Michael Cornish