Edward Scicluna’s comment that it gets harder to cut the deficit towards the latter half of the legislature is probably true for every finance minister. He was making the point to the social partners as he unveiled the pre-Budget document.
It was a frank admission by the Finance Minister of the pressure he faced from his Cabinet colleagues to loosen the grip and spend money on initiatives and projects in the final two national budgets prior to the general election.
Having himself been on the other side of the political fence, Prof. Scicluna knows all too well the dangers of fiscal slippage in election years and it is something he would want to avoid.
He did put his finger on a few legacy problems related to pension anomalies brought about decades ago that afflict cohorts of workers and which the government had made a political commitment to solve. Tackling these will be treading a minefield because solutions could trigger permanent expansionary forces that will have ramifications on public finances far into the future.
But it is not just these legacy issues, mainly involving pre-1979 government workers that Prof. Scicluna had in mind.
With electioneering likely to start in the second half of next year after Malta ends its EU presidency, the government will be under pressure from various quarters to be more generous on handouts. Ministers will also be pressured by individuals in their constituencies to accede to their demands, justified or not.
All this ups the pressure on the Finance Minister to loosen the grip on expenditure in the last leg.
Prof. Scicluna has managed since 2013 to cut the deficit in a sustained way, down from 3.5 per cent in 2012 to 1.5 per cent last year. Admittedly, his feat to control expenditure was helped in no little way by a booming economy. The tax-take increased despite a reduction in the top income tax rate for those earning less than €60,000.
The economy’s growth was not coincidental. While the foundations were robust, the government took targeted policy decisions that unshackled its potential.
Free universal childcare, tapering of social benefits, a more generous part-time tax regime and advantageous tax systems to draw individuals out of the shadow economy were some of the decisions that helped stimulate growth.
The utility rate reductions and the sustained drop in fuel prices – even if these could be cut further given the drop in the cost of oil – also provided a stimulus that left families and businesses with more cash and profits in hand.
Prof. Scicluna is steering the most successful economy in the EU that also boasts the lowest unemployment. Still, as he targets a surplus in public finances by 2019, he will navigate a difficult course over the next two years.
The deficit for this year is expected to drop to 0.7 per cent of GDP but, as the pre-Budget document highlights, the downward projection is expected to slow down next year and the one after. In 2017, the Finance Ministry is projecting a deficit of 0.6 per cent, which will go down to 0.2 per cent in 2018.
The pre-Budget document justifies the deceleration by saying deficit reduction was brought forward to 2016 to capitalise on favourable economic conditions. This may be the case but the figures also suggest the Finance Minister has taken cognisance of the political pressures and applied the brakes.
It may be his way of wresting control from the voracious demands but Prof. Scicluna will do good to remain vigilant.