The Malta Independent
16th July 20004
The Convergence Programme, that Malta presented to the EU explaining how the budget deficit will be brought below the 3% criterion for accession to the Euro monetary union, makes interesting reading.
It is clearly written by economists for economists with little or no involvement of the real people who make the economy grow. It was readily accepted by the politicians as it meets, superficially, the need to reign in the deficit from 9.7% of the GDP in 2003 (6.5% if the special one-off Malta Shipyards transaction is excluded) down to 5.2 in 2004, to 3.7% in 2005 to 2.3% in 2006 and to 1.7% in 2007.` What a feat! We would have 1.3% of GDP room for manoeuvring and still be within the Maastricht criteria!
The question how is it possible that what we have not done in eight years since the structural deficit was discovered in 1996, and in spite of government success in stimulating its tax revenue flows during this period, is now going to be achieved in three odd years without further tax measures except for an eco tax?
The first check I made is whether this planned improvement is coming from above normal economic growth. But the assumptions in-built in the study re GDP growth in fact under-state our growth potential. The Programme plans average annual real growth of 1.75% whereas EU `15 is forecasting a real average growth of 2.3% p.a. and the US a real average annual growth of 4.8%. If anything we should aim to do better in order to maximise our true potential and speed up our catching up with EU average GDP.
I looked at the revenue side to see if there are plans for further tax measures beyond what has been divulged. But hereagain government revenue is planned to keep normal growth in line with the rate of growth of the whole economy.
The real change catalyst to deliver the objective to bring government budget deficit must, by elimination, lie in reigning in government expenditure. Hurrah! This is exactly what most economists have been preaching. Stop the tax-and-spend habits and attack the problem from the expenditure side as this is what has eroded the increased tax flows which government has enjoyed these last 9 years since VAT was introduced in 1995.
And there it is. Government expenditure is planned to drop from 52.4% of the GDP in 2003 to 44.4% of the GDP in 2007. A drop of 8% of the GDP in 2007 money is equivalent to Lm161 million which on its own accounts for 95% of the drop in the relative size of the deficit from 9.7% to 1.4%.
I searched in the report to find how such miraculous efficiency gain in government expenditure is going to be achieved. Under the relative explanations in para 3.1.2 of the Report I found that recurrent expenditure is expected to drop by 3% of the GDP between 2004 and 2007.` This means that if the special Shipyard item in the 2003 figures accounts for a further 3.2% one expects savings in Capital expenditure of around 2% of GDP to achieve the planned savings in government expenditure.
Now one can accept that government may achieve the savings in capital expenditure by restraining from undertaking new projects once those in hand are completed. The impact of this investment contraction on economic growth can only be cushioned if compensating investment is made by the private sector through Private Public Partnerships or on its own.
But the real challenging bit is the planned reduction in recurrent expenditure. This plan is contradicted by the report narration that states that government employment is to remain constant at 2003 levels (no reductions ` not even through natural wastage) whilst social expenditure is to practically stay constant in absolute terms between now and 2007. How this will be achieved depends on outcome of negotiations with MCESD regarding the costs of Pensions and the cost of Health Services.
The practicality of putting pressure on social expenditure to deliver the efficiency gains in public expenditure is to my mind very doubtful, apart from its very unsocial aspects. But I cannot fail to compare the strategy adopted by the Maltese Government with that of the British Government as expounded by Chancellor Gordon Brown this week as he delivered the UK Budgetary framework for the next 4years.
Now the vibrant state of the British economy is a complete antithesis to ours. It has consistent growth, low inflation, quasi full employment and the monetary authorities are having to raise interest rates to cool it down to protect its sustainability. Its level of deficit and debt is very low and well under control. Chancellor Brown announced substantial social expenditure increase in Health and Education ( apart from similar increases in Defence and Law and Order spending) and to finance it without creating deficit problems is suggesting the rundown of 30% of public sector jobs to deliver the necessary efficiency in public spending.
We seem to be doing the opposite. We are protecting central government employment and its exorbitant cost and inefficiencies (where is the value of e-government if it cannot be translated into operational cost reductions in manpower terms?) and putting the pressure on social expenditure, on those who can least protect themselves!
When the detail of the planned expenditure economies is revealed we may well find that the devil is in the detail that the economist`s report approved by the EU has so conveniently avoided.
16th July 20004
The Convergence Programme, that Malta presented to the EU explaining how the budget deficit will be brought below the 3% criterion for accession to the Euro monetary union, makes interesting reading.
It is clearly written by economists for economists with little or no involvement of the real people who make the economy grow. It was readily accepted by the politicians as it meets, superficially, the need to reign in the deficit from 9.7% of the GDP in 2003 (6.5% if the special one-off Malta Shipyards transaction is excluded) down to 5.2 in 2004, to 3.7% in 2005 to 2.3% in 2006 and to 1.7% in 2007.` What a feat! We would have 1.3% of GDP room for manoeuvring and still be within the Maastricht criteria!
The question how is it possible that what we have not done in eight years since the structural deficit was discovered in 1996, and in spite of government success in stimulating its tax revenue flows during this period, is now going to be achieved in three odd years without further tax measures except for an eco tax?
The first check I made is whether this planned improvement is coming from above normal economic growth. But the assumptions in-built in the study re GDP growth in fact under-state our growth potential. The Programme plans average annual real growth of 1.75% whereas EU `15 is forecasting a real average growth of 2.3% p.a. and the US a real average annual growth of 4.8%. If anything we should aim to do better in order to maximise our true potential and speed up our catching up with EU average GDP.
I looked at the revenue side to see if there are plans for further tax measures beyond what has been divulged. But hereagain government revenue is planned to keep normal growth in line with the rate of growth of the whole economy.
The real change catalyst to deliver the objective to bring government budget deficit must, by elimination, lie in reigning in government expenditure. Hurrah! This is exactly what most economists have been preaching. Stop the tax-and-spend habits and attack the problem from the expenditure side as this is what has eroded the increased tax flows which government has enjoyed these last 9 years since VAT was introduced in 1995.
And there it is. Government expenditure is planned to drop from 52.4% of the GDP in 2003 to 44.4% of the GDP in 2007. A drop of 8% of the GDP in 2007 money is equivalent to Lm161 million which on its own accounts for 95% of the drop in the relative size of the deficit from 9.7% to 1.4%.
I searched in the report to find how such miraculous efficiency gain in government expenditure is going to be achieved. Under the relative explanations in para 3.1.2 of the Report I found that recurrent expenditure is expected to drop by 3% of the GDP between 2004 and 2007.` This means that if the special Shipyard item in the 2003 figures accounts for a further 3.2% one expects savings in Capital expenditure of around 2% of GDP to achieve the planned savings in government expenditure.
Now one can accept that government may achieve the savings in capital expenditure by restraining from undertaking new projects once those in hand are completed. The impact of this investment contraction on economic growth can only be cushioned if compensating investment is made by the private sector through Private Public Partnerships or on its own.
But the real challenging bit is the planned reduction in recurrent expenditure. This plan is contradicted by the report narration that states that government employment is to remain constant at 2003 levels (no reductions ` not even through natural wastage) whilst social expenditure is to practically stay constant in absolute terms between now and 2007. How this will be achieved depends on outcome of negotiations with MCESD regarding the costs of Pensions and the cost of Health Services.
The practicality of putting pressure on social expenditure to deliver the efficiency gains in public expenditure is to my mind very doubtful, apart from its very unsocial aspects. But I cannot fail to compare the strategy adopted by the Maltese Government with that of the British Government as expounded by Chancellor Gordon Brown this week as he delivered the UK Budgetary framework for the next 4years.
Now the vibrant state of the British economy is a complete antithesis to ours. It has consistent growth, low inflation, quasi full employment and the monetary authorities are having to raise interest rates to cool it down to protect its sustainability. Its level of deficit and debt is very low and well under control. Chancellor Brown announced substantial social expenditure increase in Health and Education ( apart from similar increases in Defence and Law and Order spending) and to finance it without creating deficit problems is suggesting the rundown of 30% of public sector jobs to deliver the necessary efficiency in public spending.
We seem to be doing the opposite. We are protecting central government employment and its exorbitant cost and inefficiencies (where is the value of e-government if it cannot be translated into operational cost reductions in manpower terms?) and putting the pressure on social expenditure, on those who can least protect themselves!
When the detail of the planned expenditure economies is revealed we may well find that the devil is in the detail that the economist`s report approved by the EU has so conveniently avoided.
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