Friday 2 July 2004

Cosmetics will get Us Nowhere

The Malta Independent
2nd July 2004

 

One can understand that government is desperate for any scrap of statistic that might throw any evidence, no matter how patchy, that the economy is getting better, that its measures are working and that the priority issue of getting public finance under control with the deficit on a structural downward trend, is showing progress.

So when last Friday the National Statistics Office released the public finance figures for May 2004 the government was quick to blow its trumpet when the structural deficit showed a reduction of Lm19 million from the same position last year i.e. a deficit of Lm86 million for the 5 months to May 2004 as against a deficit of Lm 105 million for the five months to May 2003.

A reduction of 18% is not to be scoffed at. To be sure one should expect a substantial reduction considering that VAT increased from 15% last year to 18% this year.` In fact revenue from VAT increased from Lm48 million to Lm58 million during the 5 months` in spite of loss of VAT cash flow in May under the new importation arrangements for items sourced from the internal EU market.

But for believers like me in real rather than cosmetic change, deeper analysis of the published figures clearly shows that there is no room for optimism about public finance being really on the mend.

The improvement of Lm 19 million over the corresponding position of a year ago is totally attributable to two items. Firstly the government registered `a net increase of Lm7.8 million under Licences Taxes and Fines mostly by way of signing-on fees received upon privatising the operations of the lotteries earlier this year`. It`s a moot point to argue whether or not it is technically correct to include this one-off item as regular recurrent revenue. Annual recurrent revenue certainly it is not.

If the Lotto and Lotteries were privatised in the form of sale of shares of a government owned commercial company then such revenue would not have been considered as ordinary and recurrent but would have been categorised as an exceptional financing item. The fact that the Lotto/Lotteries was still a government department which could not be privatised through a sale of shares but only through outsourcing the operation under a long-term license agreement, does not change the fact that such revenues are anything but ordinary and recurrent.

So out of the Lm19million improvement, Lm 7.8 million is due to exceptional privatisation revenues that technically, though substantially incorrectly, have been taken as ordinary and recurrent. That leaves a real improvement of Lm11.2 million.

This is all explained by a drop of Lm12.1 million in capital expenditure from Lm54 million last year to Lm41.9 million this year.` In the absence of any evidence that any capital project has been cancelled or postponed this drop in capital expenditure has all the ingredients of a postponement of works and/or payments rather than a real saving that can be relied upon to recur each year.

So official statistics, correctly interpreted, offer no room for optimism that the public deficit is in fact being addressed. Recurrent expenditure increased by Lm11.5 million whilst interest payments on public debt increased by Lm3.5 million.` Jointly such increase in recurrent expenditure fully absorbed the real increase in recurrent revenue of Lm14 million (net of the Lotto license fees) being increased take from VAT and Income Tax.`

The tax and spend worm is still there eroding the energy of the productive sector due to government`s inability to address the weakness in its finances `by tackling the real source of the problem i.e. recurrent expenditure.

I maintain that the real level of structural deficit, judging by the performance of the first 5 months of 2004, is still hovering at the same levels of 2003, excluding the exceptional Shipyards adjustments in the final 2003 figures, and we are still way way above the deficit of Lm68 million registered in the first five months of 2002.

Problems can only be addressed by real solutions based on a clear plan of action. This has not happened. Claiming success where none is evident reinforces my suspicion that government is continuing in its vain pursuit of attempting to solve the problem by hope and prayer rather than by applying carefully thought out and widely supported solutions.

Indulging in hope and prayer is a praiseworthy if considered as a supporting exercise for the real plan of action, but certainly not as a replacement thereof. Cosmetics will get us nowhere.

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