Tax Dilemma | Should we raise departure taxes?

“The bottom line is, comparing 2024 to 2019 is not the same,” said Dr Kishti Sen, international Pacific economist at ANZ Bank.

In the lead up to last Friday’s Budget we had an email exchange about the Airport Departure Levy and there were rumours that the Government would follow through on its intention to return the departure levy to its pre-COVID level of $200.

“The government has every right to seek revenue to fund its spending and provide its core services, but do a few cents in departure levy really make a difference in revenue? Probably not,” Dr Sen responded.

“So, I hope that it will remain as it is so that Fiji can continue to compete for tourism revenue.

“We want to increase the number of tourists coming to the country and have them spend more money at home.”

The tourism industry is the “savior” of Fiji’s economy after the COVID-19 pandemic. Its unexpectedly unprecedented performance has driven the country’s GDP to grow by 20% in 2022 and 8% in 2023.

With official growth forecasts downgraded to 2.8% for 2024 (a return to pre-COVID levels), even at such a low rate the driver will still be tourism, and tourism experts say Fiji is already seen as an expensive destination compared to its competitors, so who dares to touch the departure tax?

The price of $140 is already shockingly high.

“We believe our problem is supply (of rooms), not demand,” Finance Minister Professor Biman Prasad told this newspaper.

Hopes that the government would not cut the departure tax were dashed following Friday’s announcement.

“We are increasing the wages in phases. On August 1, we’re increasing the wages from $140 to $170, and on August 1 of next year, we’re reducing the wages to $200. So it’s not that the wages weren’t there before. This is a COVID measure to reduce the wages.”

But will the post-COVID boom and still-strong visitor numbers, after the tax was reduced to $200, give us a false sense of security that we have no idea what is happening in our two key source markets, Australia and New Zealand?

Consider this: “For a family of four (mom, dad and two children), the typical tourist group in Fiji, they will soon have to pay $800 in departure tax before they can even think about booking flights and reserving hotel accommodation, let alone spending money,” Dr Sen noted.

“All of these factors combined have made it impossible for many tourists who love Fiji to visit, especially in the current climate of continued cost of living pressures.

“Also, just because the tax rate was $200 in 2019 doesn’t mean it should go back to where it was.

“Fiji was ranked as an expensive holiday destination in 2019, with many blaming the $200 tax levied on departure.”

“Also, the cash rate was 0.75 per cent in 2019. Today it is 4.35 per cent.

“Mortgage holders and renters in Australia are being squeezed. More of their disposable income is being spent on higher mortgage repayments and rent. There is less money left for discretionary spending such as overseas holidays. The same is true in New Zealand.

“All in all, comparing 2024 to 2019 is not quite the same. As I mentioned before, Fiji was already an expensive destination in 2019,” Dr Sen said.

According to the Fiji Tourism Market Report released last month, which he co-wrote, visitor numbers from Australia, Fiji’s largest market, hit record levels immediately after the outbreak but are now trending downward again.

The report shows that Australian tourists visiting Fiji account for about 5% of Australia’s total annual tourists.

Just after the outbreak, the infection rate was close to 15%. Now that Fiji is weakening, Dr Sen said Fiji must do everything it can to keep the infection rate to at least 7%.

“The two main drivers of Fiji’s overseas visitor numbers are income growth in source markets and Fiji’s competitive position – prices relative to competitors,” Dr Mori said.

“Currently, household disposable income, which represents consumers’ spending power, is being squeezed.

“Consumers in major markets are spending a greater share of their total income on interest payments on mortgages and personal debt. Australia’s standard variable home loan rate has surged to 8.8 per cent from 4.5 per cent two years ago.

“In New Zealand, the variable housing rate is 8.6 per cent, up from 4.9 per cent a few years ago. Personal debt interest rates have also risen in line with the policy (cash) rate.

“One in three Australians are mortgage holders, so their disposable income growth has slowed or reversed.

“Another third of the Australian population are renters and they are also feeling the pain of rising interest rates.

“Almost all landlords will pass on higher debt servicing costs to their tenants. As a result, rising interest rates around the world are putting pressure on household disposable income, and in Australia’s case, 67 per cent of the population is affected.”

In addition, both Australia and New Zealand are struggling with high price inflation.

“With inflation in Australia currently at 3.6 per cent, it will take some time to get back to our 2-3 per cent target band,” Dr Sen said.

“Most experts do not think the Reserve Bank of Australia will cut interest rates this year.

“In 2019, Australia’s annual inflation rate averaged 1.6%. New Zealand’s annual inflation rate this year is 4%, compared with 1.7% in 2019.

“Against this backdrop, now may not be the best time to increase departure taxes twice in a short period of time.

“Soon, a family of four (mum, dad and two children), the hardcore visitors to Fiji, will have to scrape together $800 in departure taxes before they can book flights and accommodation.

“Food and leisure costs are added on top. Suddenly, prices are at the limit, which may deter potential tourists from looking for other more competitive markets.

“Yes, the departure tax was $200 in 2019, but the cost of living pressures are much greater now than they were in 2019.

“Interest rate dynamics are strained and a high inflation environment makes it more challenging to afford overseas leisure travel.

“So when it comes to overseas holidays, families are looking at options that offer value for money.

“Even if they do travel, the proceeds (tourism spending) are likely to be lower this year as the savings buffer built up during the pandemic has been largely depleted.

“Cash savings rates have returned to pre-pandemic levels in most markets. Any further increase in departure taxes would likely simply provide a ‘free hit’ to some of our competitors.”

This is something our policymakers need to think about before the budget debate begins next week.