Keeping expenditure in check
Leading economist Prof. Edward Sciclulna is interviewed by Anthony Manduca after the latest deficit figures made the headlines.
NSO figures show that the budget deficit for the first seven months of this year increased by 36 per cent over the same period last year - €283 million compared to €209 million. What caused this in your opinion?
I would reckon that about half of this amount was caused by the budget itself, and in that sense it was predictable. The effect is permanent and can only be reduced marginally by the end of the year if it is addressed with earnest as one would expect. The other half is merely a cash-flow phenomenon and therefore transient. It is associated with the general election whereby during the first quarter of the year certain taxes due were postponed, while certain planned expenditures were accelerated. Even the deadline for the submission of income tax returns was postponed by a few weeks. Comparing the first six months of this year with the last is not comparing like with like.
You mentioned recently that unless the government significantly cut expenditure or increased taxes this year's budget deficit target would not be met. What option would you go for - a cut in expenditure or increased taxes? What expenditure should be cut or what taxes should be increased?
Since the electorate is expecting a tax cut, a tax increase is out of the question. But an expenditure cut is not like a haircut, you remove a few hairs from behind the ears and such-like. Not that this will not happen. A finance minister would consider anything to keep the budget on track. However, seriously, an expenditure cut based on a reform of a programme in the area of pensions, social benefits, education or health has to be well planned, discussed with the social partners and thoroughly run through before it is carried out. The government has to explain clearly to all the taxpayers that it is simply not feasible or sustainable that these programmes together continue to grow by a higher rate than our GDP, unless we want to go back to suffering from an increasing tax burden.
The government has targeted a budget deficit of €68 million for the end of the year. What are your predictions if expenditure and taxes remain the same?
Under that hypothesis I would still keep my last year's prediction that the total deficit would exceed the €100 million mark (i.e. exceed the projected figure by another €60 million), and our deficit would gravitate back towards the 2 per cent of GDP and not towards the 1 per cent as projected. But I know the government has many tools whereby the projected expenditure and taxes will not necessarily be the same. There are many small and not-so-small programmes which could easily be snuffed out or postponed to next year. Similarly there could be many government contractors who would not get a visit by Santa this Christmas.
The government says that one should wait until the end of the year to really get a clear picture of the country's finances, and that expenditure in the first six months is always higher than in the second part of the year. How do you react to that?
Nowadays good corporate governance expects certain public firms to account for their half-yearly results. I see no reason why the financial director of our country's economy should not do likewise. In any case I think he would, well before the end of the year.
Despite a difficult global economic climate Malta's GDP still grew by over 3 per cent in the second quarter this year and now oil prices are finally going down. Won't these factors have a positive impact on the country's public finances by the end of the year?
Certainly. More so with a high inflation where the fiscal drag (that is, the fixed income-tax thresholds) bites in favour of the public purse, and the deficit and debt ratios are minimised when divided by an inflated nominal GDP, currently growing by more than 6 per cent per annum. But when we come to the absolute size of the deficit or debt this is not the case. We must keep in mind that the deficit results we have today are what they are in spite of a buoyant economy during the first half of the year.
The government is still predicting a budget surplus by 2010. What are your predictions?
The fiscal slippage is there for all to see. I cannot see a budget surplus before 2012, unless we want to jolt the economy negatively by undertaking an over-ambitious public finance programme.
Do you think the shipyards' early retirement schemes will negatively affect the budget deficit for this year?
Not if we are allowed to write them off from the privatisation proceeds. However, we have not been informed how these schemes will be financed.
Are you worried that Malta's rather high annual inflation rate will encourage unions to demand hefty wage increases, thus putting more pressure on the country's deficit? How, in your opinion, should the government tackle the problem of inflation?
It is not the unions but the workers who would exert pressure for wage increases. Over the last four years the unions were quite responsible. The economy made up for a part of its lost competitiveness due to falling unit labour costs. So this time we have to look elsewhere for the source of our core (not headline) inflation, defined as our price index for all the goods and services excluding energy and certain food prices. Putting more zest into the liberalisation process would definitely be a step in the right direction. I am sure Commissioner Nellie Kroes visiting us this afternoon will have some ideas for us to put into practice.
The government promised tax cuts in its electoral manifesto and is determined to start this process in the next budget. Considering the latest NSO figures on the deficit, do you think tax cuts in this budget would be irresponsible or will they help spur economic growth and consumer confidence?
The state of our public finances cannot afford them. Period. This has nothing to do with the oil or food price hikes, the world slow-down, or because we lost to Portugal. The theory that with a tax cut the Finance Minister would get more revenue is a myth. A country can opt for a lower tax burden and subsequent tax cuts if it reaches a consensus that public expenditure will be kept in check.
I would reckon that about half of this amount was caused by the budget itself, and in that sense it was predictable. The effect is permanent and can only be reduced marginally by the end of the year if it is addressed with earnest as one would expect. The other half is merely a cash-flow phenomenon and therefore transient. It is associated with the general election whereby during the first quarter of the year certain taxes due were postponed, while certain planned expenditures were accelerated. Even the deadline for the submission of income tax returns was postponed by a few weeks. Comparing the first six months of this year with the last is not comparing like with like.
You mentioned recently that unless the government significantly cut expenditure or increased taxes this year's budget deficit target would not be met. What option would you go for - a cut in expenditure or increased taxes? What expenditure should be cut or what taxes should be increased?
Since the electorate is expecting a tax cut, a tax increase is out of the question. But an expenditure cut is not like a haircut, you remove a few hairs from behind the ears and such-like. Not that this will not happen. A finance minister would consider anything to keep the budget on track. However, seriously, an expenditure cut based on a reform of a programme in the area of pensions, social benefits, education or health has to be well planned, discussed with the social partners and thoroughly run through before it is carried out. The government has to explain clearly to all the taxpayers that it is simply not feasible or sustainable that these programmes together continue to grow by a higher rate than our GDP, unless we want to go back to suffering from an increasing tax burden.
The government has targeted a budget deficit of €68 million for the end of the year. What are your predictions if expenditure and taxes remain the same?
Under that hypothesis I would still keep my last year's prediction that the total deficit would exceed the €100 million mark (i.e. exceed the projected figure by another €60 million), and our deficit would gravitate back towards the 2 per cent of GDP and not towards the 1 per cent as projected. But I know the government has many tools whereby the projected expenditure and taxes will not necessarily be the same. There are many small and not-so-small programmes which could easily be snuffed out or postponed to next year. Similarly there could be many government contractors who would not get a visit by Santa this Christmas.
The government says that one should wait until the end of the year to really get a clear picture of the country's finances, and that expenditure in the first six months is always higher than in the second part of the year. How do you react to that?
Nowadays good corporate governance expects certain public firms to account for their half-yearly results. I see no reason why the financial director of our country's economy should not do likewise. In any case I think he would, well before the end of the year.
Despite a difficult global economic climate Malta's GDP still grew by over 3 per cent in the second quarter this year and now oil prices are finally going down. Won't these factors have a positive impact on the country's public finances by the end of the year?
Certainly. More so with a high inflation where the fiscal drag (that is, the fixed income-tax thresholds) bites in favour of the public purse, and the deficit and debt ratios are minimised when divided by an inflated nominal GDP, currently growing by more than 6 per cent per annum. But when we come to the absolute size of the deficit or debt this is not the case. We must keep in mind that the deficit results we have today are what they are in spite of a buoyant economy during the first half of the year.
The government is still predicting a budget surplus by 2010. What are your predictions?
The fiscal slippage is there for all to see. I cannot see a budget surplus before 2012, unless we want to jolt the economy negatively by undertaking an over-ambitious public finance programme.
Do you think the shipyards' early retirement schemes will negatively affect the budget deficit for this year?
Not if we are allowed to write them off from the privatisation proceeds. However, we have not been informed how these schemes will be financed.
Are you worried that Malta's rather high annual inflation rate will encourage unions to demand hefty wage increases, thus putting more pressure on the country's deficit? How, in your opinion, should the government tackle the problem of inflation?
It is not the unions but the workers who would exert pressure for wage increases. Over the last four years the unions were quite responsible. The economy made up for a part of its lost competitiveness due to falling unit labour costs. So this time we have to look elsewhere for the source of our core (not headline) inflation, defined as our price index for all the goods and services excluding energy and certain food prices. Putting more zest into the liberalisation process would definitely be a step in the right direction. I am sure Commissioner Nellie Kroes visiting us this afternoon will have some ideas for us to put into practice.
The government promised tax cuts in its electoral manifesto and is determined to start this process in the next budget. Considering the latest NSO figures on the deficit, do you think tax cuts in this budget would be irresponsible or will they help spur economic growth and consumer confidence?
The state of our public finances cannot afford them. Period. This has nothing to do with the oil or food price hikes, the world slow-down, or because we lost to Portugal. The theory that with a tax cut the Finance Minister would get more revenue is a myth. A country can opt for a lower tax burden and subsequent tax cuts if it reaches a consensus that public expenditure will be kept in check.