Public finances and the mia fudge

In the first half of 2002, the fiscal deficit grew by 45 per cent over the comparable period of 2001, rising to almost Lm79m. The data for July 2002 shows that the deficit for the first seven months stands at Lm72.5 million, which implies a decline of around Lm6 million from the January-June level, though still standing Lm4.5 million (6.6 per cent) higher than the January-July period of 2001.

As had been already anticipated a couple of months ago, public finance data for July were affected by the privatisation proceeds from the MIA deal.

This boosted ordinary revenue by Lm21 million. However, it is crystal clear that such proceeds are indeed not 'ordinary', so much so that next year the Maltese government will not cash in another Lm21 million worth of revenue from MIA, but only around Lm0.3 million from rental fees.

Furthermore, it is also clear that, in the absence of MIA's privatisation, government would not have collected such funds. Therefore, it is all too evident that such proceeds emanate directly from the privatisation process, and as international statistical standards and EU requirements dictate, these are to be strictly classified as a financing source rather than as ordinary or recurrent expenditure.

In truth, the fiscal deficit for January-July 2001 should therefore read Lm93.5 million - a rise of some Lm25.5 million over that of the previous year.

The latest data clearly shows that, after excluding the MIA factor, the rise in the fiscal deficit appears to be underpinned by lack of growth in government revenue, and therefore the planned rise in expenditure is far too excessive to help achieve the pre-set fiscal target.

The severe shortfall in the revenue target only indicates that economic growth, even in nominal terms, is stalling, as profits and wages are failing to generate any significant revenue gains from direct taxation.

Meanwhile, the fact that rate of growth in consumption taxes is lower than the rate of growth in prices of consumer goods indicates that the rise in revenue from consumption taxes is underpinned by retail price inflation (inflation tax) rather than real growth in consumption.

An analysis of government revenue during January-July shows that direct tax revenue grew by Lm7.8 million, with income taxes growing by Lm7.5 million, while social security contributions increased by just Lm0.3 million - the latter amounting to only three per cent of the projected increase for the whole year.

However, it is to be noted that Lm5.4 million of the Lm7.5 million rise in income tax revenue was attributable to the MIA fudge. Thus, after excluding this factor, income tax revenue actually grew by just Lm2.1 million (2.6 per cent), which amounts to just 10 per cent of the projected rise for the whole year.

Indirect tax revenue during the first seven months of 2002 grew by Lm16.3 million. The increase in VAT revenue remained rather small at just Lm2.2 million (3.4 per cent) and is just one fifth of that projected for the year.

Meanwhile, revenue from customs and excise duties advanced by Lm3.7 million, mostly underpinned by higher revenues from imports of fuel as a result of rising oil prices.

At the same time, revenue from licenses, taxes and fines increased by Lm10.4 million. Lm4 million of this increase was attributable to the MIA manoeuvre, while the remainder mostly reflected the shift in classification of lotto receipts away from other non-tax revenue to licences, taxes and fines.

Finally, non-tax revenue grew by Lm9.5 million, when in reality this was projected to rise by just Lm0.3 million, given the actual revenue figures for 2001.

Indeed, the projected rise of Lm0.3 million has resulted from the fact that the government was expecting that the one-off receipts from the investment registration scheme would offset the effect of the re-classification of lotto receipts on non-tax revenue.

However, the increase of Lm9.5 million is entirely attributable to the MIA process as Lm11.5 million of such proceeds were labelled as special dividends.

In this regard, it is worth noting that, in the financial estimates presented in November 2001, Finance Minister John Dalli had projected that he would collect Lm47 million by the end of the year from the privatisation process.

According to his budget speech, these funds were to arise from the 40 per cent privatisation of MIA and an upfront payment from the privatisation of the Public Lotto.

However, this Lm47 million was classified as a financing item and not in any way as part of income tax, licences, taxes and fines or other non-tax revenue.

Therefore, it seems that in 2002 there was a change of heart and part of such proceeds was classified as ordinary revenue. This is clearly inconsistent with the accounts presented during the past budget.

The reason for such inconsistency is rather obvious. In the absence of such a manoeuvre, Mr Dalli would have grossly missed - on paper - his fiscal target for 2002 by at least around 30 per cent.

Another important factor that needs to be considered is that, from the recent parliamentary debate concerning the privatisation of MIA, it transpires that, according to Mr Dalli, the Mediterranean Link Consortium was to fork out Lm19 million of the Lm40 million proceeds for the purchase of equity in MIA.

Meanwhile, during such a debate Mr Dalli stated that the remaining Lm21 million, that was to be classified as ordinary revenue, was to be paid by MIA.

Therefore, since the government still owns 60 per cent of MIA, Lm12.6 million of such proceeds (60 per cent of Lm21 million) simply represented a transfer of funds from the government's share of reserves in MIA to the consolidated fund.

Since it appears that such funds were primarily borrowed from BoV, therefore, indirectly, Lm12.6 million of such revenue simply represented funds arising from government borrowing, via MIA, from BoV.

In this day and age who can blame us for levelling the accusation that Enron-style accounting practices are also catching on fast in the Maltese isles?

There is no better way in which to describe attempts to 'deceive' the public and 'hide' the true state of public finances.

E-mail: leo.brincat@magnet.mt