Budget deficit could ease to 6.9% of GDP in 2022

january 27, 2022

Another budget deficit is looming for the fourth consecutive financial year in 2022/23, but the Centre for Strategic and Policy Studies (CSPS) said the gap between government spending and revenue will reduce owing to an improved oil and gas earnings outlook.

Based on the think tank’s projections in its Brunei Economic Outlook 2022 publication, the fiscal deficit is forecast to narrow to 6.9 percent of the gross domestic product (GDP) in 2022 from an estimated 10.3 percent of GDP last year.

CSPS said there was a marked improvement in Brunei’s fiscal position last year after the budget shortfall had worsened in 2020 to 15.7 percent of the GDP – the largest deficit since 2016.

The fiscal position improved in 2021, thanks to an increase in revenue and slightly lower expenditure.

Nonetheless, the fiscal deficit [in 2022] remains relatively large compared to the significant improvements during 2018-19,” it added.

During the 2018/19 financial year, Brunei posted a deficit of around $30 million as opposed to about $3 billion in the 2020/21 fiscal year.

The think tank said budget pressures have been mounting since 2014/15 when oil prices plunged from US$110 a barrel in June 2014 to US$30 abarrel in January 2016.

In response, the government undertook efforts to enhance the efficiency of fiscal spending and diversify revenue sources, including a fiscal consolidation programme and introducing new excise duties,” CSPS stated in its report.

Buoyed by higher output and prices, oil and gas revenue is predicted to rise and contribute to a reduced budget deficit in 2022.

Brent crude – the global oil benchmark – is expected to average US$75 a barrel this year, up from US$71 a barrel in 2021

Increased non-oil and gas revenue is also on the cards this year as the non-hydrocarbon sector returns to growth while COVID-19 economic relief measures are gradually withdrawn.

In 2021, non-oil and gas revenue declined due to weak private sector activity, as non-essential businesses were forced to close during Brunei’s second wave of COVID infections.

Economic support and relief measures, such as tax and duty exemptions, also contributed to lower receipts,” CSPS said.

Government spending to remain limited

The think tank added that current spending will likely be contained this year as fiscal consolidation efforts take hold after a temporary halt in the past two years to support households and businesses during the pandemic.

However, capital spending is expected to grow after execution delays of some projects under the National Development Plan.

On balance, total expenditure as a share of GDP in 2022 is projected to be lower than a year ago, in line with the downward trend of government spending since 2014.

The Legislative Council had passed the unchanged budget of $5.86 billion over the past three financial years following deteriorating fiscal buffers.

CSPS further said capital spending on National Development Plan projects has been trimmed substantially over the past few years, but there were “somewhat limited” cuts to current spending, including wages, salaries, pensions, allowances and other benefits.

As a result, the public wage bill remains high at more than 30 percent of government expenditure and more than 10 percent of GDP.

This may in part be explained by the high share of public sector employment in total employment, a distinctive characteristic of the labour market similar to that of Arab Gulf oil-exporting countries,” the think tank added.

Wage growth in the public sector has largely been stagnant since 2015.

In terms of fiscal policy, CSPS said the government should focus on containing the pandemic, stimulating the economy and providing relief to businesses and households in the short term.

Ensuring sustainability is the primary focus in the medium term, while expanding the revenue base beyond oil and gas, it added.

Immediate tax actions can include raising or introducing excises on products with a negative health or environment impact. This would be more feasible compared to other tax options.

Enhancing spending efficiency should also be continued, which may include containing the high public wage bill, improving the targeting of social spending and reviewing policies on blanket subsidies to make them more targeted.”

Source: https://thescoop.co/2022/01/27/budget-deficit-could-ease-to-6-9-of-gdp-in-2022/