TAVARUA, Rarotonga, Cook Islands (4 Oct 2001) -- A major drop in tourist arrivals in the Cook Islands will mean lower economic growth, a halt on expansion in the business sector -- and lower demand for employment. The resulting fall in tax revenue will also mean the government will have to reduce expenditure, says Bredina Drollet, Policy, Planning, Economics Manager with the Ministry of Finance and Economic Management. In a report to the Cabinet last week, looking at the possible economic effects of a "worst case" downturn in tourism as a result of last month's terrorist attacks on the US, Drollet says the immediate worry is that the fall in tourism will shift total consumption down. The immediate effect on taxation revenue will be a direct drop in VAT -- in proportion to the fall in tourist arrivals, she says. "A fall in consumption is a signal to the business sector to stop expanding, and to supply less goods and services. Employment hours could be reduced, particularly in the accommodation and restaurant sectors. A fall in consumption will also mean a drop in business revenue due to lower activity, she says. The effect on tax revenue will be a fall in individual income tax as a result of fewer hours worked and company taxes may also fall at this stage. "From this point on, the economy may experience "knock-on" effects as a result of the loss in tourism receipts. Local household income may fall due to the decision of employers to reduce the number of hours worked and private consumption could be expected to fall because of lower discretionary income. The effect on taxation revenue would be a further drop in VAT." Drollet says the additional fall in consumption will cause businesses to further reduce economic activity. Less goods and services will be provided and businesses are likely to reduce stock and import less. Reduce Expenditure "Depending on the size of the fall in consumption, a reduction in employment hours, as well as jobs, may occur. Income tax, import levies and company tax may all fall. "If taxation revenue falls, government must reduce expenditure by at least the size of the loss in revenue, and perhaps more for additional reserves. Government must cut expenditure if revenue falls as it is legally obligated to under the principles of fiscal responsible management." She says total demand in the economy could be expected to fall, caused by the drop in private household consumption and government expenditure. "Total supply is also falling because businesses are supplying less. Total demand is expected to fall more than total supply, which will lead to an overall contraction in the economy. It this happens, a recessionary effect is likely to ensue." Drollet says the scenario she has described is based on the assumption that tourist arrivals will fall significantly and will remain at lower levels for at least a year. Offsetting factors such as a fall in world oil prices, which could benefit the economy, and the remoteness of the Cook Islands from the hotspots, could dramatically reduce the impact of the events of September 11. | | But she says the importance of the tourism industry must not be underestimated, as the Cook Islands economy is highly dependent on it. "To put it in perspective, tourism is valued at around 50 percent of our GDP, which stood at over NZ$ 171 million (US$ 70,024,500) last year." Looking at ways in which the various sectors of the economy can keep consumer confidence and business confidence going, Drollet says the fact that the country doesn't have a reserve bank means the Cook Islands cannot reduce interest rates as have reserve banks in other parts of the world. However, she says an alternative tool to monetary policy is fiscal policy, specifically through government spending activities and taxation. Fiscally Responsible "A decision to reduce government expenditure will encourage the business sector that the government is fiscally responsible and adjusting to the economic environment," she says. "Changing expenditure priorities can help -- like redirecting tourism -- marketing strategy from areas likely to yield less to areas of potential. This is an initiative which the Cook Islands Tourism Corporation is working on." Capitalizing on strength factors such as "a safe destination" and exchange rate advantages may lure extra New Zealand and Australian tourists though the Cook Islands will have to compete with the attractiveness of the Fiji Islands and its current marketing strategies, Drollet says. "Another fiscal tool would be a reduction in taxes which would have the effect of making people feel wealthier, encouraging consumption and consumer confidence. However, this option is unlikely to be used until there is a serious contraction in the economy." Drollet says other key players in the economy have already taken some action. "A positive announcement was by the Westpac Bank, which said it would look at a moratorium on principal payments for those customers involved in the accommodation industry. "ANZ and BCI have not yet announced any strategies, however they are monitoring the situation closely. Government has also established a committee consisting of both public and private sector leaders to recommend and review actions that the country may take in response," Drollet said. World waiting "However, it is still difficult to determine the full impact the economic shocks will have. "It seems that the world is waiting on the looming war against terrorism as announced by President (George W.) Bush and the response by the Taliban. "Closer to home, Cook Islanders are also awaiting the outcome of the current crisis faced by Air New Zealand. "Whatever the case, the country should prepare for an uncertain period in the medium term." SOURCE - Cook Islands News |
