The budget presented yesterday by Finance Minister Tonio Fenech goes some way towards illustrating that Prime Minister Lawrence Gonzi is a prisoner of his own ambitious pledge to turn the deficit into a surplus by 2010.
Ignoring the advice of practically every seasoned economist on the island, Gonzi’s administration has forged ahead with its intention to impose steep water and electricity tariffs for commercial and domestic use, passing on to the consumer a €55 million subsidy to Enemalta which the government claims it can no longer afford.
It is a policy that can only make sense in the light of the abovementioned commitment, made in the budget presented in 2007, which also projected that the deficit would “be Lm30.2 million (1.21 per cent of GDP) in 2008... going down to Lm3.8 million (0.17 per cent of GDP) in 2009, and turning into a positive balance of Lm25.5 million (0.95 per cent of GDP) in 2010.”
But while Dr Gonzi appears determined to steam ahead with this mission, none of his advisors appears to have realised what is common knowledge to everyone else: i.e., that the above target is simply no longer achievable... in part because of the international credit crunch, but in large part also because of the same government’s foolish pre-election spending spree, which can now be seen to have wrought havoc with Gonzi’s previous predictions.
Inauspiciously for government, the European Commission yesterday confirmed as much with the publication of its own, considerably more down-to-earth budgetary forecast. Contrary to Gonzi’s prediction two years ago, the Commission expects our deficit will grow to 3.8 per cent of GDP at the end of the fiscal year... in other words, 0.8 per cent above the Maastricht criteria.
The report attributes this deterioration to increased expenditure on the government side, indicating three major contributors to the unexpected budgetary nosedive: “a higher increase in the wage bill on account of additional recruitment and higher wages, in particular in the health sector; higher subsidies given the decision to freeze water and electricity prices and the sharp rise in the oil price, and; early retirement schemes in preparation for the privatisation of the Malta shipyards...”
At a glance the Commission’s prediction, especially its reference to the surcharge and the oil price fluctuations, appears to vindicate the government’s decision to stick to its guns on the energy tariffs.
But this is a superficial analysis. For one thing, the imposition of tariffs would make sense in the context of a growing economy, but is at best questionable in the present international crisis... a fact repeatedly stressed by many of the social partners, not least the MHRA.
Besides, the wage increase is accounted for by a veritable bonanza of jobs dished out on the eve of the March 8 election: a ploy identical to that which the same Nationalist Party had cried blue murder over in 1987.
In other words, while some of the economic conditions leading us to this impasse were clearly out of the government’s immediate control, many were actually of the government’s own making. It is astonishing that, in this day and age, we continue to witness such blatantly partisan measures, aimed at benefiting only the party in government at the expense of the entire nation. Unfortunately, such is the state of play in a political landscape as intensely (some would nonsensically) polarised as ours.
Meanwhile, the increased tariffs are to be offset by only minimal tax relief, and even then, affecting only a small section of the economy.
Also as expected, the government sought refuge in the international economic crisis to justify this volte-face. But while there may be some merit in the argument, it sits uneasily alongside the same government’s current economic policy, which also runs counter to the global drive to inject more capital into world markets.
While other countries have launched financial packages at aimed stimulating their ailing economies, and the International Monetary Fund is drawing on its own reserves in order to help bail out emerging markets in Asia and elsewhere, Malta stands alone in its dogged insistence on doing the very opposite: rather than pumping money into the economy, the Maltese government is placing additional financial burdens on private enterprise and families alike.
Pushing the 2010 target for a balanced budget by a year is hardly convincing enough that government has fully understood what its stubborness led to. It simply proves it had no other option but to realise that the target was impossible to achieve. One will now have to see whether we will realistically be able to achieve it by 2011.
Until yesterday, Tonio Fenech was still in time to scale down his economic programme and bring into conformity with realistic expectations. But with Budget 2009, we now need to ask ourselves if the country’s finances are indeed in “a safe pair of hands”, as we had been assured before the last election.
