A lean FY 2022 proposed budget was submitted to Olbiil Era Kelulau (OEK) yesterday indicating tougher times ahead. It authorized $89 million and only appropriated $82 million for government operations. The proposed budget is 14% below FY 2021 Budget which was at $103 million.
The budget bill reflects the on-going impact of the COVId-19 pandemic on the economy, according to the transmittal letter by President Surangel Whipps Jr. to the leadership of both houses.
“Our tourism-based economy continues to be battered by the COVID-19 pandemic. Though I am optimistic that the coming months will offer opportunities to reopen with care, it will take time for our economy to recoup all that we have lost.” Stated Whipps.
Finance Minister Kaleb Udui Jr., at last week’s press conference said that the shortfall in revenue for FY 2022 has been anticipated and that it is something he had consistently shared with OEK members and government departments.
Udui said that they are aware that government expenditure is the major driver of the current economy and that strategies they have to manage expenditures will not significantly impact government operations.
Substantial change in the FY 2022 is the source of funding for the shortfall. In the FY 2021 budget, $46m came from local revenue and $63m from external financing. Of the $63m financing, $39m came from ADB loan. For the proposed FY 2022 budget bill, $48m is projected to come from local revenue while financing from external sources is only $34m, about half FY 2021 amount. Out of the $34m external financing, $19m comes from the ADB Policy Based Loan and $15m comes from the Compact Trust Fund according the Fund Availability Analysis Report attached with the budget bill.
In the transmittal letter, President Whipps urged OEK to pass the tax reform bill, which is one of the requirements for getting the ADB Policy Based Loan. “The FY 2022 budget bill is based on revenue projections from the current tax structure and anticipates $15 million as the last installment of the ADB Policy Based Loan.”
He added that the new tax reform is fair and equitable system. “In addition to the revenue benefits inherent with the passage of the tax reform bill, it is time for us to transition from our antiquated system and bring equity to our tax structure.”
Government expenditures for operations remained very close to FY 2021 level as indicated by Finance Minister Udui. Significant expenditure cuts in the FY 2022 budget bill were in Other Expenditures such as subsidies to PPUC, Pension Plan and Social Security Administration.
In the budget proposal, the subsidy is cut from $3,908,950 in FY 2021 down to $1,955,000 in FY 2022, a 50% reduction. The $100 Supplemental SS Benefit payment is split in half between national government and Social Security Administration under the FY 2022 budget. Whipps recommended that SSA pay $50 while national government fund $50 of the supplemental benefit.
The bill further introduces two major changes to Social Security benefits. One, the insurance premiums paid by government for people 60 years and older and for people with disabilities will apply to citizens only. Second, it changes the mandatory retirement age. The bill proposes gradual changes over a 10-year period so that by year 2031, the mandatory retirement age will be 65.
Other major budget cuts include removal of $2.6 million subsidy to Pension Plan and $1million Lifeline Subsidy to PPUC. All Other Expenditures remaining were cut with exception of funding for Mechesil Belau which was reduced from $75,000 down to $50,000.
Lastly, debt service expense went up by 18% from $2.9m in FY 2021 to $3.47m in FY 2022, most of which are ADB loan payments.
The bill was submitted to OEK last night. 11th OEK opened their 3rd Regular Session yesterday and is expected to address the bill this Regular Session.

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