Building budgets, cutting them

The ongoing controversy about government cuts from the expenditure presented in the 2012 Budget on November 14 has to be understood in the context of the planning mechanism for the public finances during the year ahead. The Budget for the coming year is, in the first instance, prepared on the basis of updated estimates of revenue and expenditure during the current year. These rolling estimates are used to start building the Budget for the coming year, taking into account the forecast movement of the Gross National Product at current prices.

To make matters worse the Finance Ministry did not say where cuts were going to be made- Lino Spiteri

The Budget 2012 actually in place reflects that process during 2011. Discretionary expenditure is relatively easy to forecast. Its core is salaries and wages for employees in the civil service. The rest of the public sector, the corporations and state-owned entities will have their own Budget. The central Budget reflects only a few of them, such as what is to be allocated to the University, Enemalta and Mepa.

Discretionary spending tends to assume stability in government employment and other outlays. But the various ministries and departments will not start on that basis. They will build in net additional spending. The late summer will see a tug-of-war between the ministries and departments on the one hand, and the Budget office of the Ministry of Finance on the other.

The ministry, such is its role, will be as tight-fisted as can be, insisting on responsible spending. The ministries and departments, faced with an obdurate Budget office, will fight for net increases they consider to be essential to their proper functioning. When ministers are brought in at a later stage they will remind the Finance Minister that providing good administration has an effect on the political standing of the government.

The net result will be a tight fit between what the spending ministries and departments feel is essential to their good functioning, and what the Budget office feels it can allocate to them.

In calculating allocation the Budget office takes the revenue side of their equation. They monitor the actual flow of revenue to see whether the forecasts made in the Budget currently being implemented are being met.

By the beginning of October the Budget office will also be able to tell what the statutory cost-of-living increase will be for the coming year. That will obviously raise public spending, making it more necessary to keep a tight rein on other spending, hoping the primary balance – the outturn between revenue and expenditure excluding the cost of servicing the public debt – will be in surplus.

Depending on the current balance and on the state of the economy the Budget office will discuss the capital Budget of each ministry, now more than ever in the context of actual experience this year, and forecast economic growth for next year. Polishing takes place practically up to the time the estimates of revenue and expenditure are sent for printing, in the context the latest available data.

That was the template way in which the Budget for 2012 was drawn up producing the tightest possible fit between forecast revenue and estimated expenditure, to keep the deficit, and so the borrowing requirement, as low as possible. After the Budget is presented and passed the Budget office can usually take a breather.

This year things did not turn out that way. Shortly after the House of Representatives had approved the 2012 estimates, news broke that the European Commission, which now has oversight of national budgets, felt that the central government expenditure should be cut by 0.59 per cent of the GDP, some €40 million.

The government, instead of putting a brave face on it and pointing out that that reflected EU evolution to give the Commission oversight over national budgets, came up with a different version altogether. The Finance Minister persists in saying that the government itself had decided to shave its programmed expenditure during 2012, to have powder in hand to tackle negatives which the uneasy European and global economic situation might bring.

That is a weak excuse. It implies that the Budget for 2012 had been prepared and presented on the basis of unrealistic forecasts by the public economists and technocrats. Spin is unbecoming, especially when it is intended to convince that the European and global economic forecast changed dramatically in the few weeks between November 14 and news of the €40 million cut.

To make matters worse the Finance Ministry did not say where cuts were going to be made, other than explaining that programmed capital expenditure would not be affected. The outcome was that the opposition began placing parliamentary questions to elicit driblet details of the cuts, moving on to announcing the rest of the cuts on the basis of information supplied by a whistleblower.

The ministries are responding to the cuts details supplied by the opposition by pointing how much allocations have increased over 2011. That is further spin, on two counts. A chunk of the increases reflects the statutory wage and salary increases in the civil service. Secondly, as detailed above in how the estimates are constructed, the final figures are a compromise reflecting the spending ministries must-have position.

This means that every subsequent cut in that position is going to hurt. Otherwise by implication the Budget was unprofessionally bloated when it was presented to the House for approval.

I do not think that the revealed cuts will hurt as much as the opposition is making out. But, given that the ministries and departments deemed the expenditure to be essential, hurt they will.

It is ridiculous that even public finances are treated and discussed in this manner. It is also a chance wasted by the government to demonstrate and explain why the European Commission is becoming more stringent in its oversight of national budgets, ours included.