Sellers of financial services base their pitches on projections and graphs that indicate exponential returns.
The figures are alluring but somewhere in the glitzy presentation is a clause, normally written in fine print, which informs buyers the past is no guarantee of future performance.
It is a getaway clause in case things do not quite turn out as projected and returns fall below expectations.
Public finance data does not contain such a clause but the Government wants the future to be better than the recent past.
July figures released by the National Statistics Office recently show the deficit stood at €333 million, more than double the shortfall the Government is projecting to the end of the year.
The deficit represents 229 per cent of the annual target set in the Budget. This is only the third time since 2007 that the deficit, just past the halfway mark, is more than double the annual rate.
The other two years when this happened were 2008 and 2009: both characterised by massive slippages in public expenditure.
A six-year historical analysis of the figures for the first seven months shows that the deficit has always been higher than projected at the halfway mark.
This can be explained because the bulk of the Government’s revenue falls at the end of the year.
The Government believes the same will happen this year. Prime Minister Lawrence Gonzi and Finance Minister Tonio Fenech have said on record that partial results do not necessarily constitute a trend.
But their bold statements were tempered when Mr Fenech admitted the Budget target may just be missed.
The Finance Minister says the deficit will “definitely be well below three per cent”, moving away from the Budget target but still within EU requirements.
Last year, public finances ended with a deficit of 2.7 per cent of GDP and the Government was committed to cut it to 2.3 per cent this year.
Under new EU rules, governments have to reduce the deficit to below three per cent of GDP and sustain the reduction until a balanced budget is achieved.
But last month the Central Bank of Malta issued a deficit warning. Basing its analysis just on the results of the first three months that showed a deficit of 3.3 per cent, the bank said the Government may have to take additional cost-cutting measures to meet its targets.
Since then, the deficit position has worsened every month, with July showing an increase of €95 million over the same period last year.
Economist Lawrence Zammit believes the Central Bank’s warning should be taken seriously. “The country cannot afford to undermine the success achieved so far,” he said.
But he also insists that the shortfall in July may simply represent “a timing difference” between revenue that is postponed to the latter part of the year and expenditure that is brought forward.
In the first seven months, expenditure rose across all sectors and this seems to be why the Finance Ministry wrote to all government departments asking them to trim costs.
The ministry has not quantified the savings it intends to make from this exercise. Mr Fenech says it is only a relocation exercise to transfer funds from one Budget vote to another, depending on changed circumstances.
In January, the Government already had to trim €40 million off its Budget expenditure projections after pressure from the EU Commission. With an election on the horizon, cost-cutting is unpalatable and even international credit rating agency Moody’s acknowledges the deficit may slip this year because of pre-electoral spending.
However, it is not just expenditure the Government needs to keep an eye on. The economy entered a recession in the first three months and came out of it in June with 0.9 per cent growth.
Labour finance spokesman Karmenu Vella estimates that, to recoup the lack of growth in the first six months and make up for the deficit shortfall, the economy would have to grow by 4.6 per cent in the second half of 2012.
It is a daunting task and, unless the economy fights back well, the Government’s income may suffer.
The Government had already reviewed its growth target to 1.2 per cent in June. Moody’s is now projecting growth at 0.5 per cent.
“I am confident we will reach the 1.2 per cent because tourism was good this year and exports have performed well, despite the international climate,” Mr Fenech said last week.
It is a sentiment shared by Mr Zammit, who says the relationship of the deficit to GDP is a more important consideration.
“The country normally experiences an upswing in economic activity in the July to September quarter when income from tourism starts being accounted for.”
All revenue streams, except excise taxes, gave healthy returns until July but whether income will be enough to offset rising expenditure is another matter.
The bogeyman in the equation is the heavily indebted Enemalta, the sole energy provider, that earlier this year sapped €25 million in government funds to offset rising oil prices and keep utility bills static.
Mr Fenech says more funds may be in the pipeline to continue mitigating the effect of rising oil prices.
The past is no guarantee of future performance but history also has a habit of repeating itself and that is one trend the Government will have to buck as the election looms closer.
ksansone@timesofmalta.com