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Timor-Leste’s Fiscal Rules: A Path to Sustainability

As Timor-Leste continues to grapple with fiscal sustainability, the government has proposed a set of rules aimed at curbing expenditure and revenue growth. These measures are designed to ensure that the nation’s budget remains balanced and sustainable in the long term.

Expenditure Ceiling Limits

One of the key proposals is the introduction of an expenditure-to-GDP ratio rule. This would limit government spending to a certain percentage of GDP, ensuring that it does not exceed a certain threshold. According to experts, this rule could help reduce the country’s fiscal deficit and promote macroeconomic stability.

  • Historically, Timor-Leste has experienced fluctuations in its expenditure ceiling limits.
  • With the establishment of a multi-annual perspective on macroeconomic and fiscal objectives, the government may consider introducing a maximum 80% ceiling expenditure-to-GDP ratio.

Revenue Rules

The government is also proposing revenue rules to ensure that tax revenues grow at a sustainable rate. Currently, domestic revenues account for only 12.1% of GDP, with oil and gas revenues making up the bulk of government income. However, through fiscal reforms aimed at improving infrastructure and enforcing compliance, the government aims to increase domestic revenue to 17% of GDP by 2023.

  • The Petroleum Fund Law currently includes a windfall country-specific rule, known as the Estimated Sustainable Income (ESI), which limits withdrawals from the fund to 3%.
  • Experts recommend revising the ESI definition and imposing a limit on Excess Withdrawal (EW) to ensure that the fund is used for long-term development projects.

Tax Revenue Floors

To promote macroeconomic stability, the government may consider introducing tax revenue floors, which would set a minimum target for domestic revenue growth. A revenue floor rule of 15% of GDP by 2023 could help balance revenue targets with macroeconomic stability.

  • The government is also considering specific revenue ceiling rules, including increasing and introducing progressivity to personal income taxes, as well as increasing corporate income tax rates to support economic efficiency and promote private investment and job creation.

Budget Balance Rules

Finally, the government has proposed budget balance rules (BBRs) to ensure that the headline budget balance is observed from two different perspectives. This would help promote fiscal sustainability and macroeconomic stability in the long term.

In conclusion, Timor-Leste’s proposed fiscal rules aim to promote sustainability and macroeconomic stability by limiting expenditure growth, promoting sustainable revenue growth, and ensuring budget balance. While these measures are crucial for the country’s economic development, it is essential that they are carefully designed and implemented to avoid unintended consequences.