Less Government revenue would mean the Government has to reduce its expenditure (see chart 5). This is the prudent fiscal response to a reduction in revenue. The alternative would be to borrow, domestically or externally, to make up for the revenue shortfall. This would however mean increasing the Government’s indebtedness. So far, the Government has succeeded in reducing its debt.
The Government’s debt to GDP ratio declined from 71 percent in 2001 to around 30 percent in 2008 (see chart 6). A return to borrowing (deficit financing) would reverse this achievement, as well as passing on the burden of servicing the debt to future generations of Papua New Guineans.