Joining the minister in prayer

Uncertainty is the enemy of forecasting and planning, no less so in drawing up the Budget for the coming year. The Finance Minister has the provisional outturn for the first eight months of the year in hand, and in a few days he will have that for September as well. That should serve as a good basis on which to estimate the outturn for the whole of 2010.

No doubt he also knows what targets he intends to set for 2011. He has already announced his main one, which is to bring the percentage of the deficit relative to the Gross Domestic Product to no more than four per cent, thereby hopefully to be able to progress to three per cent or less in 2012.

The reasoning is financial, but that will have to be translated into the impact on the economy. There is a tendency to talk in that regard in general terms, at a time when some specifics are necessary. That applies on both sides of the financial spectrum. The recent recession, which globally began in 2007, is one example.

The government says that it saved thousands of jobs with the measures it took to counter the recession, which hit Malta quite less viciously than it did other countries in Europe and elsewhere. Those thousands are never given an approximate estimate. One knows that the government took direct measures, and was right in doing so, to aid manufacturing firms which were wilting under the impact of the recession. One figure put forward was that they employed some 2,500 altogether.

If one makes the extreme assumption that all those firms would have closed then some 2,500 jobs were saved through government intervention aimed at helping those firms see that there were positive prospects beyond the recession. Extreme assumptions, however, rarely represent reality. Whatever that was, jobs were saved. The government also talks of measures taken to stimulate the economy.

Once more, there was no spelling out what those measures were. They had to be over and above the expected financial deficit to have any additional action. They cannot be assessed because the authorities have not given details.

That contrasts with other countries, whose governments spelt out what the stimulus packages consisted of. Moving forward one will have to look at the other end of the spectrum. What specific action will the Finance Minister be taking over and above what will happen naturally through fiscal drag? Revenues will increase as prices increase and, on the income tax side, because of the statutory cost of living increase, or Cola. That will not be high next year, but it will still boost government revenue. Not by enough, though, to narrow the revenue-expenditure gap by much. For government outlays, in the form of wages and salaries and social benefits, will also increase to reflect Cola.

The Finance Minister will have to focus on the expenditure side. He will not lose any money through income tax adjustments on that side. He has already made it clear that the major Nationalist pre-election promise will not be maintained, for the time being. Fiddling with the income tax structure will, as likely as not, be left – rightly so – to the Budget for 2012 and – more so – to the 2013 Budget, when the next general election will be in sight.

Aside from not losing revenue, what measures will the Minister take during 2011 to cut expenditure? He is already keeping a tight rein on it, with other ministers having to fight for their outlays tooth and nail. But will he plan any austerity drive? If so, it should be stated clearly, rather than be camouflaged in a torrent of figures that will make up the revenue side of the Estimates of Revenue and Expenditure.

I do not at all expect expenditure cuts, if they are indeed made, to resemble in any fashion those being made or are planned in other EU countries. Those countries are playing with fire, reversing their stimulus packages at a time when no strong growth has taken over from the recession, and when a double-dip recession still threatens a number of them, as well as the US which, though no longer the international economic motor that it once was, is still very important to the world economy.

If government departments and through them the citizenry are to suffer expenditure cuts, it is important that the Finance Minister will say so honestly in his speech. Important both in ethical and democratic terms as well as to help make the cuts effective.

While the Minister, within his office at least, will be clear about his plans and targets, he still has to grapple with uncertainty. We remain a largely open economy, dependent on what happens in our main markets. What will happen there will reflect the fact that, even now, recovery is not taking place in employment terms, that many jobs will surely be lost as austerity measures start to bite in countries like the UK, Germany and Italy, and that a double-dip recession might rear its head.

In a worst case scenario the impact on our tourism and manufacturing earnings would be harsh. The Minister of Finance will be praying that such a scenario will not materialise. We should pray along with him.