The cost of government

One of the major challenges that we shall be facing as a country this year is most certainly the fiscal deficit. It will be a challenge in various respects. There is the three per cent target for the deficit-to- GDP ratio that is a commitment to keep to the parameters of the EU Growth and Stability Pact.

There is the size of the deficit itself, that is the extent of the shortfall between government recurrent revenue and total government expenditure. Then there is the reason for the deficit – Is it because of a shortfall in revenue, or a one-off expenditure or an overrun in recurrent expenditure?

Whichever way one looks at it, it will be a constant headache for the Ministry of Finance throughout the year. If the growth in the gross domestic product is larger than expected, and the size of the deficit grows in absolute terms but, does not match the growth in GDP, it may not matter much as we would still end up below the three per cent threshold in relation to the deficit-to-GDP ratio.

If the fiscal deficit grows because of a shortfall in revenue, it would be very bad news as it could mean that the economy would have grown by not as much as expected. If the deficit grows because of a one-off expenditure, then the alarm bells do not need to be sounded. On the other hand, they would need to be sounded if the deficit grows because of an overrun in recurrent expenditure.

Thus, it is clear that the Ministry will need to keep a watchful eye on the performance of the economy and the evolution of government revenue and expenditure and tighten or loosen the reins accordingly, depending on the circumstances. In all these considerations there is one fundamental factor that we cannot escape from, namely the cost of government.

There are those who claim that the cost of government in Malta is too high and if that is kept under control or reduced (just as a private business would seek to reduce its costs when it is making a loss), then the issue of the fiscal deficit would be addressed in a structured manner.

Those that point towards the cost of government as being the major cause of the fiscal deficit, would also claim that once government expenditure is reduced, then it may become possible to reduce the level of taxation. They argue that the reason why the cost of government is too high is that government is still being too invasive in the operation of the economy. Another reason mentioned is that certain public services should not be given for free to everyone.

There are those who claim that the cost of government is not high since we need to take account of the fact that the size of our country is small and as such we do not benefit from any economies of scale. An example of this is health.

A city with a population of 400,000 people would not have a hospital like Mater Dei, with all its facilities and services. Neither would they have their own power station. So we have certain costs which are disproportionate to the size of our economy, and we can do very little about that.

Then there is also the fact that we are two islands, and the minute size of Gozo and its requirements makes certain costs even more disproportionate. Another aspect is our national priorities. In certain areas we had to make up for so much lost ground, that government had to keep specific services for free. One typical area is education.

As a country, we still need to keep incentivising our young people to continue with their education in order to get close to the EU average. Another aspect to consider is that there is definitely the political will to keep the cost of government under control as evidenced by the measures and initiative taken by the Ministry of Finance. The senior management of the Public Service appears to be fully supportive of this direction. However, is the middle management of the Public Service on the same wavelength?

So how big or small is the problem? In 2009 total government expenditure as a percentage of the gross domestic product was 46.4 per cent. The corresponding figure in 2002 was 44 per cent. Tax revenues as a percentage of GDP stood at 37 per cent in 2009, while the relative figure for 2002 was 34.6 per cent. The structural deficit was 5.2 per cent of GDP in 2009, compared to 4.8 per cent in 2002. The trend is a negative one, but the change has not been a dramatic one.

Moreover, 2009 was the year when we got hit by the negative impact of the international economic recession.

Maybe we need to evaluate the situation once the 2010 figures become available. In the meantime, the cost of government needs to continue being monitored.