Strong measures will be needed to allay spiralling deficit

- Country living on thin air, says veteran economist

By Matthew Vella
"We are chasing ghosts. We are hoping our gross domestic product will increase when revenue is not coming in, expenditure is rising, and wastage in human resources and other areas is rampant. We are a country living on thin air."
These are the words of senior economist Karmenu Farrugia, who spoke to The Malta Financial and Business Times on the underlying problems which the recent public finances for 2003’s first seven months have shown.
The spiralling deficit is now revealing problem areas which have survived years of warning by the business community and critics of Government’s economic performance in the last eight years.
Within seven months since the start of 2003, Malta’s structural deficit widened by Lm55.3 million to Lm127.7 million. Ordinary revenue dropped by 4.3 per cent and expenditure rose by 8.2 per cent over the same period last year.
This is a far cry from the consolidated account structure projections, published in 1998. In 1998, Finance Minister Dalli predicted the deficit by 2003 would have decreased to Lm101.5 million. By 2004, the figure should have read Lm77.4 million in the red.
For Karmenu Farrugia this is a time for strong measures:
"The people must realise that it is high time we learnt how to economise. After seven years of plenty, it is quite normal that seven years of scarcity will follow.
"I believe that Government’s first step should be to appoint teams of businessmen, who are not civil servants, and who can independently assess all areas of wastage within every department in every ministry."
The structural deficit between recurrent revenue and total expenditure reached Lm127.7 million, an increase of Lm55.3 million from a shortfall of Lm72.5 million for the same period last year.
Government debt outstanding at the end of July stood at Lm1,220.3 million, up by Lm170.8 million from last year. Compared to one month earlier, government debt increased by Lm33.2 million. Privatisation has however managed to keep debt-servicing costs under control this year, with a decrease of Lm1.7 million, from Lm38.9 million last year to Lm37.2 million this year.
Ordinary revenue totalled Lm376.8 million and made up 48.9 per cent of this year's budget forecast. Compared to the same period last year, recurrent revenue declined by Lm16.8 million, or 4.3 per cent. Recurrent revenue last year had included Lm21 million as a consequence of the Malta International Airport part-privatisation process and from fees collected through the investment registration scheme (Lm5.8 million).
Economist Karmenu Farrugia says it is bad to depend on privatisation: "These are only one-off payments to reduce national debt. The deficit is structural, a question of revenue and expenditure. Government’s accrual system has been collecting accrued tax from 1991 returns. When this happens, we are not talking about actual government revenue being generated right now, but that we are paying tax later. Tax collection has to be reinforced. It cannot be popular measure but we have to take our medicine instead of thinking about votes.
"This is a clear case where the national insurance has to be increased along with competitiveness, to ensure higher wages. Sweden manages to keep its welfare state by charging a higher national insurance. If NI would increase to between 12 to 15 per cent, our pensions would be guaranteed."
Total expenditure in the first seven months of this year amounted to Lm510.7 million, an increase of Lm38.6 million, or 8.2 per cent, over the Lm472.1 million spent in the same period in 2002. Recurrent expenditure for the period under review made up 58.4 per cent of this year's budgetary estimates.
In these first seven months, capital expenditure increased by Lm13.1 million, or 22.4 per cent and amounted to Lm71.8 million.
Higher expenditure was incurred this year when compared to the corresponding period in 2002 due to a general increase in capital works carried out in the transport (+Lm700,000), health (+Lm11.2 million) and education sectors (+Lm1.7 million).
Within this category, the capital outlay on the Mater Dei Hospital for the first half of 2003 amounted to Lm23.1 million; up from Lm12 million spent on the project during the same period last year.
Personal emoluments in the civil service amounted to Lm114.4 million, 57.9 per cent of the budget forecast (Lm197.8 million). This year's total included the normal incremental increases in line with the civil service collective agreement and the Lm1.75 per week cost of living allowance.
Karmenu Farrugia also points to the high-wage factor within the public service: "Wastage in the civil service is everywhere. Overtime, travelling, high wages for civil servants, wastage of energy. These abuses should be checked. Even unions should allow management to carry out a more efficient operation of their business. Overtime, a ridiculous amount of holidays and half-days are all abuses which have been blessed by government.
"But wastage can be cut down immediately. Civil service intake can start decreasing gradually. I am sure that even in the case of 30-hour weeks, we can have the same amount of work done today in the public service if we had to concentrate on efficiency measures."
A large part of the burgeoning problem represents the outlay spent on social services and the national health system. Equally representative of a satisfactory welfare system and health service, the bulk of expenditure today forms a dangerously enormous part of the country’s GDP.
It is satisfactory to note that increases in revenue were registered in social security (Lm2.4 million). Social security benefits and state contibutions however increased by Lm7.9 million this year and the shipyards pensions by Lm800,000 under the retirement scheme. An increase of Lm2 million were passed on in funds to the Malta Drydocks this year. In real terms, social security contribution have increased Lm5.6 million this year.
The increase, in absolute terms, of Lm17.8 million this year was mainly due to increases in the electoral commission activities (+Lm1.7 million), social security benefits (+Lm6.4 million), social security state contribution (+Lm1.5 million), guaranteed earnings agreement with public transport association (+Lm400,000), streets and roads lighting (+Lm700,000), pensions under the shipyards' retirement schemes (+Lm800,000), agriculture support schemes (+Lm2.8 million), the public private partnership (+Lm2.4 million) and the eGovernment Programme (+Lm300,000).