A Budget 2001 Analysis 3 - The Economic Aspects

The Times of Malta



Mismanagement of the First Degree

A government budget is not meant purely to be a sterile exercise in planning government financial income and expenditure streams. Its higher order objective is to stimulate and shape the nation`s economic growth in a sustainable well-balanced manner.

To measure whether the budget reaches these macro-economic objectives the following benchmarks are to be used:

Is the budget rolling back the frontiers of the state`s intervention in the economy in order to allow more room for private sector initiative`

Is the budget stimulating sensible investment in infrastructure (by the public sector) and in productive investment (by the private sector)`

Is the budget stimulating efficiency growth by reducing the impact of direct taxation and is it controlling consumption growth by taxing increased consumption levels.

These are the three crucial tests that a budget has to pass if it is to serve its purpose of being an effective macro-economic tool. In each of these three tests the 2001 budget fails miserably.

Rolling back the frontiers of the state (a Thatcherite` plagiarism) has become an accepted norm of modern economic management. Whilst privatisation might play a part in this it is not the crucial element. Often privatisation involves those government controlled firms which are already run on acceptable efficiency levels. Given that monopolies are not privatised, no government controlled entities would qualify for privatisation if inefficiently run. Therefore privatisation does not necessarily produces efficiency gain. Next year the government is planning only Lm40 million privatisation revenues which could be obtained by the mere privatisation of the remaining 25% stake of Bank of Valletta leaving some Lm15 million to spare on current valuations. If budget figures are anything to go by privatisation activity planned for next looks pretty subdued. One questions how this could be equated with the zero coupon privatisation bonds so dismally launched just a few weeks ago, promising priority allocation in forthcoming privatisation initiatives.

Where rolling back the frontiers of the state really produces the much needed efficiency gains is in control of government recurrent expenditure where government becomes leaner and more effective,` demanding less tax revenues to support delivery of its services.` Government recurrent expenditure and public debt servicing for next year is planned to reach Lm672 million.` Taking a GDP figure of Lm1672 million ( as in the medium term financial strategy of 1998) this is equivalent to 40% of the GDP. In the `dark` socialist years of 1985 to 1987 this averaged 37%.` Last year this was 39%. Rather than rolling back the frontiers of the state this budget rolls them forward.` Government remains the sick fat guy occupying too much space in the economy and sucking in resources from the hard-working productive sector who perform in spite of, rather than because of the government.

On the second test of stimulating investment the budget also fails. Not one single measure in the budget is meant to stimulate private sector investment . On the contrary the private sector has to face increased costs (wages and energy costs) whilst having to grapple with local demand in subdued mode as the middle class is creamed off of its discretionary spending power.

Government`s own capital investment programme remains on low key with total investment (excluding subsidies) at Lm60 million of which only Lm33 million is productive and infrastructural.` This is more or less on the same level as the last two years.` The massive investment needed in road improvement, in public transport and environmental projects will just have to wait better times and a more imaginative administration.

On the third test of stimulating efficiency by reducing the impact of direct taxation and increasing consumption taxes this budget again fails. Direct taxes (income tax and National insurance) are projected at Lm345 million equivalent to 20.6% of the GDP whereas consumption and other indirect taxes` are projected Lm254 being 15.2% of the GDP. Compare these to past trends of the last 10 years.

Taxes as a percentage of GDP



Year

Direct

Indirect



%

% 1985

20.29

10.38 1990

17.09

12.43 1991

16.57

12.86 1992

17.36

12.67 1993

19.37

11.96 1994

18.43

11.47 1995

18.47

14.84 1996

17.32

14.35 1997

18.07

13.69 1998

17.57

12.74 1999

18.77

14.29 2000

19.84

14.58 2001

20.63

15.19

The ratio of direct taxation has ominously crept back to the 1985 level even though consumption and indirect level has reached its highest ever level. Whilst the latter is encouraging the former runs counter to efficiency drives needed by the economy. Rather than force direct taxes out of the population stifling the initiative to work harder there was a strong case for increasing indirect taxes on the true discretionary spending to bring about a rough balance between direct and indirect taxation.

Not only this has not happened but the Minister made the colossal mistake of` extending the tax base on collective investment schemes. This is an error of judgement as big as the announced re-introduction (later withdrawn) of the capital assets return in the 1998 budget speech. People who shifted their financial wealth into these long term assets believing in the Government strategy of encouraging long term savings and repatriation of exported capital will now have a serious re-think and could be motivated to re-export their capital. This is the last thing our economy presently needs.

Even as a tool of macro-economic policy this budget has failed to deliver a clear strategy for wealth creation to re-vitalise an economy` already suffering from serious imbalances and threatened by collapse of domestic demand. If we cannot perform serious re-structuring in the background of healthy international growth and export demand for our goods and services just imagine the problems we will have on the next downturn of international economy. Clearly we are living for the day.

Alfred Mifsud