October 27, 2020
Difficult choices loom for the Brunei government on cutting spending or introducing new taxes to balance its budget in the face of falling oil prices, the Centre for Strategic and Policy Studies (CSPS) said.
The government is facing increasing fiscal pressure as the budget deficit is expected to linger when projected oil prices remain low, the think tank stated in its Brunei Economic Update for October.
Oil prices collapsed by 40 percent in March, the steepest one-month fall in half a century.
Earlier this year, the second minister of finance and economy YB Dato Seri Paduka Dr Hj Mohd Amin Liew Abdullah had said Brunei was heading towards a budget shortfall for two consecutive financial years due to decreased revenue from the oil and gas sector.
Brunei also recorded large fiscal deficits from 2015 to 2017, at 15 percent of the gross domestic product (GDP).
What’s next for the Brunei economy?
CSPS forecasts that fiscal balances are unlikely to turn positive in the short term, raising questions on the government’s next move to balance the books.
“The government is confronted with the choice of reducing expenditure, which has cyclical implications for the domestic economy given the stabilisation role of fiscal policy, or increasing non-oil and gas revenues such as introducing new or increasing existing taxes, which may not be palatable,” it said.
CSPS added that spending choices also relate to medium- and long-term development objectives in human and physical capital accumulation, as well as ensuring future generations receive a fair share of the country’s natural resource wealth.
“It may be difficult to cut spending, particularly on welfare grounds, even as oil prices and revenue decline significantly,” it stated.
For decades, the hydrocarbon sector has been dominant in generating government revenue, which fluctuates with oil and gas production and prices.
Fiscal policy in uncertain times
The think tank noted that Brunei’s financial response had varied across six episodes of oil price crashes since 1970.
“Brunei’s fiscal policy response to oil price fluctuations has been broadly consistent with the nature of the shocks.”
Government spending has generally increased during good times and reduced during bad times, it said.
“If oil price declines are anticipated to be temporary, such as due to subdued demand during the 1997-98 Asian financial crisis or the 2008-09 global financial crisis, maintaining or increasing spending to cushion the impact of oil price declines should be pursued.
“If price declines are perceived to be mostly permanent due to structural shifts such as technological advancements and the emergence of new supply sources in 1985-86 (oil discoveries in the North Sea) and 2014-15 (shale oil fracking in the United States), reducing expenditures is justified,” CSPS continued.
While the government has saved a portion of its oil windfalls in the 2000s, its cumulated fiscal balances have declined after reaching a peak of $50 billion in 2013.
CSPS said continuous efforts in strengthening Brunei’s fiscal policy is required to deal with heightened uncertainty amid the COVID-19 pandemic and geopolitical tensions.
The effects of the pandemic are still unfolding but oil prices in April were already over 60 percent lower than at the end of 2019.
“The main policy issues are fiscal adjustment to low oil prices and rebuilding fiscal buffers.
“Priorities can include streamlining expenditures with a focus including on growth-enhancing spending and increasing non-oil revenues,” it added.