Budget remains out of the ordinary

Today is no ordinary day. That’s what previous Nationalist administrations had repeatedly promised to make of Budget Day. It can never be that, whatever the circumstances. As it is, we now live in times when the government’s revenue and expenditure estimates and reports are more important than usual. On one count, they have been that for a long time, even when Prime Minister Eddie Fenech Adami was proclaiming the ordinary-day mantra.

The structural deficit has been with us for years. It was run up before the general election of 1996, which Dr Fenech Adami called early because he had a confidential report about the parlous state of the government finances. The report was so worrying it was not even brought to the attention of the most senior Cabinet ministers. The structural deficit has dogged successive ministers of finance since then.

More recently, it was attributed to the subsidies extended to Malta Drydocks. But those accounted for only a part of the gap. The reality was that, though the tax take increased regularly, not least due to measures such as raising the top VAT rate to 18 per cent, government expenditure always outstripped revenue, notwithstanding the dangerous ploy of, at times, under spending on the capital account, on which investment considerable future government value for money depends.

On another count, membership of the European Union has brought with it a sharper focus on the Budget deficit. It is immaterial that other countries too exceed the three per cent norm required by membership. We were expected to converge towards that benchmark, something we are now obliged to do by 2012, a hugely ambitious EU target given the persistent effects of the recent recession and the threat that slow recovery coupled with austerity measures will drive the EU into a fresh one.

Reducing the deficit has been a high priority for Tonio Fenech, both when he was parliamentary secretary in charge of finance and more so now he is directly responsible as Finance Minister. In one regard, he can count a few blessings. Malta was not as badly hit as others by the recession, which elsewhere started in late 2007.

The government did incur additional expenditure to assist some manufacturing firms severely threatened by the recession and increased competition. The outlay has not been properly quantified, at least not in public, but it is not believed to have dented the government’s pocket to the extent suffered by other governments. Our Minister of Finance did not have much spare capacity and he is making sure he does not aggravate his position by fully honouring an income tax reduction promise made by his party on the eve of the 2008 general election, an exercise in intellectual dishonesty, which needs to be commented upon separately.

That said, the minister has not shirked from emphasising the need to squeeze public expenditure through strict economies, with a brave objective eventually to reduce the deficit to well below three per cent.

To achieve the aim he will today set for 2011 and the longer objective targeted by Mr Fenech, now more than ever public expenditure must be economical, efficient and effective. It is massively ironic, therefore, that the Public Accounts Committee, whose main objective it is to contribute to that through careful scrutiny and assessment of the public sector’s use of resources, is being undermined by the government itself.

That, plus the related irony of, at best, inefficient outlays of resources on inappropriate and dirty technology in the extension to the Enemalta power station through the contract controversially awarded to BWSC of Denmark, set this evening’s Budget Speech in partially self-defeating framework.

Assessment of that framework and the extent to which any effective expenditure squeeze converts into a squeeze on private consumption will indicate what chances the Budget has of being a tool that contributes not only to fiscal stability but to acceleration in private investment to ensure stronger medium term growth.

Definitely, today will not prove to be any ordinary day, whatever the Minister of Finance tells us about his broad view of the country’s actual and prospective financial and economic affairs.