From Where the Growth

The Malta Independent 

The Budget presented last Monday is a deja vue. In 1999 the Minister of Finance published a projection of public finance up to 2004 which targeted that the budget deficit for 2003 to be 5.38% of GDP and Public Debt to be 57.36% of GDP.` Instead 2003 deficit will be 6.31% of GDP and the Public Debt will be 68.93% of GDP.

By everybody`s admission the patient is sick and the medicine is not working. Yet the Budget presented last Monday does nothing more than prescribe more of the same tax raising measures which were somewhat eased between 2002/2003, certainly with the elections in mind, and are now being put back in 2004 to the same level of 1999-2001.

Tax revenue growth which had come down from Lm60 million in 2000 and Lm53 million in 2001, to Lm41 million in 2002 and Lm 33 million in 2003, is expected to grow again next year by Lm59 million.

Yet just as the deficit was not controlled in 1999-2001 despite of hefty increase in the tax take, the same will happen again. In Appendix D to the Budget speech there is stated:

 

"The deficit (for 2003) would be equivalent to 6.3% of the GDP. One should note that, were it not for a serious and timely cost cutting exercise that was made half way through the year, in the expenditure of Government Departments and Public entities, the deficit this year would have certainly gone up to 7.3% of GDP".

Does the Budget Minister expect our gratitude for reining back after the election the control he let go of before it? Are we playing political games with public finances? Why was such control exercised only half way through the year and not on each and every single day of the year for the last seven years since the problem of the exploding public deficit was exposed late in 1996? 

The government insists on solving it own deficit problems by taxing its citizens.  Growth is nowhere to be seen and indeed government is only targeting nominal growth of 3.5% in each of the next 2 years. What the budget should have done is take measures to ensure that we get real growth in the order of 6% p.a. on a consistent basis. This can only be done if we get our economy competitive again and efficient enough to attract substantial FDI flows. Nothing of this sort has been provided for in the budget. It is the work of an accountant and not of an economist. It provides for deficit reduction through taxation rather than growth.

Taxation is easy. Using the middle class as sitting ducks to extract their purchasing power and compensate them on a minimum wage basis, requires no ingenuity. Raising excise duty on cigarettes has become a budget bore.` Raising VAT by 3% is a simple administrative step. But such measures will simply make the economy even less competitive as inevitably they raise inflation rendering real growth more elusive.

The fallacy of this approach is borne out in the government`s approach towards the Euro. The Governor of the Central Bank has gone on record that he favours early entry of the Maltese Lira into the Euro.` The Prime Minister expressed his willingness to oblige. The Budget Minister in his speech was even more specific.` He made a categorical declaration that he was `in favour of an early adoption of the Euro. This being so, it would, therefore, be appropriate to take the first step by applying soon after membership next May to participate in ERM II by early 2005.

This means that Malta is planning to join the Euro in early 2007 after the obligatory two years waiting period in the ERM II. To do so we have to reduce not just the budget deficit to 3% by 2006, which is at least on paper is provided for in the budget projections, but we have to reduce the public debt to below 60% of the GDP. However appendix D to the budget speech shows that by end 2006 in spite of Lm135 million extraordinary revenues from privatisations expected over the period 2004-2006, we would still have a public debt of 68.4% of the GDP. The 8.4% excess over the Maastricht criteria is equivalent to Lm160 million. No flick of the fingers really!

Not even on paper are we trying to get close to the Maastricht criteria and reality has a consistent habit of turning out worse than paper projections. Without growth there is no solution to our economic maladies and this budget does not provide for growth. Quite the opposite!