Budgeting in the sand

It is somewhat odd that the Prime Minister and Minister of Finance could not be definite about the date of Budget Day. The government was planning to present the Estimates on Monday, October 31, he said in mid-week. The date was not certain yet, "but that's what we are aiming for". Odd, because one either announces a date when one is certain that it can be kept, or refrains from saying anything at all.

There seems to be a political compulsion, whoever the politician may be, to say something, anything, even if - as lyricist Ronan Keating put it - one might say it best when one says nothing at all. Odd, yes. But then, these are not quite normal times.

Budget Day is not like any other day, as Nationalist speakers have tried to project it over the years. They used to make fun of the predilection of the Labour governments of 1971-87 to attach a slogan to each annual Budget. In time, Nationalist ministers began tagging on slogans more frequently than birds flap their wings. Even the pre-Budget document acquired a slogan through a terse soundbite.

The Labour Party have taken to the practice as well. The techniques of marketing by targeting the subconscious as well as the conscious, coming up with mission statements, branding and what not, have become part and parcel of doing politics.

That is in no way sinister, provided that the good citizenry is not thereby led to confuse the singer for the song, the shadow for the substance or lack of it.

Budget Day can never be any other day. It is an occasion for careful assessment of the state of the economy, of its ability to sustain and improve the well-being of civil society. To review whether plans laid in previous Budgets have worked out; to what extent they are meeting targets or falling behind. To update medium term plans in the light of developments, since the Annual Budget has to be part of a rolling socio-economic programme, not an end in itself as a financial exercise.

The significance of Budget Day lies in its focus, introspection and projection. The key to that significance is real and not just hypothetical fundamental understanding that all life is ruled by the dynamic of change.

The forward-looking statements made by the Finance Minister on Budget Day, whoever may be handling the great privilege and heavy burden of that portfolio, are in reality not very different from love letters written in the sand. The intention to love may be real. The sands of circumstance will attack that intention.

What is crucial to steering the economy, through the principal mechanism of the Budget, is the effort to anticipate the impact and continuing implications of unexpected, unpredicted change.

The Finance Minister and the rest of the national management team make assumptions. Their task is to do everything in their power to try to lock in those assumptions by marking down such fixed points as can be established.

That is where part of the controversy over the threatening fresh increases in the water and electricity fuel surcharge, and in the price of petrol and diesel, come in. Nobody in their right senses can argue that Malta can be an island also in respect of external factors and shocks, like sharp movements in the price of oil and its derivatives.

Yet, once the authorities assumed a certain input price of fuel in fixing the surcharge, it was their responsibility to see whether one could lock into that price. One must presume that they could do so - at the time - since the costing exercise that led to the extent of the surcharge had to be based on market-related forecasts of the price of oil and the Lm exchange rate against the US dollar.

That is how any exporter or importer who does not equate careful price setting to a game of chance whistling in the wind behaves in the realities of the commercial world.

The government had a choice. It could either follow the example of its previous finance minister in relation to petrol and fuel, and set an automatic formula tied to the international price of fuel products, refined in the light of experience here and elsewhere.

Or it could opt to secure input prices to fix the tariffs, to minimise inevitable fluctuations. Never mind that an economist would stress that, since fluctuations are inevitable, they should be reflected in domestic prices as they occur, with policy modification for the social and economic impact. Political managers tend to opt for public sector prices that can be kept stable at least through the Budget period.

Having opted for the latter approach, the authorities then could choose whether to conclude - hope is a better word - that international input prices would turn out to be close to those they had assumed in their projections.

Or to maintain an 'open' position and not take on the cost of 'covering' their assumed price. By doing so they in turn accept the upside risk that the market price would rise above the level they had assumed.

And so it happened. That is what the heat over 'hedging' is all about. The government has not stated clearly whether the input prices assumed in setting the surcharge were hedged. It has merely stated that Enemalta has suffered huge losses and is set to suffer more in 2006 if domestic water and energy tariffs and fuel prices are not raised, through a mix that should be announced on Tuesday.

The heat is fanned by lack of information, by past political declarations by the team running the economy (its new sober member, Tonio Fenech, suffers because of collective responsibility), and by political language that blunts the advantages that lie in calling a spade just that.

In the context of the Budget the dizzying upward trend of the international price of oil is a major example of the sand on which a Budget is built. That said, it would be wrong to take things out of perspective. However the increases are finally packaged in next Tuesday's Cabinet meeting, it is worth stepping back to see what has happened elsewhere. So far the rising price of oil has not really fuelled inflation.

It has parallelled the effect of a tax - which reduces disposable income - rather than raising prices, at least by as much as feared.

The Bank of England, for instance, very recently observed that there were few signs that higher oil prices were feeding through to either wages or medium-term inflationary expectations. That, too, is the conclusion in the Eurozone. In the financial markets the yield on bonds is not as yet signalling rising inflation.

Higher water, electricity and fuel prices to be announced on Tuesday will essentially reduce disposable income. People will have less to spend. That will slow consumption and VAT receipts.

The impact will be inverse - the lower one's income, the more one will feel it, even after adjusting for lifestyle (use of consumer durables, air-conditioners, cars, and such like). And so, unjust.

It would be wrong, though, to talk up prices by pumping up expectations. Expectations tend to become self-fulfilling. It would also be mistaken to focus on passing on the effects of the rising oil price onto domestic and other consumers without at least accompanying that with a clear and determined plan of action to reduce government spending and costs.

That is where the 2006 Budget exercise makes Budget Day far from just another day - not even any other past Budget Day. The Finance Minister will have to trim his estimates of tax - particularly indirect tax - revenue, as the possibility of still slower growth increases.

He has to rein in public spending. Very likely, the capital votes will be curtailed. Where that can be done because there were over-allocations in the past, and at least as much can be done with less (Housing might be one area), that would be acceptable.

To slow down the completion of the Mater Dei Hospital, more so than underlying factors may do, would be unwise. The Government has to complete projects in hand. In a general manner it also has to settle payments it owes to contractors and suppliers, such as of medicinals, both because it is obliged to do like any other creditor, as well as to counter the threatening cash contraction.

Simultaneously, the Finance Minister - all the more so since he is also Prime Minister - has to give manifest demonstration that he is really pruning public spending. To argue that one cannot reduce outlays on social welfare, public employees' wages and salaries (they are, in fact, set to rise), and spending on security and other non-discretionary (unavoidable) outlays is to state the blindingly obvious. But there is discretionary spending that can be cut. Maybe not huge amounts. Yet every cent is a metaphor.

Former members of the 1996-98 Labour Cabinet still recall to me, almost nine years on, something I told them as Economics and Finance Minister at our first meeting, after describing the terrible financial situation inherited from the Nationalists. Tighten up on all costs: before you leave a room, turn off the lights, I exhorted.

Some ministers tittered at the apparent banality of it. Whatever came after, they still remember the metaphor, weak though it was in the context of the situation.

The prime and Finance Minister has an opportunity to come up with much stronger metaphors, if he is to lead by example. As he must. I have been arguing in my daily and Sunday Times columns to the point of boring myself that he can reduce recurrent expenditure by as much as one million liri each year if he cuts the size of the political administration to sensible terms: eight ministers in addition to him and four parliamentary secretaries should be quite adequate.

Will he, at long last? Where else can he save Lm1 million each year at one go, without hitting the people, and at the same time gain effectiveness and sense?

The PM can tell his colleagues to car-share when going to and leaving meetings of the House of Representatives. He can ask the President to do with an escort of one mobile policeman, instead of two. The suggestions would not save much, if taken up. The point is that they would be metaphors easily seen and understood by the public.

Some might titter, too. Many will demand far more real savings. The Prime and Finance Minister should deliver all that he can in that regard, such as by ensuring that quangos do not duplicate government activities, making the taxpayer pay twice for the same job.

Also, he has to demand more efficiency all round, and clear value for money. Overmanning should be identified. But no one will seriously expect the government to try to release people into a stagnant or contracting economy.

Written in the sand or not, the 2006 Budget exercise has to be based on a much broader horizon than oil prices and government spending. Dynamic change will challenge and alter the assumptions on which it is based. Nevertheless, the Finance Minister has to demonstrate that he is at least trying to steer in the right direction. That may be clouded by the vapours of political heat and ongoing rhetoric.

All the more reason for the Budget Speech to be sober, to the point, and devoid of silly flourishes and sillier partisan positioning.

The present is stormy. The outlook is not for early calm. Returning to the oil factor, cold sobriety may be encouraged if we absorb detached views making their way into public discussion. A book by Richard Heinberg - The Party's Over: Oil, War & the Fate of Industrial Societies - discusses what is really going on according to oil industry scientists, against what the US and other governments say that is taking place. It tries to assess the economic, social and political implications over the coming decades.

The book shares the view of many economic analysts that oil prices can only go one way from now on - up, plus some more. It also speculates that in a few decades oil will be so scarce and so expensive that there will not be a commercial airline industry as we know it - bad news for countries which depend heavily on tourism like us.

The Budget cannot be based on and project such dire predictions. It has to transmit encouragement that the political administrators are concentrating on building on stronger foundations than the sand of external factors. It has to stimulate belief in ourselves, in our ability to get on top of situations by developing and honing skills that are flexible and can adapt to changing economic scenarios and realities.

The realities of EU membership, of the bleak short-term future for the Eurozone, of the threat of inflationary impulses that have not surfaced but could be on the way up in the markets of our main clients and suppliers, are beyond our control.

What we can prepare ourselves for, and what the Budget programme, revised and adapted on an ongoing basis, should encourage is our calculated reaction.

We have to react to a tough and uncertain environment first of all by anticipating it as much as we can. And then by being ready to take the risks to strive to exploit the opportunities that exist in every situation.

The budget for today's Malta will be a good one, I feel, if it can be viewed as one that stresses a national programme which can be presented with conviction to the people, whichever government is presenting it.

Politics can be played on another bed of sand.