Budget Analysis 2003 - Part 1 - Exploding the Myth

 

4^th December 2002

The Times of Malta

 

 

 

The budget presented last week by Min Dalli, his 9^th in 10 years, is built on the premise and assertion that the government is succeeding to control the deficit and hence can loosen somewhat the grip as a pre-election sweetener for the bitter taste of 4 budgets loaded with fiscal measures and enforcement.

 

This myth needs to be exploded.

 

The accompanying Table shows the January-September official public finance figures for the 5 years 1998-2002.   I choose to cut off in September as this is the last month of Labour administration in 1998 and before Mr Dalli cooked the books and changed the parameters to turn a deficit of Lm88 million in September into Lm150 million by December 1998.  

 

The Table makes the calculation on the basis of 1998 system of reporting and then adjusting to current systems at the bottom to reconcile to reported figures which now take grant revenue as recurring income rather than financing item as hitherto, and excludes sinking fund contributions from the measurement of structural deficit.

 

 

Comparative Government Finance Data:
January to September 1998 -2002
Description			Jan - Sept	Jan-Sept      1999	Jan-Sept      2000	Jan-Sept      2001	Jan-Sept      2002
			1998
				Lm thousands
Total Revenue			507,134	530,313	459,446	545,951	524,602
consisting of:
	Grants		8,054	7,874	6,001	456	1176
	Loans		110,000	84,000	0	79,059	0
	Receipts from Sale of Shares		35,336	37,511	12,000	0	19048
	Other extraordinary receipts			0	0	0	21000
	Ordinary Revenue	A	353,744	400,928	441,445	466,436	483,378
of which:
	Customs and Excise		35,342	40,921	41,714	38,937	44,137
	VAT & Replacement		52,437	63,623	77,539	83,315	83,219
	Income Tax		76,778	90,327	104,463	113,447	125,541
	Social Security		93,768	99,025	112,017	120,554	121,277
	Others		95,349	107,034	105,712	110,182	109,204
Total Expenditure		B	441,775	492,467	510,567	554,543	597,262
consisting of:
Recurrent Expenditure			356,674	382,078	402,765	433,601	470,984
of which:
	education		28,064	29,559	30,689	35,080	35,831
	social security (benefits)		118,492	126,239	129,829	134,341	141,788
	others		210,118	226,280	242,247	264,181	293,365
Public Debt Servicing			40,822	46,090	49,547	51,722	55,316
Capital Programme			44,278	64,299	58,255	69,219	70,963
of which:
	Productive Investment		15,494	35,653	25,336	28,144	26,446
	Infrastructure		18,089	17,956	16,800	23,474	21,700
	Social		10,696	10,690	16,118	17,601	22,817
Gross Government		Debt	726,272	858,403	900,238	1,003,175	1,042,666
	Deficit	B-A	88,031	91,539	69,122	88,107	113,884
add back	MIA						21000
	grant revenue		8,054	7,874	6,001	456	1,176
	Sinking fund contr		7000	7102	6399	6156	5622
	Deficit as re-stated		72,977	76,563	56,722	81,495	86,086
Source NSO

 

By 1998 measurement rules a deficit of Lm88 million has in fact increased to Lm113 million.   By current measurement rules the comparable deficit of Lm73 million is now Lm86 million but only after taking into ordinary revenue an extraordinary item of Lm21 million from MIA structured deal of sale and leaseback.

 

The October 2002 figure shows that the deficit further increased to Lm91 million.   Yet Minister Dalli has assured us it will reduce to Lm78 million by December 2002.   For this to happen the government’s cash flow has to be net positive by Lm13 million during the final 2 months of the year.   This has never happened before.   But Minister Dalli assured us that the cash flow improvement will materialise because the payment rules have been changed.   

 

“As sure as night follows day large corporations, mostly government controlled (like Maltacom) or influenced (like Bank of Valletta) can expect that their December 2002 PT instalment will be fixed at whatever it takes to hit the figure that the Minister wants to hit.”

It is true that provisional tax payment in the 4 months to December is generally equal to the sum of the April and August instalments as the PT has been structured to be paid in rates of 20%, 30% and 50%.   But so it was already last year and the government cash-flow in the last 2 months of the year was still slightly negative.   So what has changed?

 

The change is a convoluted Legal Notice issued in July 2002 under number 204 and further amended in September 2002 under No. 268 whereby the Commissioner is given powers to determine the amount of PT that tax-payers have to pay in the December instalment (the first one due after the coming into effect of the Legal Notices).  

 

As sure as night follows day large corporations, mostly government controlled (like Maltacom) or influenced (like Bank of Valletta) can expect that their December 2002 PT instalment will be fixed at whatever it takes to hit the figure that the Minister wants to hit.   In simple words the Minister has given himself the right to bring forward the tax payments due by large corporation in subsequent years to the current year.

 

This is yet another example of how the Minister’s energy is focused on fudging the figures and hiding the deficit rather than on solving it.

“The myth that the deficit is being successfully addressed needs to be exploded, once and for all.”

 

So in simple language although we have paid collectively in 2002 Lm240 million more taxes, fees or whatever you wish to call over what we had paid in 1998, the deficit problem is still there, untouched, left as a legacy for a future Labour government to address.   The increased revenue from taxation has all been frittered away in uncontrolled expenditure.   Nothing, absolutely nothing has gone to address the deficit which has nominally increased not reduced from where Labour left it in September 1998.

 

In further corroboration one may look at it from the financing side.   In the 4 years to September 2002 the national debt increased by Lm317 million.   Privatisation revenues brought in Lm105 million.  Extraordinary revenue from winding-down of sinking funds produced Lm37 million and the MIA extraordinary income produced Lm21 million.   In total these financing sources into the Consolidated Fund produced Lm480 million.  This averages Lm120 million p.a.   That it is true size of the obstinate deficit which John Dalli created in and prior to 1996 and which will just not go away.

 

The myth that the deficit is being successfully addressed needs to be exploded, once and for all.

 

(to be continued) …..