It would be most unfortunate if the new Labour Government were to be hit with an excessive deficit procedure right at the start of its mandate but the blame for this must squarely lie on the outgoing Nationalist Government. The blame game, however, is hardly conducive to an effective management of the problem, which now needs maximum attention from the Minister of Finance.
We should not spend like there’s no tomorrow
The deficit of €225 million registered last year was €67 million more than forecast by Minister of Finance Tonio Fenech in November. It added a full percentage point to the deficit-to-GDP ratio, taking it up to 3.3 per cent.
Was it surprising? Absolutely not. Most independent economic observers had consistently warned that Fenech was being overly optimistic about his revenue projections and that the economic data did not support his bullish expectations.
It is obvious that Fenech went ahead and presented a Budget that was unrealistic in its financial underpinnings because the driving motive was the looming electoral battle. His government was determined to present a rosy picture and provide the background for the extravagant spending promises ingrained in its electoral programme.
It was particularly cynical because the government had already had the galling experience of being forced by the European Commission to chop €40 million off its Budget in 2011.
One could argue that the 2012 fiscal outcome is also attributable to some extent to the electoral period. After all, Fenech claimed during the campaign that revenue streams traditionally tended to dry up somewhat during election periods. But this itself begs the question why his government made the situation worse by inflicting an unduly long campaign on the country. And all to no avail.
The outcome of this saga is that the 2012 deficit reversed the positive trend in Malta’s public finances and is likely to trigger a fresh procedure under the Lisbon Treaty and the Fiscal and Growth Pact, just after we have exited one.
I would hardly expect the European Commission to be sympathetic to arguments about the deficit being attributable to election campaigns. It couldn’t care less. In fact, it would probably contend that the procedure is there precisely to discipline countries that play with fire purely for mundane reasons.
The only way that the Minister of Finance can avoid the procedure being invoked again is if he can demonstrate that the 2012 result is ‘temporary and exceptional’.
The Budget presented by Finance Minister Edward Scicluna projects a deficit equivalent to 2.7 per cent of GDP in 2013, going down to 1.6 per cent in 2015. This would make the 2012 result ‘temporary’ in the context of a resumed improvement of the fiscal outcome but the Commission might be worried that the percentage point excess registered in 2012 is simply being inbuilt into the 2013 target. This is where the Maltese Government needs to convince the Commission that it couldn’t impose additional uncertainty on the country by going for a revised Budget that would have had to take many weeks of work.
The next stumbling block is to address the question whether the 2012 result is ‘exceptional’. It is, indeed, but in the wrong way.
Nominal GDP growth last year was 3.04 per cent, versus 3.79 per cent the previous year and the 3.3 per cent forecast in the 2012 Budget. A rather simplistic relationship between GDP growth and revenue growth shows that revenue in 2012 grew rather less than one would expect – by €72.2 million versus the €95 million predicated by a simple proportion. That’s disappointing, but containable.
On the other hand, the expenditure angle is a totally different story. Using a similar simplistic relationship between GDP growth and expenditure growth, while expenditure should have risen by €46.4 million, it actually grew by €195.5 million! The Nationalist Government blew it.
It is no wonder when you have people like the new Nationalist MP Claudio Grech stating in Parliament that “controlling expenditure should (not) come at the cost of jobs, health or education”. Or when you have the Leader of the Opposition castigating the new government for not building a new school this year.
Does that mean that we shouldn’t care about jobs or about better schools for our kids? Of course, not. But neither does it mean that we should spend like there’s no tomorrow, when tomorrow is burdening future generations with more debt than they can handle.
The Labour Government now has to defend a 2013 Budget drafted by the previous government but which remains fiscally challenging. It requires revenue to grow by 11.6 per cent versus last year’s 2.7 per cent increase, whereas expenditure growth has to be restricted to 4.6 per cent versus last year’s 6.8 per cent.
The second objective might appear rather achievable, were it not for the widespread underprovisioning reported in various ministries. As for the first objective, this depends crucially on whether the economy grows at 3.3 per cent as predicted or better.
We have few publicly available indicators regarding economic trends in the first quarter of the year. The few we have are a mixed bag.
Visible exports in the first two months of the year were down by an annual 23 per cent while consumer goods imports were down by 13 per cent, pointing to a slowing down in the economy.
On the other hand, tourism bed nights in January were up by an annual 6.3 per cent whereas industrial production in the first two months of the year rose by 6.5 per cent.
It is hazardous to guess what might have happened to GDP. The recession in the eurozone and the incipient recession in the EU27 do not augur well in terms of their impact on the Maltese economy.
One can only hope that Malta will continue to beat the trend. The quicker the Labour Government’s economic incentives are rolled out, the better it would be.