Unravelling Budget 2013 jungle

When the Budget for 2013 was presented by then Finance Minister Tonio Fenech it was obvious that whoever was appointed Minister of Finance after the forthcoming general election would have a tough task implementing it. Had it been Mr Fenech he would soon have faced the familiar task of starting off with the projections for 2012 all awry.

The outcome is likely to be a demand by the Commission that the Government trims expenditure by some €50 to €60 million

That is what the incoming Finance Minister, Edward Scicluna, was told by the Budget Office as soon as he sat down in his new seat. The structural deficit for 2012 was going to be substantially higher than forecast, as also predicted over a year ago by those of us who follow fiscal and economic affairs.

Higher it was, by almost a third, as the IMF too noted. The rest – the real forecast outturn for 2013 – Scicluna had to discover for himself. That outturn once again, unless remedial action is taken, will be much worse than forecast by Fenech when he presented the 2013 estimates. Planned public expenditure would be too high relative to estimated revenue. The latter aggregate, to boot, would once again be below what minister Fenech had estimated.

The Budget, with the election in mind, included a hash of an income tax review which would reduce revenue below what it could be, and in the process introduce social inequity by taxing minimum wage earners while giving substantial relief to higher earners.

Minister Scicluna, in presenting the same Budget for approval by the reconstituted House of Representatives, included a measure to remove the minimum wage earners inequity, plus some additional expenditure to meet the higher cost of government because of the extended Cabinet nominated by Prime Minister Joseph Muscat.

In reality there were no surprises for those who had been watching and assessing carefully. The surprise lay in the new reaction by the budget representatives of the European Commission. That reaction, miracle of miracles, disagreed with the Commission’s acceptance of the budgetary estimates after due discussions with Tonio Fenech and his team.

The Commission, I understand, is now disputing assumptions regarding public employment levels because such forecasts by the Nationalist government had not been met in the past. In short, the Commission is disbelieving the Budget forecasts for 2013, which it had accepted four months ago.

The outcome is likely to be a demand by the Commission that the Government trims expenditure by some €50 to €60 million. It will be recalled that the Commission had imposed a similar demand (for €40 million) on the Nationalist government in respect of the approved planned expenditure for 2012. The miracle of miracles included a high moral stance by, of all people, Tonio Fenech who remains responsible both for the outturn of 2012 and that forecast, with minor upward adjustment, for 2013. That is barefaced cheek, not to call it worse.

The question now is what will the Government do? At this stage of the annual cycle the Budget Office is already in the process of considering inputs to the Budget for 2014. It will be forced to impose on the spending ministries to whittle their outlays, while it will be urging the revenue ministries to do their utmost to ensure higher receipts, short of introducing new taxation.

At the same time the Budget Office has to tackle Brussels’ demand to cut back this year’s expenditure, at a time when revenue is likely to fall short of Fenech’s forecast. The Government is in a real conundrum. This is shown by the declaration by the Education Minister that there are no funds to continue with the school building programme under which the Nationalist government had undertaken to build one new school a year. The remarkable thing is that such building had been financed through a bank loan, not out government revenue. So, who pays the ferryman now?

The Labour Government has not set out these paradoxes and fiscal juggling as clearly as can be to demonstrate the base from which it started off. I understand that is going to be helped by a British public expenditure export economist. For my money I would task him first with an undertaking a 2013 Budget review together with the Budget Office team, and then with suggesting how best to identify the cuts demanded by Brussels. Only after that is done would I deploy him on helping out with structuring the estimates for 2014.

To reiterate, had the Nationalists won the election Tonio Fenech would in all probability have remained Finance Minister and he would be grappling with the same problems that beset the Labour Government. Ironically, having been swept out of office he can now play Pilate, wash his hands of his own baby and cheekily attack Labour for doing what he would have had to do had the Nationalists won on March 9.

This is going to be one heck of a fiscal year. Minister Scicluna needs all the skills and focus he can deploy, plus some more.