2002/2003 Budget Statement
Presented by Hon Misa Telefoni,Deputy PM and Minister of Finance
I. THE BUDGET SETTING
Mr Speaker, Honourable Members,
In framing this budget, government has had to take into account the turbulent events of 2001, especially the damplening effect of the tragic events of the September 11 in the united States on world production. This fallout has been greater for some of the member countries of the Pacific region highlighting the vulnerability of our small open economies to exogenous shocks, with real GDP for the region falling by 0.8% and GDP per capita dropping by 3%. Nevertheless, in spite of this disappointing regional performance, our economy has continued to achieve strong economic growth – reaching a 6.5% GDP growth rate in 2001, which is directly attributable to the appropriate mix of economic policies we have implemented in the recent past.
Samoa has been no less affected from the flow-on effects of these tragic events, and it is against this backdrop the Government has formulated an expenditure program that will deliver the nest services for the whole of Samoa, whilst ensuring that macroeconomic stability is not undermined. The had reality is that government must continue to implement sound financial problems experienced in other parts of the world.
On the international front, there is now some cause for optimisn as recovery in the United States begins to have a positive impact on economies in othe regions. The question however is how strong and durable that revovery will be, This must be seen against the current political uncertainties in the world,, particularly in the Middle East and South Asia, and their likely impact on commodity prices, especially oil.
Domestically, over the last four years the Samoan economy has continued to achieve strong real economic growth. In 1998, economic activity grew by 2.5%; 28% in 1999; 6.9% in 2000; and 6.5% in 2001. This sound performance isa direct result of the implementation of responsible economic and financial policies. It has also benefited from the reform program initiated by the Government in 1994. Prudent economic policies and sound fiscal management must be continued in order to consolidate the gains already achieved and to provide the basis for further sustained growth in the short ot medium term.
Earlier this year, government launched the 2002 – 2004 Strategy for th Development of Samoa. We have called this Strategy “Opportunities for All”. The SDS is not a government-only document – it is a document shared and owned by the whole community because its formulation involved all stakeholders ranging from church leaders, women’s committees, NGOs, pulenuu, youth, the business community and government departments and corporations.
It builds on the commitment on the part of the government to ensure that the benefits of development and reform initatives are shared by the communuty at large. The SDS provides a clear visiion for the way forward. it clearly articulates the areas of priority need as perceived by the wider community.
To put into perspective the 2002/2003 budget parameters, it is important that I briefly present our economic performance in 2001.
The Samoan economy perfrmed stringly in 2001. Gross Domestic Product in nominal terms was estimated at $851.5 million tala in 2001, which represents a per caouta income of $4,894.
In constant prices, the real vlue of aggregate GDP was $688.4 million tala representing an increase of 6.5% over 2000. The “Other Manufacturing” sector was the biggest contributor accounting for 1.9 percentage points of the 6.5% growth rate. This strong growth was attributed mainly to improved production by Yazaki which increased by 25.2% over 2000. Transport and Communications as well as Commerce contributed positively with 1.5% and 1.3% respectively. Agricultural production on the other hand, dropped by 12% as direct result of the limited market outlets for copra, cocoa, kava and coconut cream. Construction eased off in the last two quarters of 2001.
On the external front, mechandise exports improved by $7.57 million (or 16.8%) to $52.69 million over 2000. The rebound in dish exports of $11.27 million had amajor positive impact.
Remittance inflows continued to increase albeit at a lower rate than 2000. At their current level, remittances are equivalent to 18% of GDP.
Gross Tourism receipts rose only marginally by 0.7%. This sharp slowdown in growth is a direct result of the September 11 terrorist attack in the US.
The high economic growht rates in recent years is reflected in another year of high import growth with imports in 2001 28% higher than in 2000. This reflects the Government’s efforts to ensure maximum credit is available to the private sector. However, after discounting the various one-off items imported in the course of the year, the underlying growth was only 22.6%. As a result of the sharp increase in imports, and despite the improved performance in exports, the current account deficit widened sharply by $57.29 million to $95.69 million equivalent to 11.2% of GDP. In aggregate however, the overall balance of payments recorded only a small deficit equivalent to 0.6% of GDP. this was achieved as a result of the high level of capital acount inflows relating to water development projects.
At year-end foreign reserves stood at $174.84 million equivalent to approximately 4.1 months of import cover.
In the year 2001, total domestic credit increased by $32.55 million bringing te total outstanding to $168.68 million. Credit to the private sector maintained its upward trend reflecting government’s continued commitment to facilitate growth in the private sector by limiting its own domestic borrowing , by drawing down its deposits with the banking system by a marginal $0.98 million tala.
The annual rate of inflation increased to 4% at year-end. The annual rate of inflation increased to 4% at year-end. This compares with a rate of 1% at the end of 2000. This upturn in inflation resulted mainly from increases in the prices of local commodities sold at the Fugalei market. It should be noted howeverm that Samoa has over the uears enjoyed strong growth with very low inflation rates, which somewhat defies traditional economic thinking on inflationary economic growth. One plausible explanation is the tight fiscal stance government has wxercised over the years, combined with the price impact of major reduction in import tariffs.
Government financial statistics in fiscal year 2000/2001 saw a widening of the overall deficit to $19.23 million from $5.19 million in 1999/2000. The deficit however was below the budgeted estimate of $26,.60 million. The budget outturn for the first 6 months of the 2001/02 fiscal year, recorded a current surplus of $8.92 million with an overall deficit of $13.91 million, which is equivalent to 6.4% of GDP. these deficits were funded mainly by concessional borrowing from international financial agencies.
In summary, the economy performed strongly in 2001 as a direct result of the conitunuation of responsible fiscal and monetary policies. We cannot sustain this level of growth however, if we allow emerging trends of rising inflation rate, declining foreign reserves and weakened export earnings to continue. It will require close monitoring and commitment to adopt appropriate measures to reverse any deterioration to minimise thier adverse impact on stability.
Notwithstanding these concerns, the strong economic performance in the last four years is expected to continue into 2002/2003. GDP in real terms is expected to grow by around 4-5% in 2002/03. Construction is expected to pick up again with the continuation of ongoing projects such as the Apia Port expansion, the Rural Water Supply project and the commencement of new projects such as the South Pacific Games complex, school facilities improvement project and hospital refurbishment. Agriculture output is expected to pick up with the cooconut oil mill fully operational, increased taro production and expanding fruit exports with the full operation of the heat treatment plant. Fishing will continue to grow with the new fishing boats entering the fleet.
Inflation is expected to increase to around 3-4% taking into account the combined impact of fiscal measures to be implemented in 2002/2003.
Import growth will continue to be strong in line with new construction works in both the public and private sectors.
Exports will be strengthened with increased marketing outlets for taro exports, the reopening of the coconut oil mill, continued expansion of the fishing industry, improved garment manufacturing operations and improved desicated coconut exports as a result of opening new markets in New Zealand and Dubai.
I have appended to this bedget the Economic Statement for 2001/2002. I recommend Honourable members to take the time to read the Economic Statement as it provides detailed nalysis of economic performance and forecast for the immediate future.
Mr Speaker, Hon Members
To create confidence in te Samoan economy, the government must be clear ad consistent in its policy goals. Investors and the community alike, need to see clearly the future direftions and intentions of government. This is critical because unclear and inconsistent policies create uncertainties and confusion.
Our long term goal is simple and clear – that is, to improve the quality of lige for every Samoan. this vision is clearlyn articulated in the 2002-2004 Strategy for the Development that the Government launched earlier this year. The vision caters for us all – the old man and woman in the village, the church minister, the youth, the urban dweller, the unemployed, the pensioner, the low income earner and the business operator.
Mr Speaker, Hon Members
the optimal way to fulfill and sustain this goal is through economic growth and wide distribution of the benefits of development. Economic growth coupled with ow inflation generates employment opportunities providing the basis for government investment in the promotion os social programmes in education, health, family and culture support for improved quality of life.
The Government strategies to achieve its vision are clearly stated in the 2002-2004 SDS. They are:
i. Maintaining a stable macroeconomic framework
ii. Improving education standards
iii. Improving health standards
iv. Private sector promotion
v. Agricultural development
vi. Strengthening social structure
vii. Infrastructural development
viii. Tourism development; and
ix. Efficient public service delivery.
The government is committed to the implementation of these strategies in the next three years.
V. THE BUDGET STRATEGY
The strategies in the 2002 – 2004 SDS, provide a string basis for responsible and prudent spending, while at the same time pursuing a sound and responsible approach to financial and economic management that has been set in place over recent years.
The key element is to ensure the allocation of resources we can afford as a nation, is focused on strategic areas of development and growth that will provide improved opportunities for every Samoan.
The budget strategy therefore aims at maintaining a surplus between current revenue and current expenditure of no less than 1% of GDP. Te target for the overall budget balance is a deficit of no more than 3.5% of GDP in GFS format. This is considered to be the maximum deficit the economy can sustain to ensure that macroeconomic stability us not compromised.
This Budget also contains a number of revenue initiatives to broaden the revenue base. I will detail these initiatives later on.
VI. BUDGET MEASURES
Mr Speaker, Honourable members,
I would now like to summarise the main aggregates of the 2002/03 budget.
Ordinary revenue 283,649,759
External grants 73,666,118
STABEX 500,000
Statutory 32,361,852
Current 250,721,786
Unforseen Expenditure 2,507,218
Development 103,797,619
Financed by:
Soft Term Financing 29,631,501
Domestic Financing 2,500,000
The 2002/03 Budget is projected to achieve an overall deficit of 31.9 million which is being financed from soft term loans of $29.6 million, and domestic financing of $2.5 million tala. When expressed in government finance statistics, the overall deficit is equivalent to 1.9% of GDP. This is consistent with the target set our in the 2002-04 Strategy for the Development of Samoa. The deficit is considered sustainable given that a large part of expenditures is to finance investment projects, details of which are provided below.
Mr Speaker, Honourable Members
I would now like to highlight the key expenditure priorities the Government will implement during 2002-2003.
In line with the theme and strategies highlighted in the 2002-2004 Strategy for the Development of Samoa, the expenditure program will focus in enhancing opportunities in health and education services, agriculture development, infrastructure services and a range of community social services.
1. Education
Investment in human resource development is being seriously pursued by the government. Education and training play a critical role in providing the knowledge and skills to support private sector development, and more efficient government service delivery, as well as equipping workers with capacity to realize higher returns and increased satisfaction in return for their labour. Indeed an educated population is a productive labour force.
Government’s objective in this sector is to ensure all children receive good education through enhanced teacher quality and improved teaching materials and facilities.
in support of education development, the budget for the education sector has been raised from $41.8 million in 2002/02 to $47.1 million in 2002-03. This represents an absolute increase of over $5.0 million tala, which is equivalent to a 13% rise. It is worth noting also, that since 1996/97, the education sector budget has increased by 54%, against growth in budget program expenditures of 25.1%. Of that budget, I would like to highlight the following key measures.
(i) $3.1 million tala representing an increase of $334,000 tala has been earmarked to meet the rising demand for awards from high school graduates entering university studies. This will cover 159 new awards offered at USP, New Zealand, Australia, NUS, Polytechnic and the Alafua campus. These new awards are additional to the continuing scholarships, which currently stand at 507.
(ii) $3.0 million has been provided as government assistance to private and mission schools.
(iii) $3.35 million has been provided as counterpart cost for the ADB and AusAid funded project to strengthen education management and refurbish selected school facilities in line with the goal of improving access and equity to higher levels of education.
(iv) $367,000 tala will cover the cost o teacher training in the faculty of education at the NUS.
(v) $850,000 tala is earmarked to meet the cost of stationery or all village schools.
(vi) A combined total of $7.75 million tala will be provided as grants to institutions such as the National University of Samoa and Polytechnic.
(vii) As further support to community schools, particularly in Savaii, a total of $800,000 has been approved to construct a boys hostel at Vaipouli.
2. Health
This budget continues to promote key health initiatives. Achieving a sound health standard is one of the key pre-conditions for improved quality of life. Government focus in the health sector is geared towards strengthening primary and secondary prevention and treatment programs through greater community participation and improved facilities.
Mr Speaker and Honourable members, to reinforce this focus, the budget for the health sector has been increased by over $1.3 million tala. The health budget has increased by 67% since 1996/97, against the growth in overall expenditure of 25.1%. Within that amount the following measures have been approved for implementation.
(i) A combined $3,850,000 tala has been provided as government commitment to meet the rising cost of overseas medical treatment of those medical cases that cannot be treated locally. Mr Speaker and Honourable members I am pleased to report that a large number of people have benefited from this scheme. Despite the high cost, the Government undertakes to continue this scheme until such time we have built up sufficient local capacity to perform these treatments.
(ii) A total of $500,000 is earmarked to meet the cost of essential medical equipment for the hospitals.
(iii) Another $500,000 has been provided to cover the cost of critical maintenance and repairs to ensure the Tupua Tamasese Meaole Hospital at Motootua is capable of providing the service standards demanded by the public.
(iv) As further commitment to the improvement of health facilities, $500,000 has been provided as counterpart contribution to the Health Sector Project funded by the World Bank to upgrade health facilities throughout the country.
(v) With financial assistance from donor partners, the government will continue its program for the treatment of various non-communicable diseases such as diabetes and high blood pressure.
(vi) Government will also continue its dialogue with private sector practitioners to ensure national health objectives become a feature of programs shared by the government and the private sector, as partners in vital sector.
(vii) Government has noted the dramatic increase in non-communicable diseases from changing lifestyles and the significant rise in treatment cost to Government as a result. To counter this high impact, the Health Department will be implementing public health education programs to inform our people about the harmful effects of poor diet, lack of exercise, and lack of proper treatment of such diseases. As further deterrence, Government has increased the excise tax on some of those consumable products such as tobacco, soft drinks and alcoholic beverages, which have direct impact on our health.
3. Agriculture
Agriculture production remains the backbone of the Samoan economy. Agricultural development will aim at focused research and improved extension services as well as facilitating market identification for agricultural and fishery products. In support of these objectives, the agriculture budget has been increased to $11.3 million tala for 2002/2003. The activities considered includes the following:
(i) A total of $2.8 million has been allocated to carry out crops research work and advisory services. The research is expected to identify high valued crops and opportunities or profitable down stream products.
(ii) $645,000 tala is earmarked for surveying, monitoring and controlling pests and diseases that may affect crop quality and production systems.
(iii) To enhance marketability and compliance of agricultural crops with overseas requirements, the heat treatment plant announced in last year’s budget is now fully operational.
(iv) In support of fisheries development, $1.4 million has been approved to strengthen the management of commercial fisheries on a more sustainable basis.
(v) As announced in last years budget address, the government’s commitment in support of stabilizing domestic copra prices is now fully operational benefiting coconut producers.
(vi) Ava assistance – Government has noted with concern the adverse impact of the kava ban on our kava exporters. In response, Government has been aggressive in discussing the issue with ava growers as well as raising it at international meetings in an effort to minimise the impact of the ban. The establishment of the Government Export Guarantee Scheme is one avenue of assisting ava growers. As well, a high level task force has been established to continue to find new initiatives to assist kava growers and the industry in general.
(vii) Export Development – Mr Speaker, in an effort to diversify and fast track the growth in exports, the Government recognizes the importance of expanding the range of products that Samoa could export to the outside world as well as increasing the number of individuals and businesses taking part in Samoa’s export drive. One of the main constraints faced by exporters, is gaining access to finance from the financial institutions.
In this regard, I am proud to announce that Government has allocated in this Budget an amount of $1.0 million to set up a Government Export Guarantee Scheme, to be used by eligible exporters as collateral to obtain export financing from the local financial institutions. This Scheme will promote the cultivation of new export products and establish more lucrative markets overseas. It should also help those exporters who do not have the necessary financial track records to be considered for export financing by the financial institutions.
The mechanics for operating the Scheme have already been put together by a special committee that was appointed by Government. And, I am proud to inform this House and members that Scheme will be ready for implementation as soon as this Budget is passed by Parliament. Initially, the Government Export Guarantee Scheme will apply to the export of goods, with the intention of extending it to the export of services in the future.
4. Infrastructure
The provision of adequate and quality infrastructure is an essential element of Government’s drive towards economic growth. It can also be seen as a valuable vehicle to distribute the fruits of development for the benefit of us all. Major allocations for infrastructure development in 2002/02 are as follows:
(i) Electricity
A total of $6.5 million tala is provided to support electricity related developments. A key development in this area will be the installation of cables to supply electricity to the residents of Manono-tai. This is a substantial government commitment in line with the objective of providing opportunities for everyone regardless of location. Additionally, over $578,000 has been allocated to support this ADB funded project as Government contribution. This will help address the intermittent supply of electricity currently being experienced.
(ii) Water
In support of water development, a total of $4.2 million tala has been approved to meet Government’s contribution to the Rural Water supply project current underway as well as strengthening the financial basis of the Samoa Water Authority.
(iii) Telecommunication
With assistance from the World Bank, concerted effort will be directed at promoting improved postal and telecommunication services on a more competitive basis so that all consumers can receive the best service at the most competitive prices. A total of $150,000 has been approved as government contribution to this development.
Through the Samoan Communications Ltd, improvement in telephone services continues. The completion of the fibre optic network currently underway, will substantially expand the capacity and efficiency of the communication system.
(iv) Roads and Bridges
Investment in the improvement of roads and bridges will continue under the new Ministry of Works. The Ministry will concentrate on its new management and regulatory functions with most of the works to be out-sourced. A total of $3.5 million tala is also provided under the Ministry of Works as counterpart contribution to the Infrastructure Asset Management project. Under this project the bridges at Saleia and Falevao will be constructed in 2002/02. Provision has also been made to meet design and construction costs of the Salelologa Township roads around the country will also continue to support transportation of agricultural produce and public travel.
(v) Port Development
The expansion of the Apia ort currently underway with assistance of the Japanese Government is well ahead of schedule. The completion of this project is expected to facilitate trade development and could provide an incentive for more cruise ships to visit our shores.
5. Housing Corporation
A provision of $400,000 has been included as government’s capital contribution tot he corporation to strengthen its financial position further. This will provide additional capital for housing loans for our people especially for first homeowners’ who may have difficulty in accessing other lending institutions.
6. Senior Citizens Pension Scheme
The provision for the Senior Citizens’ Pension scheme has been increased to $11.5 million tala, to meet the additional cost of new members, as well as the cost of travel and medical treatment. Government is committed to ensuring the fund is able to support its senior citizens, and will continue to monitor its sustainability from time to time.
7. Sports Development
Government recognises that sports offer great potential for generating income for the young population. Following our successful bid to host the 2007 South Pacific Games, a comprehensive program to guide the construction of new facilities and renovation of existing ones is under review. Such program will include the preparation of Samoan athletes for the 2007 Games. An initial amount of $2.0 million has been allocated for this purpose in 2002/03. This investment will elevate our sporting facilities to international standards in addition to creating an invigorating sporting environment for sportsmen and women to exploit their potential.
Additionally, a total of $200,000 has been earmarked for Samoa’s preparation and participation at the South Pacific Games in Fiji later this year. a combined total of $435,000 is provided to support sports promotion as well as hosting of international sporting activities.
Support for the construction of sports fields will continue with $100,000 allocated for that purpose.
8. Tourism Development
Tourism is recognised as one of Samoa’s growth sectors – one that can also provide a major benefit through the creation of employment opportunities and generating income particularly in the rural areas. Tourism also offers an opportunity for diversification away from agricultural-based production. In fact over the last couple of years, it has demonstrated that it can generate positive impact on the economy.
Data provided by the Central Bank indicates that travel related receipts reached $133.0 million tala in 2000. This is a substantial sum by regional standards. Development of tourism therefore is seen as a priority as highlighted in the 2002-2004 SDS.
Tourism development in the next five years will focus on promoting a clear and coordinated image of Samoa in all areas of tourist development ranging from marketing and product development to human resource development.
Government has instituted a policy to provide support to existing and new investors in the hotel industry as part of the overall assistance to the sector. This involves duty concession on specified building materials and furniture for hotels and motels.
I would like to underscore however, that tourist related operations are high-risk investments. It is a function of a combination of factors. The status of the global economy in particular source market economies, affect the ability of tourists to come to Samoa. The fare cost and availability of airline connections can be critical. We can only do so much to attract tourists to Samoa.
At this point in time, Mr Speaker and Hon. members, the Government believes we must continue the re-capitalisation of Polynesian Airlines. The Government is committed to support the national airline in the dace of ongoing difficulties in the travel industry worldwide as a result of the September 11 terrorist attack, and to ensure that adequate capacity required by the tourist industry, our exporters and the general public is available. At the same time Government will continue to seel a partner in the corporate restructuring of the airline. In support of that commitment, a total of $8.0 million tala has been allocated to re-capitalise the national airline.
9. Business Development
The Government will continue to support the enhancement of the enabling environment for business development by maintaining appropriate accommodative monetary policies to ensure sufficient credit for private sector growth. This will also include further refinements to the tax and tariff structure to support competition. Providing infrastructural services to support business development is a key part of the enabling environment and will intensify during the next twelve months.
Under the Trade Commerce and Industry Department, a grant of $40,000 is provided to assist private sector development. The Government has also initiated a policy in support of manufacturing operations. The assistance involves duty concessions on equipment and machinery.
In the budget address last year, I announced the establishment of a Small Business Development Project to assist and facilitate the development and promotion of small businesses around the country. This is essential to the Government’s strategy of strengthening the private sector as the engine for growth through income generation and employment opportunities particularly in the rural communities.
Mr Speaker and Honourable members, I am pleased to report that this project is now operational. The Project Management unit has been established and operating out of the treasury office. The project is under the guidance of a Steering Committee comprising of representatives of the commercial banks and other central lending agencies, Women in Business, Small Business enterprise Centre, Central Bank and Treasury. All the key stakeholders are involved in this development.
The project is anticipated to facilitate the establishment of 20 new businesses as well as benefiting 30 existing ones spread around the country. Assistance available will include direct financial assistance as well as training in the proper management of enterprises.
To signify government’s commitment to small business development, a grant of $150,000 is provided as its contribution to the work of SBEC. This contribution will continue for the duration of the project, which is five years, given the vital role SBEC plays in this development. A total of $700,000 is earmarked as counterpart cost to the Small Business Development Project funded by the Asian Development Bank.
10. Banking Sector
Government has noted the vast improvement continued to be made by the commercial banking sector, with improved services and expanded facilities. This reflects well on the Government’s initiative to deregulate the financial sector in January 1998 as part of its overall public sector reform program, to strengthen the private sector, and to diversify the country’s economic base. the contributions by the major lending institutions including smaller organisations like the South Pacific Board for Development (SPBD), Women in Business Foundation (WIBF) and other informal lending organisations (credit unions) at micro level, play a key role in making credit available to the enterprising men and women of our country.
11. Public Service Delivery
The government is committed to reviewing its role in the economy, especially as a service provider. As adviser in previous budget statements, efficient delivery of public services in transparent and accountable manner, underpins its public service reform.
the implementation of the restructuring of Public Works will commence in the new financial year. This change will provide the basis for improved management of financial resources against available capacity in the private sector, to undertake public works in a competitive and transparent process. It will also enhance the new department’s regulatory function to ensure sound construction standards for all public works are being followed, consistent with international best practices and accepted standards.
12. Salaries and Wages
In the formulation of this budget, the Government is conscious of the freeze imposed on increments during the current financial year. For 2002/03 the Government had decided to award appropriate increments to good performers provided savings can be identified to meet them. The only exception is a provision for a review of salaries of the Police force, which will be underway this year, as the last review was conducted in 1997.
Mr Speaker and Honourable members, I am pleased to inform the House that Cabinet has approved an increase in the minimum wage from $1.40 per hour at present, to $1.60 per hour. This represents an increase of 14%. With inflation at around 5%, the 14% increase indicates that the minimum wage earner will be much better off. the new wage rate will take effect from 1 October this year.
13. Unforeseen Expenditures
In line with provision of Section 29 of the 2001 Public Finance Management Act, an allocation of $2.5 million tala has been provided to cover unforeseen expenditures. This is a major departure in presentation, which allows the government to secure up front financing for unforeseen expenditures. This provides a degree of predictability on budget outlays.
As is required by law, a statement will be tabled in Parliament on all transfers and approvals made under this provision by the government.
Mr Speaker and Honourable members
The new format allows this House the opportunity to clear the appropriate use of this provision in a transparent and accountable manner. Effectively, it discontinues the need for subsequent supplementary budgets.
A total of $2.5 million tala, which is equivalent to 1% of the total expenditure program, is provided under the Cabinet Secretariat budget for unforeseen expenditures that may arise during the course of the financial year.
Mr Speaker, Honourable Members
I will now turn to the revenue side of the Budget. I am announcing a package of revenue measures that include increases in some taxes, and reductions in others. These measures continue the reform process, which commenced in 1994 with the introduction of the VAGST, and some tariff cuts with major income tax cuts implemented in 1995. These initial reforms signalled the Government’s commitments to “reorient taxation to encourage income and employment generation”.
Similarly in 1995/96, the Government announced its intention to undertake a general review of tariffs “with a view to arriving at rates which better encourage trade, manufacturing and export, whilst continuing to provide adequate levels of revenue for the government”.
This review resulted in major changes to taxes and tariffs in 1998, with VAGST remaining at 10% since its introduction in 1994. These changes included major cuts to import duties in many cases, with the highest rate of 60% coming down to 20%; those at 35%-42% were reduced to 15%, with most remaining at 0%, 5% and 10%. Excise tax was abolished on all goods except for alcohol, soft drinks, tobacco products, petroleum products and cars with engine capacity of greater that 2,000cc.
Personal income tax rates were similarly amended raising the tax free threshold from $6,000 to $8,000 while the income at which the marginal tax rate increased to 20% was lifted from $12,000 to $14,000. The income tax base was also broadened with commercial income of churches subject to income tax.
In 1999, the 15% tariff rate was in turn reduced to 10%. Since 2000, further adjustments have been made to personal income tax with the tax-free threshold now at $10,000 while the threshold at which the marginal tax rate increases to 20% has been lifted from $14,000 to $15,000.
The threshold at which the top tax rate applies has been lifted from $18,000 to $20,000, while the top rate of tax has now been reduced from 35% to 29%. The company tax rate was also adjusted similarly from 35% to 29%.
Mr Speaker and Honourable Members
I have given you a quick summary review of the major revenue measures implemented since 1994 to date. They all underscore the following objectives of Government:
(i) To continue the momentum of these reforms to phase out eventually tariffs and where appropriate taxes, in keeping with our commitment for full integration into the evolving international trading regime, and enhancing VAGST as a major revenue source for government, along with other fees and charges;
(ii) to raise net additional revenue to fund government services that will benefit all Samoan; and
(iii) To fund higher levels of priority sectoral investments as in education and health and higher infrastructure investments.
While I am happy to report that tax revenues have continued to increase, encouraged further by the high levels of growth in the economy, current and development expenditures have also increased at a pace that is faster than the growth in receipts, particularly in priority sectors promoted in the SDS.
Simply put, it will not be possible to meet community aspirations for continued strong progress in developing Samoa’s community services, and infrastructure, and maintain a sound budgetary outcome, without some increases in taxes and charges. Without these increases, high Budget deficits would accrue. If this was allowed to continue, Samoa’s enviable economic and development record would be seriously jeopardised, and the next generation of Samoans would inherit a legacy of high Government debt and interest payment obligations. The Government is therefore taking responsible steps to ensure that this does not happen.
This responsible fiscal policy stance is also in line with clear commitments in the SDS to maintain a stable and sustainable macroeconomic framework, and to improve private sector development and employment creation opportunities. The range of measures proposed are supported by many members of the business community, and take up a number of recommendations submitted by both the Samoa Chamber of Commerce and Industry, and the Samoa Association of Manufacturers and Exporters. It also reflects the wider consultations undertaken by government with all stakeholders including the wider community, on preparation of the SDS, which also focused on financing options.
1. VAGST
It is against this background that I am announcing an increase in the rate of VAGST by 2.5% only, to take effect from 1 October this year. This date has been chosen to allow businesses and government departments to adjust their systems before the rate increases takes effect.
In considering the impact of this increase on the community, and particularly on the poorest members of the community I wish to point out that VAGST does not apply to a range of basic items. Examples include most raw fish, fruit and vegetables, water, power, taxi fares, public transport, and many medical and educational services.
Whilst this limits the impact of the VAGST increase to an important extent, I am pleased to advise that the Government will go further in compensating for the impact. The import tariff on goods currently subject to a 10% duty rate will be reduced to 8%, also with effect from 1 October 2002.
The current 10% rate of duty applied to a wide range of goods commonly used by households, as well as most raw materials and capital equipment used by business. Examples include building materials such as cement, galvanised iron, timber, glass and nails, as well as chemicals, fabrics, pumps, sewing machines, electrical fitting, most farm equipment, larger buses, some pasta and cereals, and toothpaste.
The Government has chosen to provide compensation in the form of tariff cuts rather than by reducing income tax rates, as it is much fairer. This is because an income tax cut would only directly benefit the small percentage of Samoans who earn the highest incomes, whereas the reduction in tariffs that I have just outlined will directly benefit virtually all Samoans. I emphasise that the Government nevertheless remains committed to reducing income tax rates in the medium term.
The tariff cut also increases the competitiveness of most Samoan businesses, and represents a further step towards meeting longer- term World Trade Organisation obligations to phase out tariffs. However, the Government acknowledges that this step does not go far enough to address the legitimate concerns of some local manufacturers who, under this new tariff regime, would still face a tariff disadvantage in some circumstances when the Pacific Free Trade Zone arrangements take effect. I confirm the Government’s commitment however to work with the manufacturers to develop and implement effective measures to overcome these concerns, prior to the Pacific Free Trade Zone initiatives coming into force.
On an annual basis, the increase in the VAGST rate will add an additional $14.0m to revenues, with $4.28m of this handed back via the tariff cuts outlined, giving a net gain of $9.2m.
2. Broadening the Income Base
Mr Speaker, Honourable Members
I turn now to another reform measure, relating to broadening the tax base. The Government is taking this measure to increase the fairness and equity of the tax system, in line with priorities outlined in the SDS.
The Government has decided to remove the income tax exemption for “commercial fishing”, with effect from 1 January 2003. However, income from subsistence fishing and other primary production will continue to be exempt from income tax. a fishing business will be regarded as “commercial” in all cases where it is conducted by a company or trust, or by a partnership or joint venture in which at least one of the partners or joint ventures is a company or trust. In all other cases it will be regarded as “commercial” where the fishing boat used is 8 metres or more in length.
The standard 10% tax withholding regime that applies to certain contractor payments will be extended to apply to appropriate payments in the “commercial fishing” industry, such as payments to crew who receive a share of the catch. In addition, claims for depreciation of pre-existing plant and equipment, and opening written down values at 1 January 2003, will be calculated as if the plant had been used for taxable purposes since purchase.
In recognition of the financial impact of this measure and to ease the transition, the Government has decided to reduce the import tariff on fishing boats and fishing gear and equipment, to 5%. In many cases this represents a further reduction from the new general 8% duty rate I have already announced, and will take effect on 1 October 2002 – the same date as the general tariff reductions.
3. Excise Taxes
The Government will increase the excise tax imposed on a range of products, both for “user pays” and revenue reasons. The adjustments proposed represent an increase in the fixed excise amounts broadly in line with inflation. In order to limit market manipulation, each of these excise rate increases will take effect from today. To the extent that the goods affected are subject to price control, the approved prices will e adjusted accordingly.
(i) Soft Drinks and Alcoholic Beverages
The current rate of excise on soft drinks is 30sene per litre, which was set in 1998. It is proposed to increase this by 10%, to 33sene per litre.
For alcoholic beverages, it is proposed to increase the excise rate from the level set in 1998 of $30 per litre of alcohol, to $33 per litre of alcohol. This translates, for example, as an increase in the excise on beer of 15sene per 750ml bottle, and 30sene for a 750ml bottle of white wine.
(ii) Petroleum Products
It is proposed to increase the excise on unleaded fuel by 4sene per litre, and on diesel and kerosene by 2sene per litre. This tax in part represents a “user pays” contribution to the high cost of building and maintaining the nation’s road system.
(iii) Tobacco Products
The excise on cigarettes and other tobacco products is set at a high rate, in part to discourage smoking, as one of the Government’s strategies to encourage a healthier community. This signals Government’s commitment to supporting preventive health in the face of rising cases of non-communicable diseases. This can therefore be seen as a health tax. The high rate also represents a “user pays” charge for medical treatment, in that, people who smoke will, on average, make higher demands on the health system over time. Given these factors, and recognising that the excise rate has not been adjusted for 5 years, it will be increased by approximately 15%. The excise on cigarettes will become 185% or $149.18 per kilogram or 1,000 sticks, whichever is the higher. The excise on roll-your-own tobacco will become 185% or $127.36 per kilogram, whichever is the higher.
4. Motor Registration and Licence Fees
Motor Vehicle Registration and Driver’s Licence fees are imposed as a “user pays” charge to help meet the high cost of maintaining and upgrading the road system. The schedule of fees for these charges was last adjusted in 1998, and they will increase by approximately 10%. The new schedule of fees will take effect from the date the relevant legislative amendments receive assent.
5. Venture Capital Company
The Government also intends to amend the law to exempt from tax, the income of Samoa Venture Capital Ltd, until 31 December 2009. This will be a specific Samoan based and registered Venture Capital company, with a significant part of the share capital to be subscribed by aid organisations, including the Asian Development Bank, the International Finance Corporation (IFC) of the World Bank, and Government. The purposes of the company, although essentially a private sector/profit oriented structure, are heavily weighted to development purposes – partly in terms of promoting the activities of the underlying investee companies, but more so in terms of stimulating the development of a capital market in Samoa. This development focus is the reason why aid organisations are prepared to invest in this project, and the reason why the Government considers that an income tax exemption is justified. The exemption is only for the Venture Capital company – it does not extend to the fund manager, the investors, or to the individual companies in which it invests.
With the implementation of the new revenue measures, it is most important for members of the public to know that if there are any suspected unfair trading practices, particularly in the setting of prices of goods beyond what is estimated to e a fair market value for the sale of goods, protection is available under the Fair Trading Act administered by the Department of Trade, Commerce and Industry. Members of the public are encouraged to exercise that right as consumers under this Act for fair trading practices, and also where there may be serious breaches of prices set by the Price Control Board on those selected goods under the Board’s supervision.
The Government will be tabling at this session a second Supplementary Estimates to clear unauthorised expenditures approved during the current financial year.
XI. CONCLUSION
The Speaker, Honourable Members
The Government believes this budget will continue to harness economic growth, which we have enjoyed in the last four consecutive years. It will also enhance opportunities for every Samoa to realise his or her aspirations.
What is also important is that the budget delivers ion the commitments made by the HRPP in its Manifesto, while maintaining a responsible financial program that is consistent with sound economic management. These commitments remain on track.
As a small open economy, we are vulnerable to the influence of worldwide developments. It is our interest however, that where we can be proactive in setting the pace of our development to anticipate these changes, we should be bold and assertive to do so.
We are on the eve of celebrating 40 years of independence. We have struggled during this period for attainment of greater self-reliance against many odds – a narrow resource base, natural disasters, worldwide recessions, amongst other constraints and challenges.
Through it all, we have been able to secure a better platform for improved economic growth, especially in the last five years, which augurs well for the future if we continue to implement sound economic and financial policies against which we can pursue our goals for social equity and greater development.
I believe part of this success lies with our commitment to macroeconomic stability, for it has provided us with the flexibility to implement wide ranging reforms which have proven untenable and difficult to carry out in other countries.
It is a winning formula we should continue to follow.
The other part, and I consider this to be the greater part, is our faith in god, and His spiritual guidance we continue to seek, in moving this country forward.
In the face of conflicts and tensions around the world, including within our very own region, we continue to enjoy peace and harmony, and an invigorating environment to develop and grow. It is our prayer that we may be able to continue to do so.
Mr Speaker, Honourable Members
In summation, our economic fundamentals remain strong. Our external position is firm. Inflation is manageable. Our fiscal policy is appropriate and responsible. We do not have a burdensome debt servicing problem and our economic potential remain strong.
All of this would not have been possible without the firm support of our people and out partners in development. We are but a few steps further towards realising greater independence. With your continuing support and our development partners’ invaluable assistance, I am sure we can attain this inestimable goal.
On behalf of government, I would like to express our sincere appreciation and gratitude to our partners in development. Your invaluable contributions have strengthened our efforts for greater self-reliance.
To our people, we thank you for your support as full partners in developing our country. We strongly believe that Samoa is moving forward, and we need your support to allow us to put in place the proper constructs for greater independence.
Mr Speaker
I recommend the 2002/2003 Budget to the House.
May God bless Samoa and her people.
Soifua.