The Times of Malta
The success and failure of the Budget for 2002 has to be measured against the criterion of whether it is stimulating economic growth. This is a very important test.
Ultimately budgets and other economic tools are not used to reduce or augment the deficit, cut or add taxation, increase or decrease government expenditure. These are all intermediate targets.` The final objective is solid and sustainable economic growth because only this could lead to improved standard of living for the entire population.
Tackling the budget deficit in a practical and sustainable manner must include strong economic growth as an indispensable part of the policy mix. We have been grappling with unsustainably high public budget deficit since 1996 and on budget figures would still have not resolved it by the end of 2002. 7 years of deficit accumulating at an average real rate of Lm100 million p.a.` has added no less of Lm700 million to our financing needs which translated itself into doubling of the national debt from Lm500 million at the end of 1996 to more the Lm1 billion presently. The remaining Lm200 million odd were or are to be financed by privatisation one-off revenues.
Had we maintained stability in our expenditure and revenue patterns so that additional tax revenues went to reduce the deficit by` just Lm10 million p.a. after meeting the unavoidable expenditure creep,` a deficit of Lm110 million odd at the end of 1996 would now be Lm60 million. Economic growth of 8% pa. nominal compound would have given us a 2001 GDP of Lm 1764 millions. The deficit would today stand at comfortable` 3.42% of the GDP and we would not be talking about it except in terms of achievement.
I use the 8% factor because I firmly believe that a small nation like ours needs an annual average real growth rate of 6% which loaded to an inflation rate of 2% gives the 8% nominal growth.
The truth is that this budget is hostage to the ones before it.` You cannot achieve this sort of success if` first you get elected on a platform that the deficit identified by your predecessor was a myth, and then the first thing you do on getting elected is to` settle electoral obligations by giving generous wage increases to an over-bloated and inefficient public sector.
Next year the budget is projecting nominal growth of 5% slightly up on the 4% being registered this year. But these are nominal figures.` Translated into real figures with real inflation hovering around 4% we are actually travelling in negative GDP territory as was the case in the 3rd quarter of this year. And that was before the 11th September effect started to impact the international linkages of our economy.
Being content with a near zero real GDP growth for next year and doing little or nothing about it is indeed pitiful and should give a thumbs down to the assessment of the budget against economic growth criterion.
Other countries, that because of their size and advanced state of development are happy with 2% - 4% real growth rates, are taking active measures to stimulate growth. Particularly after the events of 11th September monetary policy has been eased reducing interest rates in successive notches to stimulate investment and consumption. And fiscal policy is revisiting Keynes to leave more spending power in the hands of the consumers.
Financial mismanagement by the same Minister who presented his 8th budget allowed him little or no room to manoeuvre with similar measures. Instead of tax rebates we get higher taxes intended to whip away a further Lm 53 million of disposable income through increased tax transfer to the government.
An in order to contain the worrying growth of the public debt which forces additional interest burden each year the government is having to resort to wholesale privatisation at a time when the scenario is more conducive for share buybacks rather than share issues.
Privatisation has become a funding exercise so much so that the government needs to net Lm47 million in the course of the next 4 weeks.` Not much room for negotiations to get a fair price!
To see the difference between macro-economically responsible privatisation and irresponsible funding motivated privatisation compare the floatation of 40% of Maltacom to the 70% sale of Mid-Med to HSBC. Maltacom today returns annual profits in the Lm15 million region as against to the Lm2 `Lm3 million that its predecessor used to generate. Under the admirable leadership of Tony Meilaq first and Maurice Zarb Adami later, it is offering products at the very edge of technology at an internationally competitive price and still delivering enhanced value to both clients and shareholders. The government`s 60% remaining equity` is worth much more than the 100% it owned prior to privatisation even at the currently depressed equity price levels.
Mid-Med privatisation` is a different affair. Government has no equity left in the Bank to enjoy the efficiency growth. In reality the Minister himself had to criticise the Bank for showing efficiency growth only in selling its parents` wealth management products rather than in assisting the local economy to revert to sustainable growth paths.` HSBC profits are showing scant growth over that of its predecessor even though it shows little social respect in establishing the price for its services.
Failure to achieve sustainable economic growth is forcing the government to fritter away privatisation revenues rather than re-invest them in new growth generating projects or debt reduction. The budget motto could well be God helps my successors that will find little or no resources to help engineer a real` economic turnaround.
The success and failure of the Budget for 2002 has to be measured against the criterion of whether it is stimulating economic growth. This is a very important test.
Ultimately budgets and other economic tools are not used to reduce or augment the deficit, cut or add taxation, increase or decrease government expenditure. These are all intermediate targets.` The final objective is solid and sustainable economic growth because only this could lead to improved standard of living for the entire population.
Tackling the budget deficit in a practical and sustainable manner must include strong economic growth as an indispensable part of the policy mix. We have been grappling with unsustainably high public budget deficit since 1996 and on budget figures would still have not resolved it by the end of 2002. 7 years of deficit accumulating at an average real rate of Lm100 million p.a.` has added no less of Lm700 million to our financing needs which translated itself into doubling of the national debt from Lm500 million at the end of 1996 to more the Lm1 billion presently. The remaining Lm200 million odd were or are to be financed by privatisation one-off revenues.
Had we maintained stability in our expenditure and revenue patterns so that additional tax revenues went to reduce the deficit by` just Lm10 million p.a. after meeting the unavoidable expenditure creep,` a deficit of Lm110 million odd at the end of 1996 would now be Lm60 million. Economic growth of 8% pa. nominal compound would have given us a 2001 GDP of Lm 1764 millions. The deficit would today stand at comfortable` 3.42% of the GDP and we would not be talking about it except in terms of achievement.
I use the 8% factor because I firmly believe that a small nation like ours needs an annual average real growth rate of 6% which loaded to an inflation rate of 2% gives the 8% nominal growth.
The truth is that this budget is hostage to the ones before it.` You cannot achieve this sort of success if` first you get elected on a platform that the deficit identified by your predecessor was a myth, and then the first thing you do on getting elected is to` settle electoral obligations by giving generous wage increases to an over-bloated and inefficient public sector.
Next year the budget is projecting nominal growth of 5% slightly up on the 4% being registered this year. But these are nominal figures.` Translated into real figures with real inflation hovering around 4% we are actually travelling in negative GDP territory as was the case in the 3rd quarter of this year. And that was before the 11th September effect started to impact the international linkages of our economy.
Being content with a near zero real GDP growth for next year and doing little or nothing about it is indeed pitiful and should give a thumbs down to the assessment of the budget against economic growth criterion.
Other countries, that because of their size and advanced state of development are happy with 2% - 4% real growth rates, are taking active measures to stimulate growth. Particularly after the events of 11th September monetary policy has been eased reducing interest rates in successive notches to stimulate investment and consumption. And fiscal policy is revisiting Keynes to leave more spending power in the hands of the consumers.
Financial mismanagement by the same Minister who presented his 8th budget allowed him little or no room to manoeuvre with similar measures. Instead of tax rebates we get higher taxes intended to whip away a further Lm 53 million of disposable income through increased tax transfer to the government.
An in order to contain the worrying growth of the public debt which forces additional interest burden each year the government is having to resort to wholesale privatisation at a time when the scenario is more conducive for share buybacks rather than share issues.
Privatisation has become a funding exercise so much so that the government needs to net Lm47 million in the course of the next 4 weeks.` Not much room for negotiations to get a fair price!
To see the difference between macro-economically responsible privatisation and irresponsible funding motivated privatisation compare the floatation of 40% of Maltacom to the 70% sale of Mid-Med to HSBC. Maltacom today returns annual profits in the Lm15 million region as against to the Lm2 `Lm3 million that its predecessor used to generate. Under the admirable leadership of Tony Meilaq first and Maurice Zarb Adami later, it is offering products at the very edge of technology at an internationally competitive price and still delivering enhanced value to both clients and shareholders. The government`s 60% remaining equity` is worth much more than the 100% it owned prior to privatisation even at the currently depressed equity price levels.
Mid-Med privatisation` is a different affair. Government has no equity left in the Bank to enjoy the efficiency growth. In reality the Minister himself had to criticise the Bank for showing efficiency growth only in selling its parents` wealth management products rather than in assisting the local economy to revert to sustainable growth paths.` HSBC profits are showing scant growth over that of its predecessor even though it shows little social respect in establishing the price for its services.
Failure to achieve sustainable economic growth is forcing the government to fritter away privatisation revenues rather than re-invest them in new growth generating projects or debt reduction. The budget motto could well be God helps my successors that will find little or no resources to help engineer a real` economic turnaround.
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