Thursday, 30 November 2000

A Budget 2001 Analysis 1 - The Perspective

The Times of Malta

The 2001 Budget in Perspective

The reaction to the 2001 Budget was an evident organised concerted artificial blitz by the government friendly media depicting the author, the Minister of Finance, as a super-human financial genius, head and shoulders above all else.

It is therefore dutiful as a prelude to this analysis to place the 2001 Budget against a medium term background. It is the fifth consecutive budget that has budget deficit control as the primary macro-economic objective.` The fact that five years and Lm` 217 million additional` tax revenue (see Table 1) later we would still be facing a horrendous budget deficit problem at the end of the year 2001 shows the magnitude of the problem which developed in the country`s finances during 1996.


Tax Revenues ` Lm millions

1996 2001 Increase

Income Tax

93 163 70

Social security

126 182 56

Direct Tax

219 345 126

Customs and excise

32 62 30

Licences , Taxes & Fines

52 76 24

Consumption tax

79 116 37

Indirect Tax

163 254 91

Total Tax revenue

382 599 217

By Government own estimates the Budget deficit next year is targetted at Lm83 million compared to Lm133 million in 1996 (these figures are challenged later on in this analysis) a drop of a mere Lm50 million in spite of increased tax revenue increases of Lm217 million. This demonstrates the structural nature of the problem and the momentum it had when Labour entered the government in the last quarter of 1996. We have yet to tame the horse five years later!

And it is appropriate to underline that the same Minister who is now being depicted by friendly press as the super hero capable of resolving the budget deficit is the very same architect who with four budgets between 1992 and 1996 created the structural deficit problems in the first place.

Between 1992 and 1996 any sensible Minister of Finance would have sequenced his strategies as follows:

Control of government expenditure, especially recurrent expenditure. Introduce VAT to establish a tax net capturing services within its base and provide the raw data for income tax enforcement. Enforce direct taxation. Increase in the lower tax-free or moderately taxed income bands.

Instead of doing these steps in sequence the Minister confused the order to 4, 2,3, 1. And as far as 1 is concerned it is still mere intentions and vague platitudes.

The consequences of these wrongly sequenced strategies is the development of a horrendous budget deficit which is proving so hard to tame. This is coupled with the explosion of the national debt which has become a huge burden even merely to service the interest payments and this at a time of record low interest rates. I just shudder to think the consequences on public finances if full capital liberalisation were to co-incide with an international increase in interest rates!

At a time when chronic deficit countries like US, UK and Italy moved their budgets to manageable deficits (Italy) or sizeable surpluses (UK & USA) our finance super-hero ran havoc with the public finances trusted under his care.

I dispute whether in effect the budget deficit is effectively being controlled. Table 2 gives a like for like comparison of government finances for each year from 1996 till 2001 with revised estimates figures for 2000 and budget figures for 2001. The budget figure for 1998 has been adjusted to remove one off items which the Minister included in that year`s budget and which would normally have been spread on following years.

As can be seen the real reduction in deficit between 1996 and 2001 is not Lm50 million as earlier argued but a mere Lm30 million if a true apples for apples comparison is made. These are the government`s own figures divested from convenient manipulations. A mere reduction in budget deficit of Lm30 million in spite of tax revenue increases of Lm217 million. This is not the work of a super finance hero. It is work of the shoddy hands that created the deficit in the first place and the shoddier still approach of someone who takes the easy way out of trying to solve the problem by increasing tax revenues without making any decent attempt to control expenditure. This goes against all principles of modern economic management. It shows the accountant within our Minister supercedes any traces of the economist within him.

Tomorrow: The Social Aspects of the Budget

Alfred Mifsud

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