Finance minister upbeat on government finance

The government recently announced that the deficit was up to Lm78.5 million for the first six months of the year. The privatisation programme is lagging and the ratio between debt and the Gross Domestic Product exceeds that allowed by the Maastricht convergence criteria to join the eurozone. Vanessa Macdonald met Finance Minister John Dalli to see whether the government was still on track to bring the public finances under control.

In the six-year forecast you made in the 1999 budget, you planned a deficit net of sales of assets of Lm77 million for last year and of Lm94 million for this year. But last year's was Lm85 million and for the first six months of the year it was Lm78.5 million. Can you bring this back on track?

Government accounting is done on a cash flow basis and normally what happens in the first six months of the year is different to what happens in the last six months of the year. Most of the government's revenue is received in the last six months of the year.

And although the deficit for the first six months of the year is what it is, we are confident we will be on budget at the end of the year.

You said that revenue will recover because there are payments due in the second half of the year. If I could take last year's pattern: the government got 54 per cent of its revenue in the second half of the year: not that much more than in the first.

This would represent proportionally, a revenue of Lm376 million and an expenditure, also calculated proportionally, of Lm341 million. Presuming that debt servicing and capital expenditure would also rise proportionally, that would give you a deficit in the region of Lm130 million by the end of the year.

This year, the revenue will be higher percentage-wise than last year, partly because last year we had some adjustments to make, especially in the introduction of new time-tables for tax payments, which are totally different this year.

So what do you forecast the deficit will be?

The deficit should be in the region of Lm75 million to Lm80 million.

It is already Lm78.5 million. Are you going to be able to reverse it so much?

Yes.

Much of your extra income was forecast to come from economic growth. Now the GDP actually went down by one per cent last year and in the first quarter this year only grew by 1.4 per cent. Are you going to boost taxation revenue enough?

When one quotes GDP growth vis-á-vis financial flows in budgets, one has to look at the nominal GDP and not the real GDP. Nominal GDP is what is measured in money terms and the real GDP is the nominal GDP discounted for cost of living. Accountants usually look at nominal GDP while economists look at real GDP to take out inflation to compare like with like. But in nominal terms, last year the GDP grew by 3.7 per cent and this year we are expecting, as budgeted, 5.5 per cent.

Debt was also forecast to come down to 58.17 per cent of the GDP last year and to 57.69 per cent this year. However, the National Plan for the Adoption of the Acquis recently reported it being 63 per cent, which is three per cent higher than the Maastricht convergence criteria for joining the eurozone.

What happened is that the revenue from privatisation did not come in when expected. Therefore, that put up the debt more than we expected. But, again, that would now be coming down because of the privatisation proceeds. It will not go down to 59 per cent, but it should go down to close to 60 per cent.

In your forecast, you had calculated over Lm200 million from the sale of assets in the 1999-2004 period. Do you still think this is feasible?

Yes, by 2004. Between HSBC and MIA alone, we have already brought in Lm120 million. So when you take into account Bank of Valletta, the rest of MIA and, possibly, the Freeport and Maltacom... then the figure is within reach.

Air Malta?

Not before 2004...

One of the other items of revenue that the government should see soon is from leases on projects such as Manoel Island and Tignè, Cottonera and the cruise liner terminal... Have you quantified how much this is likely to be?

The leases are budgeted for in the context of rent but they will not make a big difference. When you think that the government's revenue today is in the region of Lm800 million I don't think it will make a difference. One has to keep in mind that a government makes this kind of agreement not to get the money from the rent but because it improves the infrastructure, which is an asset for the country, and for the employment that it will generate.

You said in an interview with me recently that the government would be spending a lot on the early retirement schemes at the drydocks in the short term, to save even more in the long term. Will this start to have an impact on the government wage bill?

Yes. We have already paid out Lm6 million this year, as announced, and we have reached our targets there. We believe this should have an impact on the level of subsidies paid by the government. However, our plan for the drydocks is to make some investments, which will take up the savings on wages. We are talking about creating a company that is viable and which is also well equipped.

Bearing in mind the pressure, not just to boost revenue but also to curb expenditure, how important is it that the civil service collective agreement does not include a wage increase?

I have made my point very clearly: I think the government is paying its employees fairly so after the big adjustment that we had in the last collective agreement I think the situation in the next collective agreement should remain stable. We are now discussing this with the unions and the government is explaining its position and I hope we will reach an agreement in the short term.

Expenditure is not just about wages. Labour finance spokesman Leo Brincat had said in 1998 he would curb non-fixed costs by five per cent, an intention you echoed recently. I wonder why you have waited so long to curb the spending by ministries...

What I said was that it was ridiculous to talk about curbing government spending by concentrating on operating and maintenance expenses because, in total, these amount to Lm41 million out of a total expenditure of about Lm900 million. To think you can curb the deficit by cutting five per cent on this expenditure is ridiculous.

What about the old adage about saving the pennies to save the pounds?

One has to be realistic. Cliches are very easy to say. Such as what Labour said: that they were going to reduce spending by five per cent across the board. It doesn't work that way. For example, we cannot reduce spending on pensions as every year there are more pensioners joining the list.

When one considers that of the Lm41 million on operating and maintenance expenditure, there is Lm15 million on medical supplies alone, and another Lm10 million or so on rentals, from government to government, you can see how frivolous such statements are.

Having said that, surely if you forced each department to look at spending, there would be more incentive to curb abuse... Let us take the figure you mentioned yourself, for medical supplies?

The medical supplies issue is another one that needs to be correctly analysed. The amount has increased because of new equipment in hospitals and because of new operations and the supplies needed for them. It is not, as some people think, as a result of the distribution of free medicine. I think free medicine only accounts, I would say, for 20 per cent of the total supply cost. The real supply cost is from the hospitals and in Malta these are still free. So these are the real issues.

You once explained that debt repayment was not so serious because it is covered primarily by Treasury Bills and Government Stock, which is, so to speak, keeping it within the family. The risk is that this could crowd out private investment. So far, this is not the case, as can be seen by the take-up of public bond offerings from private companies. But isn't there the fear that if the debt goes up too high... following last year's trend it would go up to Lm1,093 million...

I believe that your forecasts are very linear, which is not correct. The reality is that once there is a deficit the debt increases because the government has to borrow to cover its deficit.

Sometimes people try to confuse others about this, by asking how we could be reducing the deficit but increasing the debt. Each deficit is added on to the debt. In reality, the debt will increase so long as there is a deficit.

It will decrease with the proceeds of privatisation, for example. What we are seeing is that as we control and reduce the deficit, the growth in the debt element is not as accentuated as before, as a percentage of GDP.

For example, the three per cent deficit that we aim for would contain the deficit - and therefore the debt growth - to a level below GDP growth. This would mean, mathematically, that as a percentage of GDP, it would be coming down.

This interview has lasted 15 minutes so far. At the rate the debt was increasing last year, this would have risen while we were talking by almost Lm2,500.

I think it would have gone down, not up. You cannot look at these things in a linear fashion. Last week, there was an influx into government of Lm40 million from MIA, which we used to reduce our Treasury Bill uptake by Lm40 million. So the debt went down instantaneously.

So you don't think we need a debt clock like the one in New York, somewhere in City Gate yet?

The New York debt clock was a popular way to average things out and everyone knows that averages work in the popular sense but they don't fit everybody.

So you still consider the government to be on track?

Yes, and my figures show that revenue and expenditure are as we expect them to flow and that the deficit and debt will be contained, as we will see in the next budget.

Which will be interesting, as this will almost certainly be the last budget before the general election.

Well, I still say that there is the possibility of another budget (next year).

But the timetables are what they are. This could be the last budget.