Budget 2011

[posted 26 Nov 2010,1630]

The imposition of a 15% VAT on all goods and services will have a massive impact on the already troubled Fiji economy. It is a devastating blow to the poor, and the low and medium income earners.

The 20% increase, from 12.5% to 15% will send strong ripples across the entire economy and fuel inflation. Apart from hikes in food, clothing and everyday consumer items, the electricity, water and fuel bills, doctors’ fees, transport charges, the price of market produce will all rise by an equivalent amount, or more.

“VAT plus a range of duty increases on imported food and other consumer items coupled with the recent punitive increases in the FEA tariffs will fuel inflation to unacceptable levels. It will likely generate additional inflation of around 6%.

“This will impact across the entire economy, penalising not only the poor, but eroding business competitiveness as well,” said Labour Leader Mahendra Chaudhry.

The Labour Leader said once again the people are being made to pay the price for bad governance and indiscriminate government borrowings.

“Raising VAT rate and increasing the yield of customs and excise taxes is a direct consequence of the high level of government borrowing since 2008. Much of the revenue derived from these increases will be used to meet loan repayments rather than to fund social and capital development programmes as alluded to in the Budget address,” Mr Chaudhry said.

The value of welfare assistance and food voucher programmes in Budget 2011 will be substantially eroded as a result of the VAT increase, he added.

Public Debt

Public debt levels, excluding contingent liabilities, have escalated to 57% of the GDP since 2008 when it was brought down to 48% from a high of 53% in 2006.

The 2011 Budget deficit at 3.5% of the GDP is high and will result in increased borrowing thus raising debt levels even higher.

While the poor is being penalised, Budget 2011 has granted new concessions and extended existing ones to help the rich. Concessions that had a definite lifetime have now been extended by the Acting Finance Minister.

The FLP believes VAT would not have had to be raised if there had been better compliance and rationalisation of the tax concessions and incentives regime.

The increased taxes levied on the people of Fiji is proof that government strategies in the past three years have failed to generate growth. Fiji’s economy has contracted three years in row – 0.9% in 2007, 0.1% in 2008 and 3% in 2009.

This means a decline of 6% in official terms but real decline may be in the vicinity of 9-10% of the GDP.

Sugar industry

The increases announced to revitalise the sugar industry are intended more to pay off FSC’s debts and keep the South Pacific Fertiliser Company afloat, rather than to assist the industry get back on its feet.

Of the $123m allocation in the Budget, $110m is set aside to meet FSC’s debt repayments and $5m will go to keep the South Pacific Fertiliser Company afloat. There is absolutely no compensation offered to the cane farmers for the huge losses they suffered as a result of milling inefficiencies in the 2009 and 2010 seasons. These losses are conservatively estimated at $120 million.

Nothing short of a well funded crop rehabilitation programme with focus on tangible assistance to cane farmers will result in revitalising the industry and returning it to viability.

Moreover, the high-handed approach of the government and the involvement of the security forces in the operations of FSC are likely to further erode the morale and confidence of the workers and the farmers.

Resource Tax on Fiji Water

An interesting feature of the Budget is the excise duty of 15 cents per litre imposed on bottled water. This tax applies to those operators who extract in excess of 3 million litres of water per month. There is only one such operator ie. FIJI WATER, which falls in this category.

It will be recalled that in 2008 when a similar tax of 20 cents per litre was imposed on all exporters of bottled water, it was quickly reversed at the instance of some influential and powerful lobbyists acting for the water companies.

This intervention resulted in the excise duty being reduced from 20 cents to the preposterous rate of 0.001 cents per litre!

“I wonder what process of enlightenment has made those responsible in the regime to now strike a somewhat unrealistic rate of 15 cents per litre. And why is it confined to only one operator? Where is equity?

“I believe we have gone a full circle on this one,” said Mr. Chaudhry.

We have also gone full circle on the 15% VAT issue which had been such a contentious point in December 2006.

The overall situation of the country is deteriorating fast. While a few are benefiting from this, our history in the past 20 years has shown that there will be no real economic growth unless there is political stability, a return to parliamentary democracy and respect for human rights.

The pain this Budget will cause the poor will be felt well before Christmas.

Mahendra P. Chaudhry
Secretary-General/Leader