NEWS | Wednesday, 03 September 2008

Analysts sceptical of budget surplus by 2010

Charlot Zahra
Economists who spoke to Business Today this week said that they were not surprised by the latest budget deficit figures for July announced by the National Statistics Office (NSO) last Thursday.
However, with this shortfall, the general feel is that the Government has seriously dented its chances of reaching a budget surplus in two years’ time.
Asked for his reaction to the latest budget deficit figures, which showed that budget deficit had grown by 36 per cent in the first seven months of the year when compared to the same period last year, senior economist Edward Scicluna said that there was “no surprise at all. It was so very predictable last October when the 2008 Budget was announced.
“I found this out when I realised that the Government was factoring-in a higher tax burden (as a per cent of GDP), when all the programmes agreed with the EU and the IMF were pointing the other way.
“It was a clear case of an overly optimistic revenue stream, which could not materialise given that the economic environment was not getting any better,” Scicluna told Business Today.
Asked to elaborate on the factors which, in his view, led to this deterioration in the Government’s financial position, Scicluna said: “All the planned expenditure programmes were known and announced at the time.
“Of course no monthly cash-flow statements were presented, so it could be that the present position is not as bad as it seems, but basically still untenable,” he explained.
Asked about what concrete action the Government should take to correct its budget deficit, Scicluna said that there were “no secrets about this. Either it cuts expenditure or it increases taxation or does both.
“The problem with cutting expenditure is that only capital projects are readily suitable for cutting back. If the Government’s wage bill has increased by 10 per cent, what can Government do about it before the end of the year?” he asked.

Asked whether he thought that the Government would be able to keep up with its projected budget deficit figures of €68 million at the end of this year or not, the senior economist did not mince his words. “No”.
“I reckon that it would be very hard, with this fiscal slippage, not finish in the same position we ended last year.
“We would still be hovering around the 2 per cent rather than gravitating towards the 1 per cent of GDP level as projected,” Scicluna told Business Today.
Asked whether it was a realistic proposition that the Government would be able to make up for the shortfall in revenue in the remaining five months of the year as Finance Minister Tonio Fenech was claiming, he said: “Since our public accounts are still on a cashflow basis nothing is impossible, but postponing payments to a future year would not gain us anything.”
Prime Minister Lawrence Gonzi set out a target of a budget surplus by the end of 2010, but in view of this shortfall, Scicluna is not confident on this target being any longer achievable by the stipulated date. “If Government continues with its commitment, a budget surplus would be possible, realistically by the year 2012,” he said.
Likewise, veteran economist Karm Farrugia said he was “not surprised at all” with the July deficit figures and the sharp rise registered in the first seven months of this year when compared to the same period last year.
“How can one forget we had general elections during this year’s first quarter?” he said.
“During the second quarter, solid in harness, the administration should have endeavoured to cut down on its expenditure in order to compensate for the previous quarter’s inevitable profligacy. It did not.”
Farrugia said that while economic growth is still in positive territory, as the revenue side of the Government’s financial equation has been “quite satisfactory. Sadly, it is not so the expenditure side.
Questioned as to what concrete action the Government should take to correct its budget deficit, Farrugia said there should be “A thorough, but swift, ‘due diligence’ examination by outside experts to identify wasteful, excessive or unnecessary public expenditure.”
Asked whether he thought that the Government would be able to keep up with its projected budget deficit figures of €68 million at the end of this year and whether it was a realistic proposition that the Government would be able to make up for the shortfall in revenue in the remaining five months of the year as Finance Minister Tonio Fenech is claiming, Farrugia said emphatically: “No, I do not.
“And I certainly would not advise the Finance Minister to try it out yet. At least not before the first draft of the experts’ report which I recommend has been submitted to him,” the veteran economist warned.
Farrugia also questioned the need for a balanced national budget by then, “especially with a threatening slowdown or recession nearer than the horizon and which might engulf us even throughout 2009.
“It is more important to reduce the budget deficit slowly but surely even if over a longer stretch than planned and even if global circumstances compel us to halt the reduction for a while,” he insisted.
“Otherwise we risk depriving a running economy of the oxygen it requires in its running against recessionary headwinds.”

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