The taming of the deficit

MUCH HAS BEEN SAID OF LATE ABOUT THE SHORTFALL BETWEEN GOVERNMENT EXPENDITURE AND REVENUE, WITH MALTA'S CONSTITUTED BODIES HITTING OUT AT GOVERNMENTAL POLICY, WHILE THE GOVERNMENT, ON ITS PART, REITERATES THAT THE ECONOMY IS ON TRACK AND THAT IT WILL REDUCE THE NATIONAL DEFICIT TO LM85 MILLION BY BUDGET DAY.

IS THE GOVERNMENT SPENDING BEYOND ITS MEANS?

THE MALTA FINANCIAL AND BUSINESS TIMES LAYS OUT THE FACTS.

Last week the National Statistics Office reported that the shortfall between government ordinary revenue and total expenditure over this year's first seven months of this year tallied up at Lm68.9 million - up from a comparable shortfall of Lm61.5 million reported during the same period last year.

However, with total government revenue accounting for only 54 per cent of government revenue and government expenditure to date accounting for 58.3 per cent of estimates Finance Minister John Dalli still has some two and a half months to meet his target of reducing the budgetary deficit from the Lm150 million he had started the legislature with to the reduced deficit of Lm85 million he intends to wrap the budgetary year off with.

Mr Dalli stated earlier this week that the government's plans to reach the target are on track. However, if the government does manage to accomplish its goal, it would have effectively brought the national deficit down from 12 per cent five per cent of gross domestic product. Mr Dalli also expects to register a four per cent overall growth rate for the economy for the whole of the year.

Deficit, the EU and GDP
Dalli's projection of reducing the national deficit to some five per cent of GDP is in line with what the EU is proposing for its internal economy. In fact, the EU's financial policy makers are proposing measures to prevent the deficit of any EU member from exceeding three per cent of its GDP.

EU finance ministers are expected next month to debate how to respond to the economic slowdown without violating rules on budget discipline underpinning the euro single currency, an EU Commission spokesman stated earlier this week.

However, The euro-zone's two powerhouses, Germany and France, have both questioned the pact's budget deficit targets in recent days because of slower than expected growth in Europe.

The 1997 so-called Stability and Growth Pact requires euro-zone countries to aim for budgets in balance or surplus in the medium term through annual targets.

Commission spokesman Gerassimos Thomas said finance ministers will discuss the pact during an upcoming informal meeting 21-23 September in Liege, Belgium.

"This is the first time we face the situation," of an economic slowdown, Mr Thomas said.

However, he reiterated that member nations and the Commission remain committed to the objectives of the pact, which also seeks to ensure that the deficit of euro-zone members doesn't exceed three percent of gross domestic product.

Countries that have brought their budgets "close to or in surplus" since joining the monetary union have greater flexibility in an economic slowdown, he said.

But the Commission has told Germany, France, Italy and Portugal to refrain from using automatic budgetary stabilisers, which are built-in changes in government spending and taxation that tend to damp the business cycle.

Malta's social partners
Meanwhile, Malta's constituted bodies hold a somewhat different view and last week lashed out at the government for failing to curb public expenditure, which has continued to accelerate.

A joint statement released by the Malta Federation of Industry, Malta Chamber of Commerce, Malta Employers Association, Malta Hotels and Restaurants Association and the GRTU Association of General Retailers and Traders, stressed that the situation is worrying because government’s spending requirements can only maintain their present momentum by further taxation.

It adds, "Industry and business in general, and even the workers are already being taxed at high rates. If these increase further they will only serve as a disincentive for investment by employers and can only be expected to reduce the will to work on the part of our workforce. It is evident that the situation is leading the country to a lower level of competitiveness on the international market. Our enterprises are finding it increasingly difficult to compete with the costs they can manage for their manufactured goods and services.

The statement reminded the government that, in this situation, the associations would have expected urgent action by government to benchmark its expenditure levels and to start a programme of eliminating waste, generally reducing inefficiency, and trimming down, rather than increasing, employment in the public sector. The country simply cannot afford to carry on ignoring the problem of spending beyond its means and expecting the taxpayer to solve the problem through more taxation. This is unacceptable and will only serve to depress the economy further rather than stimulating the creation of wealth.

It adds, "It is pertinent to note that in its latest report on Malta published earlier this month, the International Monetary Fund stated that 'Fiscal deficit reduction would best be achieved through expenditure reform rather than through further increases in tax burden.'

"In this scenario the five organisations call for a concerted effort to be made by the country’s social partners to responsibly put a halt to any unjustified wastage of funds on public projects and to any improvements in wages and/or conditions of employment which cannot be justified by increases in productivity levels particularly in the public sector and state-owned enterprises.

"Otherwise, this situation will require more money which can only be obtained through higher taxes and charges mainly subsidised by the private sector. Employees paid directly or indirectly by the State cannot demand any more benefits from the taxpayer without themselves contributing more to solve the current financial problems. This must be the quid pro quo value for money contributed by the public sector. The general improvement in working conditions in the public sector can only be maintained if the private sector of the economy manages to retain its competitiveness through stable costings through an increase in efficiency, output and profitability.

Ordinary revenue - +5.6%
In fact, although ordinary revenue was found to have increased by Lm19 million, this positive development was more than offset by an increase of Lm26.4 million in total expenditure - less contributions to the Sinking Fund which this year amounted to Lm6.2 million compared to Lm6.4 million contributed last year.

Compared to the first seven months of last year, ordinary revenue, up or 5.6 per cent, and amounted to a total of Lm359.8 million.

Among the main protagonists in the rise are revenue from Consumption Taxes (VAT) -up by Lm6 million or 10.1 per cent - income tax and social security - up by Lm5.4 million and Lm6.7 million respectively - profits on lotteries - up by Lm1 million - while customs and excise revenue declined by Lm2.8 million or 8.6 per cent.

With some 10 weeks left until budget time, total ordinary revenue only accounts for 54 per cent of this year’s original budgeted revenue forecast.

However, it must also be noted that during the comparative period last year, the government had also received Lm12 million through proceeds from the sale of assets and of Lm6 million in the form of grants. Meanwhile, this year the government saw no revenue from asset sales, while revenue from grants amounted to less than Lm0.5 million.

Expenditure - +6.4%
Total expenditure as of last month had amounted to Lm434.9 million - an increase of Lm26.2 million or 6.4 per cent. However, Total expenditure over the first seven months of 2000 and 2001 were both within the 58.3 per cent benchmark when comparing this year’s data with budgetary estimates, and last year’s data with the actual final outturn.

Wage increases - +Lm13.9m
As could have been easily predicted, the most pronounced increase under recurrent expenditure was blatant outstanding in the personal emoluments category, which had increased its expenditure by Lm13.9 million. The increase was predominantly due to the increase in the salary scales following the new civil service collective agreement, comprising the Lm1.50 per week cost of living adjustment and normal incremental steps in wages and salaries.

Programmes and initiatives - +3.1%
A comparative increase of Lm5.5 million, 3.1 per cent, was reported in the programmes and initiatives category. Although the government last year paid out a one time budgetary compensation Lm4 million, this year higher expenditures were reported in terms of treasury pensions, up Lm3.9 million, the state grant, up Lm1.8 million, social security benefits, up Lm2.2 million and church schools financing, up Lm1.3 million.

Meanwhile, contributions to the government entities category this year registered a comparative increase of Lm2 million, on account of this year’s contribution to the University of Malta and the Junior College.

Operational and maintenance expenses - (-Lm3.5m)
The above raises listed above were partially offset by a reduction of Lm3.5 million in the operational and maintenance expenses category, which was the result of reduced expenditure on materials and supplies at the Health Division and in terms of certain transport costs.

Public debt interest - +Lm0.7m
The interest factor of public debt servicing costs was found to have increased by Lm0.7 million this year, from Lm35 million last year to Lm35.7 million this year. The increase was mainly the result of loans taken out during the second half of 1999 and the resort to Treasury Bills. Government transferred roughly the same amount (just over Lm6 million) both this year and during the same period last year to sinking funds in respect of foreign and local loans.

Capital expenditure - +17.1%
Capital expenditure over the period increased by Lm7.8 million, 17.1 percent, and amounted to Lm53.3 million. The Malta Tourism Authority has this year utilised Lm1 million more than the amount withdrawn during the same time frame last year.

Meanwhile, additional capital outlays of Lm1.5 million and Lm2.2 million were reported for, respectively, road works and the acquisition of property. Mainly due to Malta Freeport's debt servicing costs, capital expenditure by the Economic Services Ministry showed a comparative increase of Lm4 million, which were partially offset by a decrease of Lm1.2 million in payments on projects of the Education Ministry.

Government debt - +10.8%
Provisional statistics supplied by the Central Bank of Malta show that government debt outstanding at the end of July stood at Lm993.8 million - up by Lm96.6 million, or 10.8 per cent, from Lm897.2 million outstanding at the end of July last year. Treasury Bills and Malta Government stock accounted for Lm188.7 million, 19 per cent, and Lm768.2 million or 77.3 per cent respectively, while the remaining share of Lm36.9 million, 3.7 per cent, was comprised of foreign borrowing.

Additionally, at the end of July government debt was Lm68.8 million higher when compared with the end of last year. Compared to data for the end of June, this debt was up by Lm19.6 million.

Guaranteed debt
Data on government guaranteed debt has been included in this issue and the sum of Lm434.7 million represents outstanding balances on Government Guaranteed debt.

They exclude Multilateral Investment Guarantee Agency (MIGA) and International Bank for Reconstruction and Development (IBRD) positions, as well as government guarantees on foreign loans taken by the Central Bank on behalf of the Malta Government as these loans already feature in the calculation of Government foreign debt.

The aggregate figure of Lm434.7 million was arrived at by adding the amount withdrawn (being an overdraft or loan), with the interest charged during the period under review. If this figure exceeds the limit, the latter is then reported as being the total balance guaranteed by government. Within this context it is interesting to note that the amount of Government Guaranteed debt has been declining over the last few years. In fact, the June figure is almost Lm35 million lower than the Lm469.7 million guaranteed at the end of last year.