Deeper in the red

I can still vividly recall that a week before the April 12 election, the Nationalist Party had just released a new poster claiming a sound public finance situation. This poster had really struck me because if there was anything that the PN could not claim it was precisely the soundness in public finances, and such a poster was clearly the epitome of political dishonesty.

At that time, I had already been long pointing out how the finance minister was giving instructions to shift expenditure, that was already paid for in 2002, to the financial accounts of 2003.

No one from the ministry at South Street rebutted my claims and the local media never bothered to question the state of health in public finances. Suddenly, the government releases public finance data for the year 2002 revealing that the fiscal deficit, rather than going down to Lm78 million, actually widened to Lm88 million, implying that Minister John Dalli missed his target by over 12 per cent.

Now, the local media appears to have woken up to the reality that "the country is sick", and that the government is slipping badly on its fiscal targets. According to these, a pension reform was urgently needed to restore sustainability in public finances.

Barely a day had passed after such gloomy pictures of the Maltese economy, that the National Statistics Office released public finance data for the first three months of 2003. Just a few days before the general election, I had already indicated that public debt developments indicated that the fiscal deficit in the first quarter was some Lm30 million higher than in the same period of 2002. The latest release in public finances clearly vindicates my claim as the fiscal deficit rocketed from Lm32 million to almost Lm58 million - an impressive 81 per cent increase in the deficit.

The increase in the deficit in 2003, in part, continues to reflect the persistent stagnation of the Maltese economy as the collection of both direct (income tax and social security contributions) and indirect (VAT, Customs and excise duties and other taxes), tax revenue slipped once again slightly below the amount collected in the comparably quarter of 2002. However, the fiscal deficit bubble of the first three months was most attributable to higher expenditure. It is clear that in the pre-election period, the Nationalist government embarked on an unprecedented spending spree to influence the electorate and sway it in its favour.

The increase in the deficit in 2003 does not seem to be attributable to a higher wage bill, which was only marginally up (Lm0.2 million) from the previous year, or expenditure on social security benefits (including pensions), where such costs grew by just almost Lm1 million. The rise in the deficit was partly attributable to a 24 per cent rise in operational and maintenance expenditure, probably reflecting the contracts that were awarded for the landscaping of various roundabouts and central strips, where work was carried out with great urgency before the election.

A similar rise in expenditure of 26 per cent was recorded in respect of subsidies to government entities, which apparently are becoming increasingly prone to greater losses, while expenditure on programmes and initiatives grew by 12 per cent. Capital expenditure, probably on the new hospital, also showed a marked increase, rising by 45 per cent. Therefore, it comes as no surprise that Minister Dalli, in his desperate attempt to achieve his targets, is demanding a 10 per cent cut in expenditure from government departments, as recurrent expenditure in the first quarter incidentally grew by 10 per cent.

However, the bad news for public finances does not end with the first quarter. I can already anticipate another Lm20 million deficit in April, as indicated by the rise in public debt, which has soared to about Lm1,154 million. Thus, during the first four months of 2003, the fiscal deficit has already shot up to almost Lm80 million and exceeded the Lm75 million deficit target for the whole year, which the minister set in the last budget.

Besides, the fiscal deficit for the first four months must be about 60 per cent higher than the deficit recorded in the first four months of 2002. This marked widening of the fiscal deficit in 2003, compared to 2002, is expected to continue particuarly because one should recall that in July 2002, government revenue was exceptionally boosted by Lm21 million as a result of the partial privatisation of MIA, which will not be repeated in 2003. Thus, if the government were to repeat the same performance of May-December 2002, without raking in these Lm21 million, the fiscal deficit in 2003 should rise to about Lm140 million.

It is therefore no surprise that the finance minister is already in a state of panic and has immediately called for an urgent pension reform that would entail "painful measures". The issue of pension reform is simply being once again used as a decoy to cover up the mess which the Nationalist government has created in public finances. The latest data clearly shows that the rise in the deficit was not attributable to a surge in outlays on pensions but because of mismanagement and irresponsible behaviour of the government in its frenetic desire to retain power at all costs, including that of destabilising the country's financial situation. With such a poor record in public finances, one can only question how can Malta satisfy all the Maastricht criteria to reach the goal of adopting the euro by mid-2006, as recently declared by Minister Dalli?

If the current fiscal performance persists, one can only expect great uncertainty and increased financial pressures on Maltese citizens.

Mr Brincat is a Labour MP and candidate for the vacant post of deputy leader for parliamentary affairs.