FOI reactions to state of government finances

Speaking to the Malta Financial and Business Times yesterday, Federation of Industry Director-General Edwin Calleja expressed concern over the state of government finances, saying the figures could not be termed to be in good shape and a concerted effort had to be made to get the situation under control without further delay.
"Public Debt stood at Lm925 million at the end of 2000 and now reads Lm1.077 billion at the end of 2002, excluding the guarantees and letters of comfort provided by Government to a number of corporations, that stood at Lm 374 million in December 2002.
"Most corporations do not generate enough funds to repay any part of their loans and therefore a substantial part of this amount will never be repaid and Government is de facto the real creditor.
"This means that the national debt to GDP ratio stood at 63.9 per cent in 2002, exceeding by almost four per cent the target that Government planned to achieve. If the guarantees to Corporations are added to the National Debt the ratio to GDP goes up to 86 per cent."
Calleja said the excess of recurrent revenue over recurrent expenditure had been a positive turn, but said Government also had to concentrate on reducing wasteful public expenditure.
"We have viewed as positive the declarations by the Minister of Finance that an urgent solution needs to be found for the Social Welfare Gap which is not just a long-term goal but a real short-term worry as evidenced by the high-expenditure ratio on social transfers.
"The structural deficit went down considerably to 4.6 per cent of GDP last year and it is estimated to go down further to 4.1 per cent this year. However, it will be extremely difficult for Government to achieve this if the increases in welfare and other spending witnessed in recent years continues at the present rate."
Calleja said FOI would like to see the recurrent expenditure creep restricted to the inflation rate, currently in the region of 1.46 per cent as a maximum target:
"This is not happening. Expenditure in 2002 stood at Lm646 million, an increase of five per cent over 2001. This year recurrent expenditure is estimated to be pegged at Lm 677.4 million, an increase of 4.9 per cent. In this respect, there are no healthy prospects ahead of us in the short term unless some drastic measures are taken.
"Two years ago the FOI insisted on a benchmarking exercise to be conducted on public expenditure. The FOI would like to see Government and Unions negotiating public sector wages within the parameters of a national productivity index which so far is non-existent.
"Government stated that the MCESD would be monitoring progress in this respect, but the FOI has not witnessed any serious attempts by Government to benchmark major items of Government Expenditure or bring about any reduction."
Calleja said debt-servicing was still at a high rate and that only a reduction of public debt could solve the burden of the payments, but this could not be expected to happen before the budget is either in surplus or at least level.
"It is a pity that privatisation proceeds at this stage cannot be devoted to bringing down the level of public indebtedness. All revenue of a one-off nature representing the proceeds of privatisation have so far only gone towards slowing down the rate of public borrowing. Government is still far from coming to grips with the core of the problem."
On taxation, Calleja said FOI believes that the best taxation system should be based on a low direct tax regime and a reasonably high rate of indirect taxation on consumption of non-essential items.
"Taxation levels stood at 34.7 per cent of GDP in 2000. In September 2002 this figure read 39.26 per cent. This level of taxation is considered to be on the high side and can only be reduced either if there is a tremendous jump forward in economic expansion, which does not seem likely in the short term, or if government curbs its expenditure."