Tough year ahead in public finances

Tough year ahead in public finances

One of the hardest tasks facing our finance ministers for years has been the structural deficit in the public finances. It has been high and stubborn, thereby contributing to extensive growth of the national debt. For that reason alone, apart from its claim on resources that might be better used by the private sector, it has to be curbed.

The last phase of the Nationalist administration saw progress in that regard. But not enough. The deficit does not only have to be contained. It has to be reduced to below three per cent of GDP according to Malta’s obligations under the Maastrich Treaty.

The European Commission is adamant about that, unlike its stance with Germany and France, and places countries who do not fulfil the three per cent obligation under the excessive deficit procedure, a tight watch on what is going on in the public financial sector, which could lead to penalties.

The Labour government inherited finances which were on the mend, but not quite there yet, and in those circumstances an EU excessive deficit procedure was in force.

Through a mix of measures aimed at keeping a closer watch on public expenditure while chasing revene more rigidly, improvement was registered in 2013. Exactly how much so will not be known for some time since the year-end public finances position always takes some time to be established.

The government’s attack on the deficit has included an attempt at more professional control. To this end it again sought the services of Maurice Mullard, a British economist whose most recent assignments were at Hull University and in the US.

Prof. Mullard had also been in Malta during the lifetime of the 1996-98 Labour government and his services had been retained for some time by the post 1998 Nationalist government.

He is focused and dedicated, emphasising a strict regime of comprehensive expenditure which brought a fresh dimension to the way public expenditure is built up by the spending ministers, tackled in bilateral discussions with the finance ministry budget team and eventually executed.

It enables direct monitoring so that the outcome can be adequately identified live, throughout the year, allowing any necessary remedial measures to be drawn up and implemented in good time.

The pressures on the government’s outlays will indeed be strong

This is still work in progress but I am told it is proceeding well, with close collaboration between Prof. Mullard and Alfred Camilleri, the permanent secretary at finance, himself an economist of note with an extensive background. The work they recommend is acted upon with enthusiasm by the civil servants involved in the various processes.

Such tightening up is necessary. The improvement in the structural deficit has to result from carefully controlled expenditure, especially of the discretionary investment category, and collection of due revenue in a context where avoidance and fraud are still a bane of the government’s life.

This latter area, I understand, is another one where Prof. Mullard is active. He has also been making a valid contribution to the social services ministry. It remains to be seen how that will continue once the present minister, Marie-Louise Coleiro, becomes President of the Republic.

Notwithstanding the progress being made in the planning and execution of the public finances this newspaper reported on Monday that it is likely that Brussels will keep the excessive deficit procedure in force. The main reason given is that the Commission is not convinced that the Maltese government will reach its targets during 2014.

I wouldn’t look at that as bad news. Discipline has to start internally: that is where the action takes place. And there is discipline in growing force. Yet it does no harm for the government to feel that Brussels is breathing down its neck. That will, as with everything else, be politicised and criticised by the Opposition, as every Opposition of the day does.

The spur will be good. It will make those involved in drawing up, collecting and spending the public finances realise more acutely that they cannot rest on their laurels.

Progress has been made but there is a lot more to be done, as spelled out in the Budget speech for 2014.

Tax avoidance is still rampant, both at the Inland Revenue Department and Vat, and customs and excise duties are a constant target, especially by parallel traders.

On the expenditure side outlays on social services are still subject to unbelievable fraud. Wasteful bureacracy in the public sector also takes its toll and has to be attacked more vigorously.

All this needs to be done for Malta’s sake, not simply to abide by EU strictures. The pressures on the government’s outlays will indeed be strong. It’s going to be a tough year.

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