Sinking Funds Can`t Save a Sinking Ship

The Malta Independent of Sunday

When in September 1998 Minister John Dalli found himself in charge of administering public funds much earlier than he ever expected, he knew better than anyone else that Alfred Sant’s government was not exaggerating the extent of the fiscal deficit problem.

“Cannily he devised a multi- pronged strategy to contain the harsh impact of an exploding public debt without, in any event addressing the underlying problem”

Cannily he devised a multi- pronged strategy to contain the harsh impact of an exploding public debt without, in any event addressing the underlying problem.

The first  steps were to overstate the deficit as at the end of 1998.   A deficit which as at the end of September 1998 for the relative 9 months was reported by the incoming administration at Lm88 million, in the last quarter of 1998 was turned to a deficit initially of Lm162 million and eventually re-stated at Lm150 million.   Acceleration of expenditure, delay of revenue and passage through the Consolidated Fund of expenditure long accumulating in the Treasury Clearance Fund enabled the Minister to establish a comfortably high deficit with which to benchmark his own future performance.

He then took a simple administrative step that by the stroke of a pen gave a double whammy to public finances.   He changed the government financial procedures to avoid the need for the government to provide any sinking funds for local stocks and to liquidate the sinking funds as the relative loans mature.   Through this simple measure he sourced a substantial amount of interest free funding with which to finance the recurring deficit.

When you and me borrow from the bank we are expected to make regular repayments and eventually to pay off the whole loan.    With this in mind government regulations used to provide for the sinking funds to be created obliging  the government to put aside regular annual amounts to accumulate enough funds to repay the loans as and when they mature.

“Basically the thinking is that government loans will never be repaid and therefore there is no need to provide for their repayment!”

Every year until Min Dalli was returned to office in 1998 the government budget provided for sinking fund loan amortisation under the vote ‘public debt servicing’.   By the stroke of a pen Min Dalli not only  freed himself from the obligations to make further provisions for the sinking fund on new local loans, but also  provided that accumulated amounts in the sinking fund were to be  taken by government as a financing item as the old loans get rolled-over into new ones not conditioned by a sinking fund.

Basically the thinking is that government loans will never be repaid and therefore there is no need to provide for their repayment!

What this has meant in practice is that since it went into effect in 1999 until the end of 2001 the government has sourced Lm37 million from the sinking funds.   In simple language were it not for this measure the government would have had to borrow an additional Lm37 million increasing the public debt by this amount.

But this is not the whole story.   The other shot in the arm, which the Minister helped himself to, is that by freeing himself from the need to make provisions for the sinking funds,  he saved some Lm12 million p.a. in recurrent expenditure in the form of public debt servicing which was effectively re-styled public debt interest.

So basically were it not for this simple administrative step the budget deficit for 2001 would have been Lm12 million higher for public debt servicing and public debt would have been Lm73 million higher ( Lm37 million sourced form the sinking funds and Lm12 million p.a.  for three years in additional financing needs to make additional provisions to the sinking funds) which would at least have increased public debt interest by another Lm4 million p.a.  

“Playing around with sinking funds cannot save the sinking ship of our public finances”

To make a real public deficit comparison the stated deficit of Lm99 million for 2001 would have to be re-stated to Lm115 million.     Compare this to the true deficit of Lm113 million deficit of 1997, the only full year under Labour, ( stated deficit of Lm137 million less Lm24 million  one off investment in Malta Drydocks) and you understand why I argue that the underlying deficit is not being addressed.

Ordinary revenue increased from Lm504 million in 1997 to Lm667 million in 2001, an increase of Lm163 million.   This increase all happened in the period 1999 – 2001 under Min Dalli’s charge meaning an average Lm54 million of new taxes in each of these three years.

If there is anything that Min Dalli can certainly take credit for, it is tax collection efficiency.   The whole credit proves pious , however, as this increased tax revenue is just being frittered away in useless recurrent expenditures  and heavy interest payment  commitments.

Playing around with sinking funds cannot save the sinking ship of our public finances.  Nor can public finances be saved by strategically short-sighted privatisations that give full control over the airport monopoly to minority strategic partners , maximizing one-off revenues and jeopardising future annual revenues that will be creamed away by the minority partners through self-serving technical service agreements .

The sinking ship of public finances can only be saved by a broad based strategy undertaken by the creativenessof  a government properly mandated to do what needs to be done to tackle the problem at source and not cosmetically at the edges.