Not much to shout about, for or against the Budget

Before you praise or pillory somebody, it is wise to put yourself in that someone’s shoes, not least when he happens to be the Minister of Finance. As he prepares the annual Budget he is like a juggler, trying to keep as many balls in the air as he can, but knowing beforehand he cannot keep up all those that would like to see there.

Economics is about the allocation of scarce resources to competing needs. In the Budget the minister has to allocate finite financial resources to infinite competing needs. Some of them are set for him; he has no discretion over them. He has to provide for payment to those who work in the central public sector, for doctors, nurses, teachers, policemen, soldiers, clerks, labourers, the whole lot.

The minister has to set aside multi-millions to pay out pensions, social assistance and other welfare benefits. He has to see to it that roads are repaired, government buildings are refurbished, according to priorities depending on which road or building is the worst off. The minister must also find funds for capital expenditure. To build new roads, schools, extend hospitals, and much else.

In short, the Finance Minister has a mountain to climb, plus the higher next mountain. Which is to try to structure the Budget in such a way as to have the best possible impact on the economy and society in general, depending on current and projected needs, and his government’s political priorities.

He has to do all of that with little discretion in hand. Whatever balance he comes up with, few – except for his immediate acolytes – will think it is the best that could be done. Many – including some of his own political colleagues – will think that he’s got it wrong or even made a hash of it all.

No minister will ever get it completely right, or completely wrong. That is what was easily predictable about Monday’s Budget as outlined in the minister’s speech and detailed in the accompanying Estimates of Revenue and Expenditure. As always, the minister seeks to use whatever limited discretion he has in order to target preferred objectives, preference often constrained by necessity.

Tonio Fenech’s objectives for 2011 are to reduce the Budget deficit to under three per cent of the forecast Gross Domestic Product in nominal terms (that is, without netting out the inflation rate), and to help maintain and possibly increase the employment level.

The second target is in the mind of every person who is given the finance portfolio. The 2011 Budget should achieve that aim, other things remaining equal, especially unless external turbulence harms our economy by hitting visible and invisible exports. There is no certainty that will not happen, given that our main markets in the global economy are only recovering slowly from recession and are entering the throes of tough austerity measures. But, one hopes for the best.

The deficit target is essentially dictated by the EU. The figures given by the minister are full of hope that the target will be met. It is possible there is too much hope. Some projections seem over-optimistic, like the €60 million higher take from VAT. Granted, the minister is imposing an ill-conceived increase in VAT on accommodation, from five to seven per cent.

The rest has to come from higher consumption, in a context where, in clear contradiction of himself, the minister is (correctly) urging us to consume less and save more. There are some cosmetics too, like considering a contribution of €9 million to the sinking fund against government loans as revenue.

Keeping a tight grip on expenditure, in fact, allowing it to rise by little in real terms (after allowing for projected inflation, which by the way, is set to go up in 2011), was not enough. The minister introduced a number of tax increases in addition to the proposed increase in VAT on accommodation.

In doing so he targeted some non-essential items, like beer and spirits, though he again contradicted himself here, having reduced the excise duty – which he has now put up – only last year. Fuel, which cannot be classified as a non-essential item, is up too. So is the usual whipping object – cigarettes – with the usual platitude that the increase is for our health’s sake.

Actually, there are too many platitudes in the Budget speech, especially in the introduction. There are further contradictions too. The minister introduced a tax package which, coyly, he did not quantify. He kept a tight rein on social expenditure, such as on the disabled, ensuring without saying it that this is by no means a social Budget, or even one with a strongly discernible social bent.

Yet the minister is determined to provide funds to replace the old Grand Harbour breakwater bridge, a completely useless item. Bowing to the Prime Minister’s wishes he also told us that the new Parliament will be built, again selling us the tale that it will not impact on the government’s finances, as if the receipts from the public land to be sold to finance it would not have counted as government revenue.

Amid it all the minister is happy that the deficit for 2010 is down, without pointing to the shortfall in capital expenditure as being one of the reasons. He also introduces quirks, like voting €1million to study land and sea wind farms feasibility, notwithstanding that a decision has already been taken to build them though, mercifully, an earlier rash decision to go for untried deep sea technology has been shelved.

All in all, a Budget with pockets to criticise, and others to commend, in both instances without getting too heated about it all.