Budget Analysis 2003 - Part 2 - Riddles for 2003

The Times of Malta



The budget for 2003 pretends that the structural deficit will be just short of Lm75 million. This is some Lm4 million less than the revised estimated deficit for 2002.

However this revised estimate contains one-offs of large magnitude which will not be repeated next year. The extraordinary sale and leaseback Lm21 million cash inflow from MIA structured deal added to the` Lm7.4 million one-off revenue from the Investment Registration Scheme should re-define the real deficit for current year more in the region of Lm106 million. As I explained yesterday this will probably only be realized through Provisional Tax payments which shift to 2002 tax flows that really belong to 2003.

So the improvement in the structural deficit projected for next year is more realistically in the magnitude of Lm32 million.` How is this possible when the economy will grow in nominal terms only 5% and when tax measures introduced amount to Lm2.7 million from excise tax on cigarettes and may be Lm 3 million from VAT on electricity and gas (which are supposed to be covered or absorbed by Enemalta and so could reduce the distributable profits ` though in fact Enemalta is incurring losses). These measures are roughly neutralised by Lm5 million drop expected in Central Bank profits.

`My best estimate is that recurrent expenditure is under-estimated to the tune of Lm20 million.` Commensurate economic growth at nominal 5% could produce roughly Lm20 million increase in ordinary revenues. But these have to finance the increasing recurrent expenditure and an increase of Lm5 million in the capital vote.` A nominal 5% increase in recurrent expenditure would involve an increased spend of Lm32 million. New fiscal measures are neutralised by a drop in Central Bank profits. So where is the expected improvement year on year 2003 over 2002 of Lm32 million coming from`

Just consider that recurrent expenditure in 2002, when government froze the salaries of the civil service, was Lm43 million higher than in 2001. How realistic is it to expect that recurring expenditure in 2003 will increase nominally by less than Lm20 million, inclusive of (i) Lm6 million increase in Programmes and Initiatives related to Agriculture and Fisheries (ii) increase in cost of compliance to the Acquis as well as (iii) cost of holding a referendum and/or an election and (iv) the increase in salaries just negotiated for civil service employees`

My best estimate is that recurrent expenditure is under-estimated to the tune of Lm20 million.

From the revenue side there are also imponderables.` An increase of Lm6 million in miscellaneous receipts is not explained either in the Estimates or in the Budget Speech. Are these tax measures to be announced at the `appropriate` time But mostly what makes a difference is Lm14 million in grant revenue related to a drawdown to be made under the Fifth Financial protocol with Italy. This is on top of the Lm8 million grant revenue from the EU in pre-accession fund.` `The budget has been put together subjectively leading to wherever the Minister wanted it to lead without standing the test of reality.`

The sustainability of the Italian protocol grant revenue when and if government fulfils its ambition for EU membership is highly questionable.` Until recently grant revenue was considered as extraordinary income financing the structural deficit rather than reducing it.` If this prudent system were to be adopted the deficit for next year declared at Lm74 million would increase by at least Lm14 million re Italian Protocol grant and I would further add at least Lm20 under-estimation of recurrent expenditure. The true deficit for next year is more like Lm113 million and that only if new tax measures generating Lm6 million are announced out of budget.

And this does not take into account other financing going on off budget like the School social capital expenditure being financed by bank loans covered by government guarantees for at least Lm15 million.` This makes a mockery of the statement made in Appendix C to the Minister`s budget speech that the government has a declared policy not to provide any further security or comfort or other form of undertaking to credit or loans raised by public entities. Is the Ministry ignoring declared policy` ` Frankly the figures do not add up. The budget has been put together subjectively leading to wherever the Minister wanted it to lead without standing the test of reality. We have been through this before in 1996. The Minister, against VAT department advice, projected VAT revenue to hit Lm110 million in order to issue a pre-election budget with a manageable deficit of Lm39 million.` When Lino Spiteri walked into the Ministry late in October 1996 he was told that VAT revenue would be Lm78 million and the deficit would be Lm112 million. Which is quite near to where the deficit for 2003 will finally land at the `appropriate time.

(to be concluded) `