Today week the National Statistics Office published the data on government finance for the first seven months of the year. The top line data shows that the shortfall between recurrent revenue and total expenditure increased by €74.6 million.
Taken on its own the figure is indeed very worrying. When put into its rightful context, one recognises that there are reasons for such an increase. One recognises that the situation is not as worrying as it may seem. The only difficulty that I perceive is that the target of generating a budget surplus by 2010 becomes a more daunting challenge, but not impossible to achieve.
Someone might query this level of optimism on my part. Let us start with the composition of the fiscal deficit. The increase in the deficit is exclusively due to an increase in recurrent expenditure. In fact recurrent revenue increased by €56.5 million over last year, reflecting an increase of 5.1 per cent. The increase in recurrent revenue in the first seven months of last year over the corresponding period in 2006 was of only 2.9 per cent. Thus, government revenue is holding up, in spite of the reduction in taxation announced in the Budget last year.
Furthermore, the increases in revenue resulting from value added tax, income tax and social security contributions all reflect an economy that is performing well. They reflect a situation where employment is increasing, the level of private expenditure is sustained, and the gross domestic product is maintaining its positive trend. This is a critical factor because the level of fiscal deficit has always got to be compared to the level of the gross domestic product. Increased economic activity makes the deficit more sustainable, and all the indications so far are that Malta is still experiencing increased economic activity.
Looking at the expenditure side, one notes that capital expenditure has decreased slightly, while interest payments have not increased by a large amount. Putting the two together, one notes an increase of just €2 million over last year. On the other hand, recurrent expenditure increased by €129 million. Does this mean that recurrent expenditure has spun out of control? Most certainly not, because this increase in expenditure reflects government policy, with which one can hardly find any fault. Although fiscal prudence is a key element of government policy, this is not being achieved at the expense of other key elements of government policy such as health, education and social policy.
The data on recurrent expenditure shows that expenditure on social benefits increased by €35 million after it had increased by another €15 million between 2006 and last year. Expenditure on education increased by €3.4 million. Recurrent expenditure within the Ministry for Health increased by €29.9 million, while expenditure within the Ministry for Investment increased by €12 million. In all, this one has to factor in the support provided by the government to counteract the increase in the price of fuel in the form of the socalled energy benefit and other forms.
This is why it cannot be claimed that government expenditure has spun out of control. The government continued with its investment in a number of areas, while having to strengthen the social safety net for Maltese families. I believe that it is only fair that those who do not agree with such a stance should state so and not hide behind the increased fiscal deficit. Obviously one needs to see how much this policy is sustainable in the long term. It is not, and hence remedial action is required, but one simply could not take such remedial action nine months ago. This is why talk about halving the surcharge on electricity bills was just not realistic.
The issue of an increased fiscal deficit is a challenge not just for Malta but also for other countries. It was bound to happen in a very difficult international economic situation, compounded by reduced levels of the gross domestic product.
Addressing the fiscal deficit involves a choice, just like any other economic problem. I believe that the government should not do anything to jeopardise the investment it has been making across the board, in education, health, the environment and social policy. Neither should it jeopardise the economic growth that we have been experiencing. It is within this context that one recognises that what we require are targeted measures to help address the increased deficit, while sustaining economic growth.