The latest figures published by the National Statistics Office (NSO) last Wednesday showed that the final budget deficit figure for 2008 stood at 4.7 per cent of the GDP, well above the Government’s latest forecast in the 2009 Budget of a €200 million budget deficit. Business Today spoke to three economists – Labour MEP candidate Edward Scicluna, Lawrence Zammit and veteran economist Karm Farrugia about the latest NSO figures and the impact of a high budget deficit on the Maltese economy. Report by CHARLOT ZAHRA
Edward Scicluna : “I never thought that my evaluation on the deficit would be vindicated so soon”
What is your reaction to the latest NSO figures which showed that in 2008, Malta suffered a budget deficit of €266 million, equivalent to 4.7 per of the GDP, as against a forecast in the 2008 budget of 96 million or 1.7 per cent of GDP made in last year’s budget? I never thought that my recent opinion on Malta’s excess deficit published last March (BT 4 March 2009) was going to be vindicated in such a short time.
I had opined then that by deciding that the European Commission (EC) would not be taking any further measures against Malta – unlike the other excess deficit countries – was either a sign of naivety on the part of the EC or else it was just a game of bluff on the part of the EC in order to see whether Malta can keep up with the game.
I believed that it could not be possible for the EC to swallow our Government’s thin excuse that our deficit was just due to a one time slippage caused by the Dockyard early retirement scheme and the use of the energy subsidy.
Barely two months later the cat came out of the bag... Our deficit is indeed structural in more sense than one.
In your view, which were those areas of income in which the Government overshot significantly its budgetary targets for 2008? The government is consistently overshooting budgetary targets across the board. It is clearly a symptom of a government which still has to restructure and reform its whole expenditure programme.
The government first revised its budgetary forecast for 2008 from 98 million to 200 million in November, however in the last two months of last year, the budget deficit increased by a further €66 million. To what do you attribute this further fiscal slippage at the end of the year? What concrete measures should the Government take this year to ensure a more disciplined management of its income and expenditure and prevent further fiscal slippage as we have seen last year? You just cannot see the problem incrementally anymore. The story goes back to 2002. I had then presented a paper to the Chamber of Commerce entitled “Cutting the Deficit – We can do it.” It was clearly stated then that the IMF’s experience of most countries which had attempted fiscal consolidation suggested that short term success could not be sustainable if the deficit is reduced just from the revenue side.
You just cannot avoid the difficult and painstaking exercise of restructuring and overhauling the whole public sector programmes.
Ireland tried it our way and failed. The second time it succeeded, but only after having reformed its public sector programmes.
What a waste. We spent almost a decade wherein the tax burden was raised to such a level in such a short time that it flattened our rate of economic growth. Now we find that our public finances are almost back to square one.
Lawrence Zammit: “Businesses tend to delay payments to Government during a recession”
What is your reaction to the latest NSO figures which showed that in 2008, Malta suffered a budget deficit of €266 million, equivalent to 4.7 per cent of the GDP, as against a forecast in the 2008 budget of €96 million or 1.7 per cent of GDP made in last year’s budget? There are three factors to consider and which have contributed to the eventual result. The first is the monies paid to the employees of the Malta Shipyards for early retirement, the second is the subsidies paid to Enemalta Corporation to enable it to absorb the impact of the fuel price increase.
The third is an evident non payment of taxes due by businesses. This last phenomenon is nothing different from what happened also abroad. Businesses tend to delay payments to government during a recession.
What concrete measures should the government take this year to ensure a more discipline management of its income and expenditure for this year and prevent further fiscal slippage as we have seen last year? One needs to ask what is more important at this time. Is it to save jobs or not to allow fiscal slippage? To my mind the top priority for government is to save jobs.
Anyone who insists that avoiding fiscal slippage should be government’s top priority is implying that he cares little about saving jobs in this country.
In view of these latest figures, as well as the revision of the CBM’s revision of the GDP forecast for 2009, do you think that the GDP forecast for 2009 of 2.4 per cent growth for this year given by Finance Minister Tonio Fenech in the 2009 Budget speech is still tenable? I do not think it is tenable, but it does not matter if we manage to maintain unemployment at sustainable levels. This is the attitude of most countries and I do not believe we should be any different.
If not, what would, in your view, be a more tenable figure for the GDP growth for this year? I am not privy to the full set of data that is available to government and so making a prediction would indeed be dangerous.
Karm Farrugia : “It is clear that our planners went wide astray”
What is your reaction to the latest NSO figures which showed that in 2008, Malta suffered a budget deficit of €266 million, equivalent to 4.7 per of the GDP, as against a forecast in the 2008 budget of 96 million or 1.7 per cent of GDP made in last year’s budget? Not surprised at all. Even in a normal cyclical scenario, we are used to having actual figures deviating considerably from those previously budgeted. Budget speeches are nearly always more glowing than down-to-earth.
Last year the global slowdown in production was here not even believed it would happen and, when it did start during the third quarter we were continually reassured that our economy was far too resilient to disturb us as citizens and as a budgeting administration.
The ‘culprits’ were identified as the Shipyards and Enemalta’s increased subsidy.
Why was no provision at all made when the 2008 budget was presented in late 2007?
Was not the Shipyards’ dire financial situation already known then with an EU-imposed cut-off line for subsidies end-2008?
And who wasn’t expecting the price of oil on the international markets to shoot up?
But, even apart from these two factors, now that we know the adjusted updated budget deficit, it is clear that our planners went wide astray. I don’t want to be unkind and advise them to work on a new econometric model.
In your view, which were those areas of income where the Government overshoot significantly its budgetary targets for 2008?
The Government first revised its budgetary forecast for 2008 from €98 million to €200 million in November, however in the last two months of last year, the budget deficit increased by a further €66 million. To what do you attribute this further fiscal slippage at the end of the year? The revenue side of the equation wasn’t too bad last year except towards its end. It is the recurrent expenditure part that the government has shown inability to control and contain, and this aside from Shipyards and Enemalta.
Moreover, if it wasn’t for savings on the Capital Programmes, last year’s deficit would have been even wider. That is certainly not good for any economy facing an oncoming recession.
In 2007 with no threats of slowdown in sight, we spent much more – nearly double – on capital projects than in 2008, as the latest published statistics clearly show.
What concrete measures should the Government take this year to ensure a more discipline management of its income and expenditure for this year and prevent further fiscal slippage as we have seen last year? First of all, the government must show its acceptance that, resilient as we are or can be, we simply cannot escape the effects from the heavy global economic slowdown.
Simultaneously it should carry out a serious exercise by outside professionals to see where the recurrent spendings can be reduced without hurting possibly any sector of the population.
The capital projects part of the budget must be enhanced to stimulate investment in the economy, preferably in infrastructure, both physical and social, creating new productive jobs which, through the multiplier effect, will stem the decline in spending elsewhere and, more importantly and together with stimulated private sector investment, render the economy capable of justifying a series of balanced and surplus budgets beyond 2010.
And lastly, somehow to prevail on the banks to think less of profits and more to added value in our economy which enriched them beyond belief over the last 11 years.
In view of these latest figures, as well as the revision of the CBM’s revision of the GDP forecast for 2009, do you think that the GDP forecast for 2009 of 2.4 per cent growth for this year given by Finance Minister Tonio Fenech in the 2009 Budget speech is still tenable or not? Why?
If not, what would, in your view, be a more tenable figure for the GDP growth for this year?
Convincingly not. Even if we do take the measures I suggested, the inevitable time-lag between decision making and implementation would not permit us to achieve that kind of growth forecast. A zero growth in my view would be an achievement for this current year.
How will the latest figures affect the Finance Ministry’s projection of a budget deficit of 1.7 per cent of GDP for this year as stated in the 2009 Budget Speech? Is it still possible or not? Why?
If not, what would, in your view, be a more tenable figure for the budget deficit in 2009? Why? I can’t possibly foresee how we could manage to contain this year’s budget deficit to below the 3 per cent-to-GDP ceiling, more so if we continue experiencing shrinkage in the GDP, that is, recession.
Without the data which officialdom possesses, it is very hard to make a forecast, but I dare say that this year’s budget deficit will be not less than 4 per cent of GDP.
