Current Fiscal Landscape
Dato Dr Hj Mohd Amin Liew Abdullah, Brunei's Second Minister of Finance and Economy, emphasised at the recent Legislative Council (LegCo) that prudent spending alone cannot rectify the budget shortfalls that have plagued the nation for over a decade.
Brunei's fiscal policy differs from other countries that rely on personal income, corporate, property, sales, and tourist taxes to boost government revenues.
"In Brunei, even when we have more tourists or when more people buy houses, it does not necessarily contribute to higher government earnings," he stated, highlighting the limitations of the current tax framework.
Brunei's fiscal revenues remain constrained with corporate tax rates at only 18.5% and minimal other taxes.
Over the past ten financial years, Brunei has recorded seven budget shortfalls, with a widening deficit of $2.99 billion expected in the fiscal year 2024/25.
This situation primarily stems from lower energy prices and disruptions in domestic oil and gas production. Approximately 75% of government revenue is derived from oil and gas, accounting for roughly half of Brunei's GDP.
Exploring New Revenue Streams
To address these challenges, the government has adopted a fiscal consolidation program that aims to encourage private-public partnerships (PPP), corporatization, and commercialization. However, additional measures are necessary. One innovative solution under consideration is the establishment of a stock market exchange.
Introducing New Taxes
Another option being considered is the introduction of taxes on products with negative health or environmental impacts, such as tobacco and sugary drinks.
These taxes could generate significant revenue and promote healthier lifestyles.
However, implementing new taxes may face public resistance and require substantial administrative efforts to ensure compliance. Moreover, there could be short-term negative impacts on consumption patterns and business operations.
Raising Existing Taxes
Increasing the corporate income tax rate or implementing a moderate personal income tax could provide a substantial boost to government revenues without drastically altering the economic landscape.
However, higher taxes could potentially discourage investment and economic activity, leading to slower growth. Businesses might pass on the increased costs to consumers, resulting in higher prices and reduced purchasing power.
Enhancing Private-Public Partnerships (PPP)
Enhancing private-public partnerships (PPP) can have several benefits, including attracting private investment, reducing public expenditure, and bringing expertise and efficiency to project implementation.
However, developing and managing PPPs can be resource-intensive due to the need for robust legal and regulatory frameworks. Additionally, there is a risk of unequal partnerships where private entities may prioritize profit over public interest.
Economic Diversification
Investing in sectors other than oil and gas, such as tourism, agriculture, and technology, can create new revenue streams and stabilize the economy.
Economic diversification also promotes innovation and resilience against global market fluctuations.
However, diversification efforts require significant upfront investments in infrastructure, education, and technology. It may take several years for new industries to mature and contribute meaningfully to the economy.
Establishing a Stock Market
Establishing a stock market can provide businesses with an alternative way to raise capital, encourage investment, and foster economic growth.
It can also attract foreign investment, increase financial literacy, and create job opportunities in the financial sector.
However, establishing a stock market requires substantial regulatory, technological, and financial infrastructure.
There are risks associated with market volatility, investor protection, and ensuring transparent and fair trading practices. Initial costs and efforts to develop the stock market may be significant before it starts contributing to government revenues.
Developing Islamic Finance
Developing Islamic finance is another strategy that can improve Brunei's fiscal position. By leveraging the principles of Islamic finance, Brunei can attract both local and international investors seeking Sharia-compliant financial products.
This can diversify the financial sector and provide new revenue streams while aligning with Brunei's Islamic values.
Consolidating Social Welfare Funding
Consolidating social welfare funding and encouraging private sector participation can help alleviate fiscal pressures. By sharing the burden of funding welfare programs, the government can reduce its financial burden while ensuring essential services are maintained. This approach promotes a collective responsibility towards societal welfare.
Return on Benefits Approach
To guide fiscal policy decisions, the government could adopt a Return on Benefits (ROB) approach instead of solely focusing on Return on Investment (ROI), which is typically the private sector's approach.
ROB emphasizes the social and economic benefits of government spending, such as improved health, education, and social cohesion, which contribute to long-term national development.
Utilizing Fiscal Reserves
Utilizing fiscal reserves to bridge budget deficits can provide immediate relief and ensure the continuity of essential public services and development projects.
However, depleting fiscal reserves can reduce the government's ability to respond to future economic crises and may erode investor confidence in the country's fiscal stability.
Enabling Actions and Mechanisms
To implement these strategies, the government must take enabling actions and establish mechanisms.
For instance, the creation of a stock market can facilitate privatization, corporatization, and commercialization efforts.
It allows businesses to raise capital, promotes investment opportunities, and supports economic growth.
Additionally, it opens up opportunities for public participation in the nation's economic development, boosts the economy, and creates new job prospects.
Privatization involves transferring ownership of state enterprises to private entities, improving efficiency and fostering innovation.
A strong legal framework is essential to ensure transparency and safeguard public interests.
Corporatization transforms state-owned enterprises into functioning private companies, enhancing management and operational efficiency.
Commercialization incentivizes these entities to operate in a profit-driven manner, making them more competitive and sustainable.
Recommendations for Sustainable Fiscal Management
To ensure sustainable fiscal management, a phased approach to tax reform is recommended.
Starting with taxes on unhealthy and environmentally harmful products, followed by the gradual introduction of broader taxes like personal income tax, will balance revenue generation with public acceptance.
Developing clear and transparent regulations for Public-Private Partnerships (PPPs) can maximize their benefits in sectors such as infrastructure, healthcare, and education.
Prioritizing investments in high-potential sectors through targeted incentives can speed up economic diversification and reduce reliance on oil and gas.
Establishing a stock market as part of a broader financial sector development strategy will enhance Brunei's financial landscape and create new revenue streams.
Creating a fiscal stabilization fund will help manage future economic downturns while effectively using reserves to support critical projects. Implementing a robust monitoring and evaluation system for fiscal policies will ensure their effectiveness and allow for timely adjustments.
Conclusion
In conclusion, by implementing these recommendations and taking appropriate actions, Brunei can achieve sustainable fiscal management, promote economic growth, and ensure long-term stability.
Brunei faces a fiscal dilemma that requires a comprehensive approach. This approach should consider both immediate fiscal needs and long-term economic sustainability.
To address this, Brunei can employ a range of strategies such as tax reforms, public-private partnerships (PPPs), economic diversification, the creation of a stock market, the development of Islamic finance, the consolidation of social welfare funding, and the responsible utilization of fiscal reserves.
By doing so, Brunei can effectively address its fiscal challenges and ensure a prosperous future for its citizens. (MHO/07/2024)
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