Both political parties are claiming that their financial soothsayers know best. But just how reliable can five-year economic forecasts be? Bertrand Borg reports.

Almost eight years ago, the Government told the European Commission that the national deficit would be wiped out by 2007.

Economists tended to be 0.9 per cent off the mark when estimating growth

That was May 2004, and one year later, that deadline had been moved: a balanced budget would happen in 2009, the Government told the Commission in its stability programme yearly update. And by 2007, the Government’s report update said it now expected its year-on-year accounts to be in the green by 2010.

Depending on whom you believe, Malta will now achieve a balanced budget by 2015 (PN) or 2018 (PL). Both parties insist their calculations are the more accurate ones and based on the more “realistic” economic scenarios.

But while both the Labour and Nationalist parties pander to the electorate’s purse-strings with talk of GDP growth, deficit reductions and debt ceilings, history suggests voters would do well to take any economic crystal ball-gazing with a pinch of salt.

The PN plan for the years 2013-2017 is based on two key assumptions: that Malta’s economy will grow, in real terms, by 2.9 per cent a year; and that it can shave two per cent off public expenditure by increasing efficiency.

Both seem optimistic. Even before the global recession suppressed GDP growth, Malta struggled to achieve average growth of the type the PN is now forecasting.

Between 2002 and 2006, by the Government’s own figures, Malta’s economy grew by an average of 1.4 per cent every year, with GDP growth peaking at 3.2 per cent in 2006.

EU statistics unveiled on Friday showed Malta is this year expected to report 1.5 per cent economic growth – one of the best in the EU.

One has to go back to the turn of the century to find economic growth along the lines the PN is projecting for the period from 2015 onwards, when Malta’s GDP grew by an average of 3.4 per cent in real terms between 1997 and 2000.

Even the Government itself is not as optimistic as the PN: just last April, it told the European Commission that “from 2012 onwards, potential GDP growth is expected to follow an upward trend to reach the two per cent mark by 2015”. It is now saying 2.8 per cent is more likely, or 2.4 per cent growth in a more pessimistic scenario.

Cutting expenditure by two per cent through efficiency savings is also ambitious, given the Government’s difficulty in cutting less than a third of that amount – 0.59 per cent, or €40 million – from public expenses just 12 months ago.

Not that the Labour Party figures – where they exist – are any more insightful.

It has placed a €732 million price tag on its 800-plus proposals (compared to €1.1 billion for the PN’s 200-odd) and said a broadened workforce and refocusing of priorities would generate economic growth in line with the the Inter­national Monetary Fund and EU’s “more realistic” growth projections.

But the IMF’s annual World Economic Outlook only issues two-year GDP growth forecasts, while the European Commission’s autumn 2012 forecast only predicted growth up to 2014. This begs the question: what IMF and EU figures is the Labour Party using? A PL spokesman had not replied to the question at the time of writing.

Compared with the PN’s 2.9 per cent annual GDP growth estimate, the PL is expecting a more modest 2.2 per cent average growth rate.

It has also projected a more gradual fall in Malta’s deficit to reach 0.5 per cent by 2017, leaving Malta’s consolidated fund just €21 million short by that year.

The PN goes one better, predicting that 2017 will see the consolidated fund – essentially the Government’s bank account – run a €129 million surplus. The fund is currently €180 million in the red.

And in their scramble to win fiscal credibility points, both major political parties have brushed aside the suggestion that economic forecasts are, by their very nature, not all that reliable.

A worldwide study of 52,000 economic forecasts by 250 different institutions by Sweden’s central bank found that, while economists were fairly good at predicting inflation, they tended to be 0.9 per cent off the mark when estimating growth. In econ­omic terms, that is a significant variation.

The study also found that the “realistic” IMF was one of the worst forecasters.

Similar studies of US Congress forecasts and predictions by so-called blue chip firms have yielded similar results: annual growth forecasts tend to have a one percentage point margin of error.

Both major parties are fronted by men who insist their economic plans are credible, realistic and doable.

Whether that is true remains moot. But if history is anything to go by, voters would do well to not hold their breath.

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