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Fiscal Sustainability in Timor-Leste: A Call for Limiting Recurrent Expenditure Growth

Background

Dili, East Timor - As Timor-Leste continues to navigate fiscal sustainability challenges, experts are urging the government to take decisive action to curb recurrent expenditure growth and maintain a balanced budget.

The Problem: Rapid Recurrent Expenditure Growth

According to data from the Ministry of Finance and Treasury (MoFTL), recurrent expenditures have grown at an average rate of 10.2 percent over the past decade, exceeding the headline inflation target of 4 percent since 2012. To address this issue, the government is advised to limit annual growth for recurrent expenditures to a maximum of 10 percent.

Proposed Solutions

Allocating Growth Limits

The MoFTL has proposed allocating this growth limit to each recurrent category in its fiscal sustainability model.

  • For capital expenditure, which has seen volatile growth patterns ranging from 137 percent in 2011 to a negative 57 percent in 2017, experts suggest benchmarking it against GDP for a maximum of 30 percent.
  • Additionally, the government is encouraged to introduce expenditure-to-GDP ratio rules, which would impose limits on budget composition.

Revenue Rules

The government is also advised to introduce revenue rules, given that domestic revenues currently account for only 12.1 percent of GDP. The Fiscal Reform aims to increase domestic revenue ceiling to 17 percent by 2023.

  • Experts suggest setting an Excess Withdrawal (EW) limit at 60 percent of ESI, aligning it with the frontloading fiscal policy and capital development-to-GDP rule.
  • Additionally, the government is urged to establish floors or ceilings for tax revenues, balancing revenue targets with macroeconomic stability.

Budget Balance Rules

The headline budget balance of Timor-Leste has been observed from two different perspectives: the difference between domestic revenues and expenditures, and the overall fiscal balance including foreign aid and debt servicing. Experts suggest introducing budget balance rules to maintain a balanced budget, ensuring that the government’s spending is aligned with its revenue generation.

Conclusion

In conclusion, experts emphasize the importance of fiscal sustainability in Timor-Leste, urging the government to introduce measures to limit recurrent expenditure growth, establish revenue rules, and maintain a balanced budget. By doing so, the country can ensure macroeconomic stability and promote sustainable economic development.