Budget Analysis 1 - Words and Figures Disagree

The Times of Malta



How do you form an opinion as to whether the budget is good, bad or neutral` I suggest the adoption of three criteria against which I will analyse the budget in this three part series.` The first criterion is whether the budget is actually helping to address the structural fiscal deficit.

The answer is a straight no. To arrive at these conclusions one has to make a substantial effort to re-arrange the figures in a consistent manner in order to allow a proper like for like analysis.` The accompanying tables do just that. It takes a lot of effort to arrive at it as the published figures seem to make purposeful re-arrangement of figures making like-for like comparison very difficult to achieve.

To give an example whereas prior to 1998 public debt servicing was taken as a recurring expense in the current version it is only public debt interest which is taken as a recurrent expense. The difference between servicing and interest is around Lm12 million contributions to sinking fund, which the Minister is no longer providing for due to pure internal administrative decision. Another example is grant revenue. Traditionally grants were considered a financing item and not as recurring revenue as is current practice.` For next year this inflates revenues by Lm8.5 million.` Yet another example is Lm7.4 million which the government expects to net from the one-off foreign investment registration scheme, which will operate only until next year.` Can this be considered as ordinary recurrent revenue` To my mind this is better classified as extraordinary non-recurring item.` It makes a difference of Lm7.4 million.

Making these adjustment as in Table 1 will turn a reported projected deficit of Lm 77.7 million to a true deficit of Lm107.1 million on the same level of year 2000 and 9% more than that projected for the current year 2001.

Comparative Government Finance Data: January-September 1998 - 2001

















Description

Jan - Sept Jan-Sept` 1999 Jan-Sept` 2000 Jan-Sept` 2001

1998







Lm thousands













Total Revenue

507,134 530,313 459,446 545,951 consisting of:











Grants

8,054 7,874 6,001 456

Loans

110,000 84,000 0 79,059

Receipts from Sale of Shares

35,336 37,511 12,000 0

Other extraordinary receipts



0 0 0

Ordinary Revenue A 353,744 400,928 441,445 466,436 of which:











Customs and Excise

35,342 40,921 41,714 38,937

VAT & Replacement

52,437 63,623 77,539 83,315

Income Tax

76,778 90,327 104,463 113,447

Social Security

93,768 99,025 112,017 120,554

Others

95,349 107,034 105,712 110,182













Total Expenditure B 441,775 492,467 510,567 554,543 consisting of:









Recurrent Expenditure

356,674 382,078 402,765 433,601 of which:











education

28,064 29,559 30,689 35,080

social security (benefits)

118,492 126,239 129,829 134,341

others

210,118 226,280 242,247 264,181













Public Debt Servicing

40,822 46,090 49,547 51,722













Capital Programme

44,278 64,299 58,255 69,219 of which:











Productive Investment

15,494 35,653 25,336 28,144

Infrastructure

18,089 17,956 16,800 23,474

Social

10,696 10,690 16,118 17,601













Gross Government Debt [1]

726,272 858,403 900,238 1,003,175















Deficit B-A 88,031 91,539 69,122 88,107













[1] At end of











Table 1

Clearly one might be tempted to say that this is still lower than the reported Lm150 million of 1998. Hold your breadth. The reported deficit of Lm150 million for 1998 was conveniently fabricated in the last quarter of 1998, soon after the current administration took office. As can be seen from the Table 2 on a January to September basis the 1998 deficit was Lm88.1 million which by co-incidence is exactly the same deficit for the same period of 2001.` This is a perfect like for like comparison quoting only official figures from CoS publications.` If you can believe that in the last quarter of 1998 the accumulated deficit shot up from Lm88 million to Lm150 million whereas this year it will reduce to Lm82 million as the Minister would have us believe than you are free to fool yourself.

Reality is that next year we will collectively be transferring to the government some Lm220 million more than we did in 1998. That is an average of incremental tax of Lm55 million each year. With decent expenditure control it should have taken two years maximum to reduce the structural fiscal deficit to within 3% of the GDP. Yet here we are 4 years and Lm220 million tax revenue later still suffering from a fiscal deficit, which if the economy grows as projected at the end of next year it will still be 6.2% of the GDP.

Comparative Government Finance Data: January-December 2000 - 2002















Description

Jan - Dec Jan - Dec Jan - Dec 2002vs2001

2000 actual 2001 Revised 2002 budget % increase





Lm thousands















Total Revenue

629,652 722,355 820,160

consisting of:











Grants

9,549 1,332 8,543



Loans

454 1,415 416



Receipts from Sale of Shares

12,000 47,000 85,000



Other extraordinary receipts





7,400



Ordinary Revenue A 607,649 672,608 718,801 6.87% of which:











Customs and Excise

55,140 62,450 67,800 8.57%

VAT & Replacement

104,065 116,000 126,500 9.05%

Income Tax

149,511 167,400 186,100 11.17%

Social Security

162,018 178,500 193,400 8.35%

Others

136,915 148,258 145,001 -2.20%













Total Expenditure B 716,229 771,143 825,925 7.10% consisting of:









Recurrent Expenditure

549,837 616,918 657,651 6.60% of which:











education

40,038 47,238 49,266 4.29%

social security (benefits)

175,883 183,500 189,600 3.32%

others

333,916 386,180 418,785 8.44%













Public Debt Servicing

67,840 71,933 72,850 1.27% of which:











Contribution to Sinking Fund

12,250 12,285 11,800 -3.95%

Interest Payments

54,441 58,620 59,750 1.93%

Repayment of Loan

1,148 1,028 1,300 26.46%













Capital Programme

98,552 82,292 95,424 15.96% of which:











Productive Investment

35,807 25,364 25,000 -1.44%

Infrastructure

33,800 29,858 30,731 2.92%

Social

28,946 27,070 39,693 46.63%















Deficit B-A 108,580 98,535 107,124 8.72%

Table 2

Clearly the problem is not from the revenue side.` On the contrary the Government can claim credit for starting to get serious about tax enforcement and tax collection. The problem is from the expenditure side. Recurrent expenditure planned for next year at Lm 658 million is 28% more than the Lm516 million unduly inflated figure of for the whole of 1998. Add to this the increase in servicing a bloated public debt and load upon it capital expenditure on projects like the Tal-Qroqq hospital that is galloping out of control and you get a situation where all additional tax revenues are being frittered away. The fiscal deficit in absolute terms is still largely at the level it was when first discovered by the incoming labour administration in the fall of 1996.

On the first criteria of whether the budget is addressing the structural public deficit the budget fails. Tomorrow I will analyse whether is helping to address the deficit in a relative way by stimulating the growth side.