The 2015/16 Half Year Economic Update and the 2016/17 Budget Policy Statement

Minister for Finance, the Honourable Mark Brown released the 2016/17 Budget Policy Statement (BPS) outlining the intended focus for the development of the 2016/17 budget for 2016/17 and the 2015/16 Half Year Economic Update (HYEFU).

In releasing the statement Minister Brown pointed out the focus on the first of Government in the first six months of 2016 would be aimed at improving public financial management, economic governance and the public sector, these include:

• undertaking an independent economic review of the underwrite of Los Angeles and Sydney flights;
• further upgrading the Revenue Management System;
• scoping changes required to centralise the Cook Islands Government Financial Management Information Systems (FMIS);
• development and finalisation of the Cook Islands tourism strategy;
• reviewing the medium term infrastructure needs of the education sector and reviewing expenditure levels in the health sector;
• implementing a corrective action plan to meet ICAO universal safety oversight audit programme (USOAP) findings; and
• finalising a set of standard immigration operating procedures.

The 2016/17 BPS outlines base funding for core service delivery and economic growth activities will be maintained across the period of the budget and forward estimates (2016/17 to 2019/20). Any new initiatives will be focussed on strengthening the public sector through ongoing centralisation of corporate services functions and improving overall performance in infrastructure management.

Changes to Income Tax

As of 1 January 2016 the Government will reduce the income tax rate from 18.5 per cent to 17.5 per cent for earnings between $11,000 and $30,000. This rate will be further reduced from 17.5 per cent to 17 per cent from 1 January 2017. These initiatives have already been factored into revenue forecasts. The changes are expected to bring tax revenues as a proportion of GDP come down to around 26 per cent in 2017/18.

                                               Current                      1-Jan-16                        1-Jan-17
0 - $11,000 exempt                  0.0%                          0.0%                               0.0%
$11,001 - $30,000                  18.5%                        17.5%                             17.0%
$30,001 - $80,000                  27.5%                        27.5%                             27.5%
$80,001 & above                   30.0%                         30.0%                             30.0%

Pension Increases

In the 2015/16 budget the Government announced that pensions for those aged 70 and over will be increased by $10 from 1 July 2016 to $660 a month, these changes have already been factored into expenditure forecasts.

Changes to Estimates of Revenue and Expenditure

Tax revenue for 2015/16 has been revised upward by $0.3 million due to an increase in withholding tax being offset by lower collections of other taxes. Estimates of expenditure have increased by around $1.7 million in 2015/16, to accommodate costs incurred in 2015/16 for Te Maeva Nui transportation and the 50th celebrations.

The underlying net operating surplus 2015/16 is anticipated to be of $0.79 million. An underlying net operating deficit of $0.179 million is estimated for 2016/17 moving to a $2.698 million surplus in 2017/18 and $4.674 million surplus in 2018/19. Revenues from Maritime resources have not been updated at this stage but are expected to be higher than the budget estimate.

Seeding of the Sovereign Wealth Fund

The Government is drafting policy and legislation, in consultation with the community, to establish the Cook Islands Sovereign Wealth Fund (CISWF). The CISWF will invest any short-term gains from the natural capital endowments of the Cook Islands for the benefit of all future Cook Islanders. One of these sources of short-term revenue is from fishing penalties. In December 2015, the Cook Islands received $0.5 million in fishing fines. As the CISWF is not yet in operation, these revenues will be held in reserve, and transferred to the Fund as seed funding upon the passage of enacting legislation.

Updated economic and revenue forecasts

Nominal economic growth (which the majority of tax income is derived from) is estimated to be as follows:

• 1.8 per cent growth in 2014/15 (previously 0.5 per cent) due to the increase in public consumption and a fall in imports.
• 0.3 per cent decline in 2015/16 (previously 2.6 per cent growth) due to an increased proportion of government consumption of imported goods and services and a slippage in some capital projects, partially offset by a rebound in tourist arrivals which was evident in the first few months of 2015/16.
• 4.3 per cent growth in 2016/17 (previously 0.7 per cent) due to continued growth in tourism, and capital investments planned for 2015/16 that are likely to slip into 2016/17.

Re-evaluation of debt stocks based on updated exchange rate movements

Total Crown debt is denominated in a number of currencies. The NZD depreciated against all major exchange rates between the 2015/16 Budget at the time of this write up. It is worth noting that the NZD/RMB exchange rate depreciated the most (by 20 percent) followed by the NZD/USD exchange rate (with a 16.3 per cent depreciation), leading to a large unrealised foreign exchange loss on the overall loan portfolio.

Despite this, the net debt position of the Cook Islands remains healthy with net debt (gross debt less loan reserve monies) at 26.4 per cent in 2016/17.

Tourism forecasts

New Zealand is still expected to remain as the largest market with 67 per cent of total arrivals in 2014/15, with Australia having a smaller, but significant share (17 per cent).
Tourist arrivals are forecast to return to solid growth of 1.6 per cent in 2015/16, continuing on at this rate in 2016/17. Growth over the later forecast years is anticipated to remain close to one per cent in each year.
Current calendar year-to-date arrivals (Jan-Oct) are 2.7 per cent higher than the similar period in 2014, and the first four months of 2015/16 (Jul-Oct) are 4.8 per cent higher than the same period last year. In large part, this reflects increased numbers of arrivals due to the 50th anniversary celebrations (which appears to have also increased arrivals in June.

pdfDownload the full statement here2.05 MB

15 December 2015