The reports submitted by the Government to the European Commission will have to be amplified, in some respects, in the Budget for 2014.
The central theme remains, as it has been for several years past, the budgetary situation and the level of the national debt. Both are inheritances that the Labour Government has to deal with in the same manner that a family whose head dies leaving behind untold unpaid bills, in addition to considerable assets which, however, cannot be made liquid.
Which is why discussions in Parliament and exchanges in the media about the out-turn for the current year and moving forward into the next, sound somewhat surrealistic. For this year, the discussion essentially centres on a Budget drawn up by the previous administration and adopted, lock, stock and barrel, by the present one.
In fact, parts of the reports published by the Ministry of Finance would have been the same had they been penned by a Nationalist Finance Minister. Which in turn makes much of the criticism levied by the Nationalist side take the shape of a boomerang.
Boomerang or not, it is the Labour Government which now has to deal with the situation. According to its repeated stand, it will reach its targets, both this year and in 2014; targets which are better than those left behind by the Nationalists and also put forward by the European Commission, the International Monetary Fund and several rating agencies.
By the time the Budget for 2013 is presented the Government will be in a better position to know the forecast out-turn. Critics and analysts, bearing that in mind, will react with more care to the Government’s revised forecast.
Revenue trends are weak in some regard while expenditure is stable. In the latter regard, it is burdened by the cost of the reduction in the income tax take planned by the Nationalist government and taken on board, unwisely, in my view, by the Labour side. We know now that this will cost some €40 million in foregone revenue over three years.
At a time when the Finance Minister has to aim to reduce the Budget deficit and to stimulate growth at the same time, that is hardly a positive factor as both sides make it out to be. Raising the 25 per cent band to leave more income in taxpayers’ pocket might convert into higher expenditure, and thereby a higher VAT take. But there will be a net loss of revenue, which the Budget team could have well done without.
Parts of the reports published by the Ministry of Finance would have been the same had they been penned by a Nationalist Finance Minister
The Government is contemplating offsetting the cut and reducing the expenditure gap through a higher take in indirect taxes. There is some confusion here. VAT, the Prime Minister has reiterated, will not be raised. But will there be any increase in other indirect taxes? The Budget estimates will tell us that. Meanwhile, the Nationalist Opposition has jumped the gun and is stating as a fact that there will be higher taxes.
There might be, but in the first instance, higher indirect tax receipts will come from the natural flow of increased consumption at current market prices, and therefore increased indirect tax receipts. With the Opposition in an utmost negative overdrive, the tax factor has formed practically all its comments regarding the documents submitted and published by the Ministry of Finance.
The Opposition is deliberately ignoring the increased efficiency in Budget administration signalled by the documents. A higher tax take relative to GDP will probably be helped along by a serious drive to cut out evasion and avoidance too, and collection of tax arrears.
The discussion has also ignored the appendices to the reports, which set out an imaginative review of how the Budget will be administered. The section is technical, but the Government could do worse than translating it into language more generally understandable. Successful execution of the proposed review of expenditure control in particular should be a major influence on the Government’s forecasts of expenditure.
Tighter control there, plus a more efficient tax collecting base, should go a long way to trimming the Budget deficit. Closing the budgetary gap is essential if the public debt is to be brought under control. Any deficit, even of one single euro, will raise the absolute size of the debt. It is important in terms of EU control and rating agencies’ scrutiny that the public debt does not rise at a rate faster than the GDP.
Thereby the public debt would fall as a proportion of GDP, bringing the ratio to more acceptable levels. That will still leave the absolute level of the public debt to reckon with. In this regard it will be more revealing to see whether a primary surplus can be achieved. This offsets revenue against expenditure before servicing of the public debt – interest payments thereon – are taken into account.
The Nationalist administration was progressing towards this situation. The Labour Government will have to do so faster, in addition to introducing more transparency and up-to-date control of revenue and expenditure.
The debate on the reports to the European Commission has not been a pretty sight. The negativism shown by the Nationalists and fellow-travelling media has distorted the debate. Nevertheless, at least we are discussing a matter of policy, not just indulging in the politics of the yah-boo type that have taken over so much debating time and newspaper column inches.