Canberra, 9 July 1966
One of the questions on which the Select Committee is seeking the views of the people is whether the Territory budget should be split so that appropriations of Territory revenue can be decided in the Territory.
I thought that the Minister made it clear in the Canberra talks that it was the practical difficulties which the Commonwealth sees in splitting the budget at this stage and not the principle which resulted in the Commonwealth’s view that it was impracticable to split the budget at this stage.
It is one thing therefore for the Select Committee to ask the people for their views on ‘responsibility for a degree of internal financial control’ and another thing to find out if this can be done in a way which is fully consistent with the overall requirements of the Territory and which leaves Australia the full authority to discharge its responsibilities there.
In 1965/66 the Commonwealth is meeting by way of direct grant $62 million or about 60% of a total expenditure by the Papua and New Guinea Administration of $103 million. Internal revenue amounts to $34.7 million or about one-third of the budget and covers approximately expenditure (both capital and current) on health, education, housing, water and sewerage and posts and telegraphs. Further, the combined total of expenditure on all capital works and capital purchases constitutes about 28% only of the total estimated expenditure. There are, therefore, obvious limits to the increased responsibility that could be given to the House of Assembly through the splitting of the budget.
If two authorities each decided independently the development that would occur in the Territory in different fields there would be a real risk of unco-ordinated development—for example if schools and hospitals are established they would need roads to be constructed and maintained to serve them. If the split were to put current expenditure under one authority and capital expenditure under another, similar problems arise. Fragmentation of the budget is quite opposed to the precepts of sound budgeting.
It would be a very happy coincidence if the area of responsibility designated to be financed from internal revenue matched exactly or even closely the level of expenditure that should be incurred on that area and if the increase in internal revenue year by year corresponded with the increase in expenditure that, in proper balance, should occur in that area of responsibility. In this connection it should be noted that internal revenue in 1966/67 is estimated to be about 21% greater that in 1965/66; in 1965/66 internal revenue is estimated to be 24% greater than in 1964/65; and in 1964/65 internal revenue was 23% greater than in the preceding year. These annual increases in internal revenue are considerable; but there could be, for example, a sudden and very significant rise in internal revenue from mineral development or the discovery of oil.
A basic assumption underlying the determination of the amount of Commonwealth grant is that all avenues of raising internal revenue have been thoroughly explored. To the extent that internal revenue can be raised the gap between expenditure and receipts (including borrowings) to be met by the Commonwealth is correspondingly reduced. The Commonwealth thereto has a vital interest in ensuring that internal revenue is at the maximum practicable level. If it can be raised further, the Commonwealth would obviously wish to consider whether total expenditure should rise and if so in which directions or whether the amount of Commonwealth grant should be reduced. Recent annual increases in internal revenue would have necessitated at least an annual review of the functions to be financed from internal revenue.
It would seem that the proportion of external aid to local revenue would need to be considerably lower before splitting the budget would be practicable. A system of grants in aid for specific purposes looks practicable in a situation where a country from its own revenues provides ordinary costs of administration (salaries, services, minor works, etc.). Grants in aid can then be given for specific developmental purposes as aids to the annual programme.
At this stage, therefore, it does not seem practicable to devise an effective scheme for splitting the budget which will achieve the desired objective until a much higher proportion of total expenditure is being met from local revenue.
In asking the people this question on local responsibility for local revenues the Select Committee may have in mind that as one step in this direction the Commonwealth should meet direct the cost arising from the employment of expatriate personnel. The Treasury however has stated its opposition to ·this proposal and perhaps we should discuss that aspect on my visit to the Territory.
The Government obviously should avoid being placed in the situation where there is a strong local support for a split budget but for reasons, however legitimate, the Government has to make a decision against such action at this stage. It seems desirable that members of the Committee should be made as fully aware as possible of the difficulties seen in the proposal and I would appreciate your views on how this might be done. If the Select Committee were to come up with a recommendation which merely requested the Government to continue to examine how the budget might be split this would not appear to cause any difficulty.
[NAA: A452, 1966/2960]
1 A marginal note indicates that Warwick Smith delivered the letter during a visit to PNG.