The Malta Independent
Today we start a decisive quarter; a quarter that waves good-bye to cheap summer talk and chatter and forces us to look at ourselves critically to see whether we are measuring up to the EU challenge and whether we really mean to tackle our problems at source.
Today we start a decisive quarter; a quarter that waves good-bye to cheap summer talk and chatter and forces us to look at ourselves critically to see whether we are measuring up to the EU challenge and whether we really mean to tackle our problems at source.
At face value the figures for pubic finance for the eight months to August seem to indicate that the sharp deterioration in public accounts experienced during 2003 has been halted and we are registering a marginal improvement. The deficit, at Lm113 million for the first eight months of 2004, is superficially Lm13 million better than the deficit registered at the same point in 2003.
In 2003, the last four months of the year were cash flow positive for
the government to the tune of Lm21 million. If government achieves a similar
performance in the last four months of 2004, the final deficit for the year
would be Lm92 million – in line with the Lm95 million budgeted.
But scratching beneath the surface it is easy to see that things are not what they seem to be. The government's financial position at a given point in time can be influenced positively or negatively by the timing of collections due to government and the payments of dues by government.
Total expenditure as at August 2004 was 61.8 per cent of the year’s total. At the same point last year, the percentage outlay of the year’s total was 66.94 per cent. A like with like comparison would seem to indicate that five per cent of the annual budget expenditure is being delayed, helping to present a more positive interim picture which may not result, as the postponed expenditure has unavoidably to be paid.
Even if one makes adjustment for a compensating two per cent delay in collection on the revenue side, a net three per cent delay would amount to nearly Lm30 million, dwindling the Lm13 million superficial improvement.
The fiscal deficit cannot be addressed by the temporary postponement of payments. If anything, given the huge impact of government operations on the rest of the economy, these causes serious cash-flow problems to suppliers who depend on government’s prompt payment on contracted terms – something that medicine suppliers and construction contractors assert has become a rarity, with the norm being several months’ delay.
But there are more worrying trends which demand attention. The public debt has grown from Lm1,031 million two years ago to Lm1,351 million this August, a whopping increase of Lm320 million in two years, equivalent to 31 per cent. The speed of debt accumulation is even more worrying than its size. It would be extremely dangerous to the stability of the financial system for the government to continue to borrow at this pace. Unlike what many seem to think, debt and deficits do matter.
Indeed, we are lucky that international economic conditions have permitted us the luxury of financing these debts domestically at quite cheap rates on a long-term basis. This notwithstanding, pure interest servicing of the public debt is amounting to no less than Lm80 million per annum, which brings the average interest on public debt to a low rate of less than six per cent.
Just imagine what a burden we will have to carry if we continue to accumulate debt far outstripping the rate of economic growth and if we are forced by international economic conditions to finance new borrowings and re-finance maturing ones at a rate higher than we are carrying at present. International interest rates will not remain at such low levels for ever.
All this will bring us to the real test that Prime Minister Gonzi will face as he presents the first budget of his administration later this quarter. This will be a real test to prove whether Gonzi really means business or whether he will persist in his predecessor’s ingrained habit of avoiding hard decisions, opting instead for easy problem financing options which have blown our national debt to its current horrendous levels without much really to show for it.
This will be the quarter where one expects the government to take serious measures to address the lack of competitiveness of our product on the global market. All this is very much tied to the decision to enter into the waiting room of the Exchange Rate Mechanism, where we will have to spend a few years proving that we can maintain exchange rate stability in the context of stable macro-economics conditions, to graduate for Euro membership sometime after 2007.
The hard choices here will involve whether we can take measures to make the economy more flexible and competitive, meaning that the burden of adjustments will continue to be carried by private sectors of employees who are finding employers more intent on rolling back past concessions than considering new ones, or whether the process can be aided by macro-economic adjustment to our rate of exchange regime, to spread the burden of adjustment across all sectors, even public sector employees who are not subject to the competitive pressures of the global village.
At the end of this crucial quarter we will be in a better position to pass judgement on the true colours of the Gonzi administration. So far we have had nice words which have been contradicted by the real deeds, as in the case of theBrussels
But scratching beneath the surface it is easy to see that things are not what they seem to be. The government's financial position at a given point in time can be influenced positively or negatively by the timing of collections due to government and the payments of dues by government.
Total expenditure as at August 2004 was 61.8 per cent of the year’s total. At the same point last year, the percentage outlay of the year’s total was 66.94 per cent. A like with like comparison would seem to indicate that five per cent of the annual budget expenditure is being delayed, helping to present a more positive interim picture which may not result, as the postponed expenditure has unavoidably to be paid.
Even if one makes adjustment for a compensating two per cent delay in collection on the revenue side, a net three per cent delay would amount to nearly Lm30 million, dwindling the Lm13 million superficial improvement.
The fiscal deficit cannot be addressed by the temporary postponement of payments. If anything, given the huge impact of government operations on the rest of the economy, these causes serious cash-flow problems to suppliers who depend on government’s prompt payment on contracted terms – something that medicine suppliers and construction contractors assert has become a rarity, with the norm being several months’ delay.
But there are more worrying trends which demand attention. The public debt has grown from Lm1,031 million two years ago to Lm1,351 million this August, a whopping increase of Lm320 million in two years, equivalent to 31 per cent. The speed of debt accumulation is even more worrying than its size. It would be extremely dangerous to the stability of the financial system for the government to continue to borrow at this pace. Unlike what many seem to think, debt and deficits do matter.
Indeed, we are lucky that international economic conditions have permitted us the luxury of financing these debts domestically at quite cheap rates on a long-term basis. This notwithstanding, pure interest servicing of the public debt is amounting to no less than Lm80 million per annum, which brings the average interest on public debt to a low rate of less than six per cent.
Just imagine what a burden we will have to carry if we continue to accumulate debt far outstripping the rate of economic growth and if we are forced by international economic conditions to finance new borrowings and re-finance maturing ones at a rate higher than we are carrying at present. International interest rates will not remain at such low levels for ever.
All this will bring us to the real test that Prime Minister Gonzi will face as he presents the first budget of his administration later this quarter. This will be a real test to prove whether Gonzi really means business or whether he will persist in his predecessor’s ingrained habit of avoiding hard decisions, opting instead for easy problem financing options which have blown our national debt to its current horrendous levels without much really to show for it.
This will be the quarter where one expects the government to take serious measures to address the lack of competitiveness of our product on the global market. All this is very much tied to the decision to enter into the waiting room of the Exchange Rate Mechanism, where we will have to spend a few years proving that we can maintain exchange rate stability in the context of stable macro-economics conditions, to graduate for Euro membership sometime after 2007.
The hard choices here will involve whether we can take measures to make the economy more flexible and competitive, meaning that the burden of adjustments will continue to be carried by private sectors of employees who are finding employers more intent on rolling back past concessions than considering new ones, or whether the process can be aided by macro-economic adjustment to our rate of exchange regime, to spread the burden of adjustment across all sectors, even public sector employees who are not subject to the competitive pressures of the global village.
At the end of this crucial quarter we will be in a better position to pass judgement on the true colours of the Gonzi administration. So far we have had nice words which have been contradicted by the real deeds, as in the case of the
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