Prime Minister Joseph Muscat is heralding the balanced cash-budget of 2016 as one of the hallmarks of his administration. At face value, the fact that the government’s finances are in the black is positive. But if there is one important lesson we learnt over the past four years it is that nothing this government says or does can be taken at face value.
To be in the black, a government must spend less than what it earns.
There are many roads that can lead to this objective. But some roads are less sensible than others.
For, while balancing the books is a desirable, it is not necessarily proof that one is living sustainably.
While government earnings are mainly dependent on tax and excise revenues, government spend can be divided into three main categories: capital expenditure, recurrent expenditure and debt servicing.
Capital expenditure is the amount that a government invests in infrastructure so that the country can function properly. Past Nationalist administrations saw capital expenditure as an investment in the country’s future.
Hence, the spend in the airport, the freeport, power stations, roads, the hospital, the University, Mcast, telecommunication and ICT infrastructure.
EU membership has, moreover, enabled us to access funding to sustain this investment, which has created the foundations for today’s economy and modern development.
To have more money to invest, past administrations sought to keep the daily cost of running government reasonably low. During the Gonzi administration, recurrent expenditure grew by four per cent annually.
Moreover, the public sector headcount went down from 48,000 in 2002 to 41,000 in 2012.
This trend has been reversed by the government, which opted to obtain its surplus of €9 million in 2016 at the cost of capital expenditure to make good for its spiralling recurrent expenditure, which has multiplied from €2.5 billion in 2012 to €3.3 billion in 2016 at the average annual rate of eight per cent.
On the other hand, capital expenditure in 2016 as a percentage of total government expenditure was, at eight per cent, the lowest it has ever been in the past 10 years.
Capital expenditure as a percentage of GDP was, at 3.1 per cent, the lowest in recorded history.
Even in absolute terms, the Gonzi administration spent more in capital expenditure in 2012 than this government did in 2016: €364 million as compared to €310 million.
These are worrying numbers.
While balancing the books is a desirable, it is not necessarily proof that one is living sustainably
Lower capital spend means less money going into the infrastructure needed for today’s and, more importantly, tomorrow’s economy.
Equally worrying is the significant increase in the recurrent expenditure by a government more intent to honour dubious pre-electoral promises with little or no added value to the taxpayer than to put its expenditure on a sustainable footing.
This is not only the Opposition’s view. It is equally the view of the Auditor General who repeatedly chastised the government for the reckless spending approach.
This is also the written opinion of the Central Bank and the International Monetary Fund.
With an election looming, the government is showing little interest in heeding this advice. By spending less on capital expenditure and much more on recurrent expenditure, the government weakened and not strengthened public finances.
The government’s income in 2016 was, on the other hand, boosted by tax revenues that were higher than budgeted. If this income is the result of higher economic activity then all’s well and good. If, however, this was boosted by one-off windfall gains then the issue becomes problematic.
For while the government’s bloated recurrent expenditure will hit us every year, windfall gains do not occur recurrently. Furthermore, to sustain this level of expenditure, the government is banking on the international economic climate to remain positive. The sad truth is that economies work in cycles and, eventually, the international economy will move into harder times.
Have this government’s economic and fiscal policies made us more capable of withstanding a recession, as was the case in 2009, or even a period with subdued growth? The simple answer is no.
Moreover, the failure of the government to create new economic activities makes our economy less flexible and resilient if faced with a downturn in a specific economic sector.
Soon, the Central Bank and the European Commission will publish their respective forecasts on the government’s finances. These forecasts should shed more light on the sustainability of the government’s recurrent expenditure, the general state of our public finances and whether the surplus was a one-time occurrence or not.
Interestingly, surplus data for 2016 conveniently leaves out statistics for authorities, agencies and entities such as the local councils, which, ultimately, form part of the government.
Also, the unspoken reality is that, in four years, public debt increased by over €1 billion and the cost of servicing that debt by €500,000 a day with very little by the government to show for it.
The government’s talk of a balanced budget needs to be seen against this uncomfortable background, a background that may take away much of the gleam and shine.
But the government is mum on this inconvenient truth.
Mario de Marco is deputy leader of the Nationalist Party.