Transparent revision of estimates required

As time passes the background to this year’s government estimates of revenue and expenditure appear in an increasingly confused colour. The estimates were presented on November 14. The underlying premise adopted by the Minister of Finance was that that the economy would experience real growth of 2.1 per cent during 2012. That particular premise is always the key to the minister’s forecasts.

Instead of admitting its error the government lambasted all those who said the GDP forecast was too high- Lino Spiteri

Growth forecasts allow the minister to estimate the expected level of the gainfully occupied population during the year and the degree of consumption. On that basis he calculates the expected revenue from the three main sources of direct and indirect taxation – social security payments on and income tax from gainful occupation, and VAT, customs and excise duty from consumption.

Besides the aggregates resulting from the growth forecasts the minister will have estimates of revenue predicted from known influencing factors. For instance, the statutory cost-of-living increase, a nominally substantial one this year, allows him to anticipate an increase in the income tax take, and in taxes on consumption, other things remaining equal. Inflation and real growth give nominal yields on top of those known factors.

Taking everything together the minister will know the level of funds available to him to meet the demands of the spending ministries. Some of these demands are automatic or non-discretionary, but are influenced by the level of economic activity. They include the central government’s wages and salaries bill and social security outlays. An estimate of other recurrent expenditure is added. Plus a further estimate of how much the servicing of the public debt will cost during the year.

The minister then turns his attention to the capital budget. If he has a positive primary balance – a net current surplus before feeding in the public debt servicing cost – he will be emboldened to threat capital budgetary requirements more generously than otherwise.

Among this host of factors the Finance Minister has to take into account, the GDP growth forecast persists in coming to the fore. Get that right, and the budgetary forecasts will be approximately correct. Get it wrong, and they will be off the mark, impacting on the budget deficit outturn and the public debt.

When the estimates were published various analysts, including this one, opined that the growth forecast was too optimistic, given the actual and expected situation in our main markets for visible and invisible exports, implying that the estimates of revenue and expenditure might not materialise as structured in the Budget. The minister would not hear any of that, pooh-poohing even objective comments as alarmist. Now he and the rest of us know better.

Not many days had passed from the approval of the estimates before the European Commission, now charged with oversight of the annual budgets of the EU member states, told the government it had to lop off some €40 million of its planned expenditure. The government treated the instruction lightly, rather than admitting that it had got its revenue and expenditure forecasts wrong. The Prime Minister blandly said that we should know how the estimates are prepared. Actually, analysts and others who follow the financial scene closely do know. One does not have to be a rocket scientist cum economist for that.

Worse was to follow. Rating agencies and the International Monetary Fund stepped in to say that, given the external situation, Malta’s GDP was more likely to grow by around one per cent – less than half of the forecast upon which the 2012 estimates had been built. That explained why the European Commission had demanded a reduction in budgeted expenditure – because of its own lower forecast of revenue.

Instead of admitting its error the government lambasted all those who had said that the GDP forecast was too high in the circumstances, meaning that what flowed from it was awry. The Prime Minister also sternly demanded public sector heads to review their expenditure plans to effect savings wherever possible. Such an exhortation should be a standing issue, reviewed on an ongoing basis, and reiterated most firmly when expenditure drafts are submitted to the Ministry of Finance.

The exhortation showed that the government had no definite plan where its budgeted expenditure would be reduced to comply with the Commission’s diktat. Details are now dripping out, but not through any well-worked out and transparent plan. And, as usual, they are wrapped up in political spin, which is never far away, not even from what should be objective discussion.

For instance, a parliamentary question has elicited the information that there would be cuts from the approved expenditure in the social sector. Instead of admitting that, the government spun out a statement saying that the outlay allocated to that part of the social sector under review had been increased by €1 million for 2012. Yes, but the critical point is that the increase now has to be whittled down.

It is remarkable that there seems to be an inherent inability to discuss the situation in reality terms, instead of through never-ending political discourse. Such an approach cannot spin away reality. It only makes it more difficult to establish. Since the basis of the 2012 estimates has been blown away by more realistic forecasts of GDP growth, the Finance Ministry should be conducting a critical review of them.

Probably it is doing so, but is keeping the result away from public scrutiny. So much for transparency.