Is restarting the Excessive Deficit Procedure justified?
As announced by Business Today in last week’s edition, the European Commission last Monday week confirmed that it was going to restart the Excessive Deficit Procedures against Malta for its high Budget deficit in 2008, which reached 4.7 per cent for last year, 1.7 per cent in excess of the EU’s budget deficit limit under the Stability and Growth Pact. Business Today’s CHARLOT ZAHRA spoke to four economists and bankers – veteran economist Karm Farrugia, John A Consiglio, Lawrence Zammit and Labour candidate for the European Parliament elections Edward Scicluna on the significance of this procedure, what effective measures the government should take in order in order to curb this deficit, and the different forecasts issued by the different financial institutions in Malta, among other things.
Karm Farrugia: “The EU Commission is obliged to start it”
What is your reaction to the Excessive Deficit Procedure Deficit against Malta? Do you think that it is justified in view of the high budget deficit reached by Malta last year?
No more than I was expecting. It isn’t really a question of whether the procedure is justified or not – the EU Commission is obliged to start it, although I strongly believe that, in current circumstances, the 3 per cent-of-GDP deficit ceiling needs to be raised to at least 4 per cent, but simultaneously accompanied by a warning that it would have to go down to 2 per cent when the recession is over.
EU Member States need to realise that a maximum level must only apply in a cyclical downturn and that a budget break-even or surplus should be targeted when a country’s annual growth pattern is indicative of a 2 per cent plus.
Medium-term growth stability must be the name of the game. Ireland should have learned this lesson by now.
In your view, what concrete action should the Government take to curb the budget deficit that Malta has incurred last year and likely to incur this year as well? It would be wrong now for the government to turn to the Capital Expenditure budget in an endeavour to reduce the overall deficit.
Instead, the Government must have a good long look at all the items comprising the Recurrent Expenditure budget and cut down heavily on non-essential outlays.
If need be, all salary increments in the public sector should be stalled for a year.
And, perhaps more importantly, the inexplicably current high inflation needs to be tackled seriously – it is making a mockery of present-day economic happenings.
In view of the fact that the European Commission is now saying that the GDP for 2009 will actually shrink by 0.9 per cent and that budget deficit for 2009 will reach 3.6 per cent, do you think that Finance Minister Tonio Fenech would still be able to reach the targets set out in the 2009 Budget of 2.4 per cent growth rate and 1.65 per cent budget deficit rate for 2009? How? Certainly not. Furthermore, it would be dangerous for the economy if the Minister even attempted to cut down this year’s deficit to his set target, especially after he recently solemnly declared that he was contemplating no additional taxes, proffering this as enough reason to dismiss the call for a mini-budget.
What would be, in your view, a more realistic forecast for GDP and Budget deficit for 2009? On what assumptions do you make this calculation? What is your reaction to the latest economic forecast announced by the European Commission on Tuesday, especially with regard to the forecast for GDP contraction in 2009 and a budget deficit of 3.6 per cent for this year?
As I have previously indicated, with the Minister not reducing the planned Capital budget, the GDP in real terms might possibly break even at best this year, but is more likely to dip into negative territory by 0.5 per cent, optimistically speaking.
Contrast this with the average of minus 4 per cent predicted for the whole of the EU and the euro-area.
With regard to the budget deficit, my forecast is 4 per cent. This would not worry me that much if the Capital Budget is not made to take the brunt of the expenditure cuts.
How do you contrast these figures with those given by the Central Bank a few weeks ago, which were still forecasting a growth of 0.5-1.1 per cent and a deficit of 2.4-2.6 per cent for this year? To what do you attribute this difference? The Central Bank is probably more cautiously optimistic than the European Commission. When realism proves elusive, I suppose it is better to err on the brighter side.
Lawrence Zammit: “This is a non-issue”
The EDP slapped by the European Commission to Malta is a non-issue because the Maltese economy is suffering from a global recession, therefore the Maltese Government has to support the economy.
It is also a non-issue because part of the budget deficit for 2008 was caused by the early retirement schemes handed out to Dockyard workers and to subsidise Enemalta Corporation, to keep water and electricity costs down when oil prices were going up.
The third reason why it is a non-issue is that other EU countries are in much worse position than us, given the negative growth rates they are experiencing, which sometimes is as high as minus five per cent.
John A Consiglio: “Given the figures, they have no choice”
What is your reaction to the Excessive Deficit Procedure Deficit against Malta? Do you think that it is justified in view of the high budget deficit reached by Malta last year? My initial reaction to the EU’s starting – or should we actually call it “re-starting”? – this Excessive Deficit Procedure against Malta is simply that the EU is doing its job.
There are clearly stipulated conditions, even in the revised Growth and Stability Pact, which require it so to do, and given the figures they have no choice.
After all that is what seriousness is all about...implementing the rules, not looking at faces (big country, small country), showing integrity and respecting what the figures say, among other things.
In your view, what concrete action should the Government take to curb the budget deficit that Malta has incurred last year and likely to incur this year as well? In situations like this, what do serious Boards of Directors do? They have another serious look at all component items and related structures on both their income and expenditure sides of their income statement, and see where they can increase the former and reduce the latter.
And so, for example, are rents, taxes - including VAT and Income Taxes - being all paid to Government punctually and the structures for ensuring this fully in place and operating well?
Are contractors all giving their contracted value-for-money?
Are projects benefiting from EU funds moving speedily enough including in terms of application submissions, execution, and actual receipt of the funds?
Can certain employers – I’m talking of the targets and performance bonuses brigade! – who are literally sponging dry the work-life balance of their employees be tactically or even forcible made to employ more people so that Government social security and tax income be improved and unemployment benefits paid decreased?
Are simple economies in things like use or re-use of paper and envelopes and the use of mobile phones and electricity, among other things, being made?
Is travelling by all officials being cut to only the absolutely necessary?
Can certain capital projects be postponed? Can a full day’s work be ensured everywhere from everyone, and so on and so forth…
The really important items on both our current income and expenditure sides are of course well known to all in Government, and so their own list to the above would not doubt be much more extensive.
In view of the fact that the European Commission is now saying that the GDP for 2009 will actually shrink by 0.9 per cent and that budget deficit for 2009 will reach 3.6 per cent, is do you think that Finance Minister Tonio Fenech would still be able to reach the targets set out in the 2009 Budget of 2.4 per cent growth rate and 1.65 per cent budget deficit rate for 2009? How? What would be, in your view, a more realistic forecast for GDP and Budget deficit for 2009? On what assumptions do you make this calculation?
There is no contradiction in conceiving a situation where economic growth (GDP) actually grows whilst the budget deficit also grows.
For example, GDP would certainly grow if some initiatives are taken to bring into the official economy figures certain previously unaccounted factually economic work, for instance, the work done by volunteers or even housewives.
But that does not mean that Government’s income or expenditure will necessarily be immediately positively impacted upon...they may on a lagged basis, but not always to the same extent.
So timing comes into this very much too. Some suddenly improving factor (for instance, Smart City or some of Minister Austin Gatt’s projects for Valletta’s harbours moving ahead at some fantastically previously unimagined pace) may suddenly change things for the better, and that would put GDP growth figures suddenly back on target, or even better them.
But I have already given, in this paper in past weeks, what, on current trends, are my expected figures for both GDP and Budget Balance movement rates.
What is your reaction to the latest economic forecast announced by the European Commission on Tuesday, especially with regard to the forecast for GDP contraction in 2009 and a budget deficit of 3.6 per cent for this year? How do you contrast these figures with those given by the Central Bank a few weeks ago, which were still forecasting a growth of 0.5-1.1 per cent and a deficit of 2.4-2.6 per cent for this year? To what do you attribute this difference?
We are here talking about three entities, that is, the European Commission, the Central Bank of Malta, and the Ministry of Finance. In each of them, there are the organisations’ own – totally independent of each other – economic teams, operating with their, again totally independent of each other, tools such as economic models, statistics, and other information gathering sources.
So one does not need to be at all surprised that when they come out with their various forecasts they would differ.
The economic models used in different research institutes can differ for various reasons, for instance. the extent - and sophistication - of variables that are used in them.
Also economics is not only totally statistics, in the sense that even economists can at times differ in the importance which they give to different elements.
The story of US President Truman’s request for a “one-armed economist” is something which we regularly relate to our new economics students at the start of every academic year.
Edward Scicluna: “The strange decision that we were let off scot-free some weeks back” was more surprising
What is your reaction to the Excessive Deficit Procedure Deficit against Malta? Do you think that it is justified in view of the high budget deficit reached by Malta last year? What was surprising was not the Excessive Deficit Procedure which was slapped on us this time, but the strange decision that we were let off scot-free some weeks back because the EU believed our government, that the reported deficit was a one-off.
Any local or foreign economist familiar with our economy could see that this was not so. We are now among the three laggards in the Euro zone. Definitely not a situation to write home about.
In your view, what concrete action should the Government take to curb the budget deficit that Malta has incurred last year and likely to incur this year as well? It all started in October 2007 when Government budgeted an unprecedented revenue forecast unrelated to the expected outcome of the economy.
It was clear to me that if this revenue forecast would not materialise, our public finances would revert back to an over 3 per cent deficit/GDP ratio.
I am getting annoyed that what could be evaluated using a back of the envelope calculation was not caught on the EU radar screen with their sophisticated economic models. But then I am not yet sure they are taking us seriously. Or else we are misreading their style of evaluation.
It looks that each time they just want to call our bluff and when we are caught in our own trap, they pounce. For our own good I just wish they would act much earlier.
For the government, local economists are a bunch of gloomers and doomers. The EU can afford to be neither. But when the government transgresses the EU rules, we still have to see how they would look like.
In view of the fact that the European Commission is now saying that the GDP for 2009 will actually shrink by 0.9 per cent and that budget deficit for 2009 will reach 3.6 per cent, do you think that Finance Minister Tonio Fenech is still able to reach the targets set out in the 2009 Budget of 2.4 per cent growth rate and 1.65 per cent budget deficit rate for 2009? How? This woolly and opaque way of reporting and forecasting must stop. It is an insult to the intelligence of all Maltese and Gozitans living on this island.
How can we state with a straight face we have an international financial centre on the island and then let this fireworks of meaningless economic and financial figures be allowed to be banded about as if it is business as usual. The three public agencies must get their act together.
I am referring to the NSO, the CBM and the Ministry of Finance. I am more than sure they can do it. I know they have qualified people. Their data must converge to the EU’s own estimates and forecasts.
It does not necessarily need to be a replica but some convergence is required. It is quite disquieting that it is not.
What would be, in your view, a more realistic forecast for GDP and Budget deficit for 2009? On what assumptions do you make this calculation? What is your reaction to the latest economic forecast announced by the European Commission on Monday, especially with regards to the forecast for GDP contraction in 2009 and a budget deficit of 3.6 per cent for this year?
How do you contrast these figures with those given by the Central Bank a few weeks ago, which were still forecasting a growth of 0.5-1.1 per cent and a deficit of 2.4-2.6 per cent for this year? To what do you attribute this difference?
I think that the Government has never to date been in such a difficult situation with regard to the economic management of our economy. You have to either inflate or deflate.
Either way, in our situation Government will have to pay a very high price whichever way it goes. Unfortunately it painted itself in a corner with no exit in sight. It cannot say it was not forewarned.
