Rough fiscal waters back in season
The state of the public finances is once again a major topic for attention and discussion. I prefer not to say that the deficit is a topic for controversy. Controversy will not help to get us out of the plight we find ourselves back in. The structural...
The state of the public finances is once again a major topic for attention and discussion. I prefer not to say that the deficit is a topic for controversy. Controversy will not help to get us out of the plight we find ourselves back in.
The structural deficit, which had been declining both in absolute terms as well as in proportion to our Gross Domestic Product (GDP) in nominal terms, is on the increase on both counts.
In 2008 it overshot the target set in the budget for that year, ending at almost triple that amount. It also moved up in relative terms, though not correspondingly since the GDP in nominal terms was boosted by inflationary pressures.
The early indications for 2009 suggest that the structural deficit is going to remain high, though once again the impact relative to GDP at current market prices will be mitigated because inflation stubbornly persists in the Maltese economy.
All of this does not make good reading. Ironically, one can say that, because it is facing a higher public deficit, the government is to an extent stimulating the economy. Such a conclusion does not hold cleanly since what is happening is to a considerable extent outside the Administration's political control.
The Prime Minister and the Minister of Finance have been preparing us for several months for an inflated deficit in 2008. They attributed the way the public finances had run out of hand to known factors. Specifically, the two gentlemen refer to the handouts paid to Malta Shipyard workers who were massaged into opting for early retirement, and for the higher than expected contribution out of the public finances to contain the pressures of the oil price at which Enemalta had secured its supplies for 2008.
The two factors are real enough. Nevertheless they explain much less than fully the extent to which the structural deficit surpassed both the budget projections, as well as subsequent official indications of the extent to which these would have to be revised.
When the full outturn of the public finances was finally released a few days ago, seemingly later in the day than justified, the extent of the deficit took away the breath of many of us, no matter how prepared we were to understand that there would be an excess above projections for the reasons mentioned.
The government has not bothered to explain in detail why the deficit is much higher even than the 2008 budget forecast adjusted for the two mentioned items of special expenditure. That also ignores the fact that there was nothing special in the payments made to dockyard workers, since the government must have known of its plans to wind down the shipyard before the general election took place.
Now government spokesmen, mainly the Prime Minister, and the Finance Minister are once again massaging our consciousness to prepare us for a continuing higher deficit than projected in the 2009 Estimates of Revenue and Expenditure.
They refer to the effects of the global recession, which are being felt among other things through manufacturing companies placing their workforce on a shorter working week. The government obviously wants to counter those negative effects, even if it means exerting pressure on the forecast financial deficit.
The Administration has devised a model which has its logic and attractions. The authorities enter into discussions with manufacturing companies in difficulty and propose two ways of assisting them. One is to help them retrain their workforce; the other is to nudge them towards laying down new investment in productive capacity incorporating technological innovation.
Both steps are intended to anticipate the revival in the global economy which will inevitably come, sooner or later. Thus the government is focusing on direct action to counter part of the effects of the global recession, which have inevitably already seen our economy moving that way as well, though unemployment has not as yet risen as much as it has done in other countries, such as Ireland.
Experience will show to what extent the government's model will work. It is criticised because it is not applied to the tourist sector, where the global economic slowdown is also biting sharply. It may be that the model is not adequate for tourism. It may also be that the government has other plans for tourism, which it is keeping close to its chest.
Meanwhile, prime ministerial talk of prioritising jobs preservation over the fiscal deficit indicates that the government is funding assistance to beleaguered manufacturing companies out of the public finances. The outcome has already earned it frowns from the EU watchdog.
Yet that is not what matters most. The priority has to be sound measures which will cushion the effects of the global recession without creating fresh economic problems. The government has to find ways and means to increase public thrift, even if it means taking new austerity measures.
It has to ensure, however, that while efficient spending remains the order of the day it does not cut the capital budget in order to minimise the structural deficit.
We are in rough waters. Nothing should be done out of short-sightedness to make them rougher.
The structural deficit, which had been declining both in absolute terms as well as in proportion to our Gross Domestic Product (GDP) in nominal terms, is on the increase on both counts.
In 2008 it overshot the target set in the budget for that year, ending at almost triple that amount. It also moved up in relative terms, though not correspondingly since the GDP in nominal terms was boosted by inflationary pressures.
The early indications for 2009 suggest that the structural deficit is going to remain high, though once again the impact relative to GDP at current market prices will be mitigated because inflation stubbornly persists in the Maltese economy.
All of this does not make good reading. Ironically, one can say that, because it is facing a higher public deficit, the government is to an extent stimulating the economy. Such a conclusion does not hold cleanly since what is happening is to a considerable extent outside the Administration's political control.
The Prime Minister and the Minister of Finance have been preparing us for several months for an inflated deficit in 2008. They attributed the way the public finances had run out of hand to known factors. Specifically, the two gentlemen refer to the handouts paid to Malta Shipyard workers who were massaged into opting for early retirement, and for the higher than expected contribution out of the public finances to contain the pressures of the oil price at which Enemalta had secured its supplies for 2008.
The two factors are real enough. Nevertheless they explain much less than fully the extent to which the structural deficit surpassed both the budget projections, as well as subsequent official indications of the extent to which these would have to be revised.
When the full outturn of the public finances was finally released a few days ago, seemingly later in the day than justified, the extent of the deficit took away the breath of many of us, no matter how prepared we were to understand that there would be an excess above projections for the reasons mentioned.
The government has not bothered to explain in detail why the deficit is much higher even than the 2008 budget forecast adjusted for the two mentioned items of special expenditure. That also ignores the fact that there was nothing special in the payments made to dockyard workers, since the government must have known of its plans to wind down the shipyard before the general election took place.
Now government spokesmen, mainly the Prime Minister, and the Finance Minister are once again massaging our consciousness to prepare us for a continuing higher deficit than projected in the 2009 Estimates of Revenue and Expenditure.
They refer to the effects of the global recession, which are being felt among other things through manufacturing companies placing their workforce on a shorter working week. The government obviously wants to counter those negative effects, even if it means exerting pressure on the forecast financial deficit.
The Administration has devised a model which has its logic and attractions. The authorities enter into discussions with manufacturing companies in difficulty and propose two ways of assisting them. One is to help them retrain their workforce; the other is to nudge them towards laying down new investment in productive capacity incorporating technological innovation.
Both steps are intended to anticipate the revival in the global economy which will inevitably come, sooner or later. Thus the government is focusing on direct action to counter part of the effects of the global recession, which have inevitably already seen our economy moving that way as well, though unemployment has not as yet risen as much as it has done in other countries, such as Ireland.
Experience will show to what extent the government's model will work. It is criticised because it is not applied to the tourist sector, where the global economic slowdown is also biting sharply. It may be that the model is not adequate for tourism. It may also be that the government has other plans for tourism, which it is keeping close to its chest.
Meanwhile, prime ministerial talk of prioritising jobs preservation over the fiscal deficit indicates that the government is funding assistance to beleaguered manufacturing companies out of the public finances. The outcome has already earned it frowns from the EU watchdog.
Yet that is not what matters most. The priority has to be sound measures which will cushion the effects of the global recession without creating fresh economic problems. The government has to find ways and means to increase public thrift, even if it means taking new austerity measures.
It has to ensure, however, that while efficient spending remains the order of the day it does not cut the capital budget in order to minimise the structural deficit.
We are in rough waters. Nothing should be done out of short-sightedness to make them rougher.