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2021 NATIONAL BUDGET VOLUME 1 ECONOMIC AND DEVELOPMENT POLICIES For the year ending 31st December 2021 PRESENTED BY HON. IAN LING-STUCKEY, CMG, MP MINISTER FOR TREASURY ON THE OCCASION OF THE PRESENTATION OF THE 2021 NATIONAL BUDGET i 2021 National Budget, Volume 1 Contents CHAPTER 1: ECONOMIC DEVELOPMENTS AND OUTLOOK ..................................................... 7 1.1 WORLD ECONOMIC GROWTH AND OUTLOOK – DRASTIC ECONOMIC DETERIORATION, SLOW AND UNCERTAIN RECOVERY PROSPECTS DURING THE GREAT LOCKDOWN ................................................................................................... 7 1.2 EXCHANGE RATE DEVELOPMENTS .................................................................... 17 1.3 DOMESTIC ECONOMIC DEVELOPMENTS AND OUTLOOK ................................. 18 1.4 2021 ECONOMIC OUTLOOK ........................................................................................... 22 1.5 LABOUR MARKET .................................................................................................. 26 1.6 MONETARY DEVELOPMENTS .................................................................................. 29 1.7 CONSUMER PRICE INDEX ....................................................................................... 30 1.8 BALANCE OF PAYMENTS AND INTERNATIONAL RESERVES..................................... 34 1.9 RISKS TO MACROECONOMIC STABILITY ................................................................. 36 CHAPTER 2: FISCAL STRATEGY AND OUTLOOK .................................................................. 39 2.1 FISCAL BACKGROUND – 2020 BUDGET UPDATE ............................................... 39 2.2 2020 SUPPLEMENTARY BUDGET ......................................................................... 40 2.3 THE 2021 BUDGET STRATEGY ............................................................................. 42 2.4 THE MEDIUM-TERM FISCAL OUTLOOK ............................................................... 47 CHAPTER 3: REVENUE ....................................................................................................... 50 3.1 REVENUE DEVELOPMENTS AND OUTLOOK 2020 AND 2021 ............................. 50 3.2 TAX REVENUE ....................................................................................................... 51 3.3 OTHER REVENUE .................................................................................................. 55 3.4 GRANTS ................................................................................................................. 56 3.5 MEDIUM TERM REVENUE OUTLOOK ................................................................... 57 CHAPTER 4: TAX AND NON-TAX MEASURES AND DEVELOPMENTS ...................................... 60 4.1 OVERVIEW ............................................................................................................. 60 4.2 REVENUE POLICY MEASURES............................................................................. 61 4.3 NON-TAX REVENUE MEASURES .......................................................................... 65 4.4 DEVELOPMENT MEASURES ................................................................................. 66 CHAPTER 5: EXPENDITURE ................................................................................................ 67 5.1 OVERVIEW ............................................................................................................. 67 5.2 2021 AGGREGATE EXPENDITURE ....................................................................... 68 5.3 SECTOR EXPENDITURE ....................................................................................... 69 5.4 EXPENDITURE EFFICIENCY MEASURES ............................................................ 81 5.5 DONOR FUNDING FROM DEVELOPMENT PARTNERS ..................................................... 86 5.6 INFRASTRUCTURE TAX CREDIT SCHEME (ITCS) .......................................................... 88 5.7 STATUS OF TRUST ACCOUNTS ........................................................................... 89 CHAPTER 6: TAX EXPENDITURE .......................................................................................... 97 6.1 OVERVIEW ............................................................................................................. 97 6.2 COMPANY TAX INCENTIVES IN THE INCOME TAX ACT 1959 ............................. 98 iii 2021 National Budget, Volume 1 6.3 GOODS AND SERVICES TAX ACT 2003 .............................................................. 104 6.4 TAX INCENTIVES IN THE CUSTOMS TARIFF ACT ............................................. 105 CHAPTER 7: FINANCING AND DEBT MANAGEMENT STRATEGY ....................................... 106 7.1 FINANCING BACKGROUND TO THE 2021 BUDGET ........................................... 106 7.2 FINANCING REQUIREMENTS 2021 BUDGET ..................................................... 107 7.3 UPDATE ON DOMESTIC MARKET CONDITIONS FOR FINANCING DEFICIT ..... 109 7.4 MEDIUM TERM DEBT STRATEGY AND OPERATIONAL PLAN 2021-2025 ......... 110 7.5 MANAGING PORTFOLIO RISK 2020-2025 ........................................................... 113 CHAPTER 8: NATIONAL REFORM AGENDA ....................................................................... 116 8.1 OVERVIEW ........................................................................................................... 116 8.2 KEY REFORMS .................................................................................................... 116 8.3 PUBLIC SECTOR REFORM .................................................................................. 117 8.3.1 EQUITABLE RESOURCE ALLOCATIONS TO PROVINCIAL GOVERNMENTS ....................... 117 8.4 A COMPETITIVE AND DYNAMIC PRIVATE SECTOR .......................................... 119 8.5 ASIA-PACIFIC ECONOMIC COOPERATION (APEC) ........................................... 127 8.6 IMPLEMENTATION OF THE SOVEREIGN WEALTH FUND OF PAPUA NEW GUINEA ................................................................................................................ 127 CHAPTER 9: ENHANCING STATE’S INVESTMENTS .............................................................. 129 9.1 OVERVIEW ........................................................................................................... 129 9.2 SOE OBJECTIVES AND STATE’S INVESTMENT PERFORMANCE .................... 129 9.3 BROADER REFORMS .......................................................................................... 132 9.4 PUBLIC PRIVATE PARTNERSHIPS (PPP) ........................................................... 133 9.5 MANAGING THE NON-RENEWABLE RESOURCE SECTOR ............................... 133 9.6 EXTRACTIVE SECTOR PROJECT UPDATES ...................................................... 135 9.7 PETROLEUM PROJECTS .................................................................................... 137 9.8 PNG EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE (PNGEITI) ....... 138 9.9 REFORMING THE RENEWABLE RESOURCE SECTOR ..................................... 139 9.10 STATE PARTICIPATION AND INVESTMENTS IN AGRICULTURE SECTOR ....... 142 iv 2021 National Budget, Volume 1 Tables TABLE 1: YTD COVID-19 EXPENDITURE BY SECTOR AND PROGRAMS (KINA, MILLION) .......................................................... 40 TABLE 2: 2020 SUPPLEMENTARY BUDGET (KINA, MILLION) ............................................................................................... 41 TABLE 3: EXPENDITURE SUMMARY (KINA, MILLION) ......................................................................................................... 42 TABLE 4: 2021 AND MEDIUM TERM REVENUE PROJECTIONS (KINA, MILLION) ...................................................................... 44 TABLE 5: 2021 AND MEDIUM TERM EXPENDITURE ESTIMATES (KINA, MILLION) ................................................................... 44 TABLE 6: BUDGET BALANCE 2019-2021 (KINA, MILLION) ................................................................................................ 46 TABLE 7: BUDGET BALANCE 2021–2025 (% OF GDP) .................................................................................................... 47 TABLE 8: KEY ANCHORS OF THE MTFS 2021-2025 (% OF GDP) ...................................................................................... 48 TABLE 9: TOTAL REVENUE AND GRANTS 2020-2021 (KINA, MILLION) ................................................................................ 50 TABLE 10: TAXES ON INCOME, PROFITS AND CAPITAL GAINS 2020-2021 (KINA, MILLION) ..................................................... 51 TABLE 11: TAXES ON PAYROLL AND WORKFORCE 2020-2021 (KINA, MILLION).................................................................... 53 TABLE 12: TAXES ON GOODS AND SERVICES 2020-2021 (KINA, MILLION)........................................................................... 53 TABLE 13: TAXES ON INTERNATIONAL TRADE AND TRANSACTIONS 2020-2021 (KINA, MILLION) ............................................. 55 TABLE 14: OTHER REVENUE 2020-2021 (KINA, MILLION) ............................................................................................... 55 TABLE 15: DONOR GRANTS 2020-2021 (KINA, MILLION) ................................................................................................ 56 TABLE 16: 2021 AGGREGATE EXPENDITURE (KINA, MILLION) ............................................................................................ 69 TABLE 17: 2021 EXPENDITURE BY SECTOR (KINA, MILLION) .............................................................................................