The US have the Congressional Budget Office, the UK has instituted the Office for Budget Responsibility, The Netherlands the Central Planning Bureau, Sweden the Fiscal Policy Council and Hungary the Fiscal Council. The EU has agreed to work out standards for such fiscal councils to be tasked with providing independent analysis, assessments and forecasts.
Such fiscal councils need to be independent and their financing has to be beyond the discretion of incumbent governments they are meant to monitor, to ensure that they are not abolished, or starved of funds, if their independence starts creating discomfort to the executive arm of democracy.
Some might argue that our fiscal position is not in crisis and the need for such a fiscal watchdog is as unnecessary as trying to solve a problem that does not exist. I beg to differ. Firstly because such watchdogs are meant to look beyond the current fiscal position and to express opinions on the fiscal sustainability of current or prospected policies (so that the Governor of the Central Bank would not remain the only Cassandra in town whose voice is quickly ignored by both sides of the political divide who cannot handle uncomfortable truths), and also because the current fiscal situation is not as good as it is made to be.
Politicians’ time frame rarely goes beyond the next election. So the Governor’s warning that our current policies of students’ grants and free universal health services are fiscally unsustainable will come to haunt future governments, not the current administration. Democracy works in a way that the incumbent is faulted for the sins committed by predecessor just like Obama is paying for the fiscal largesse and economic disaster inherited from Bush. So incumbents have no incentive to take unpopular pre-emptive measures to avoid future disasters which have a long gestation period beyond the next election. An independent and effective fiscal council would be tasked to bring out these hidden truths and to educate the public about the long-term bitter consequences of short-term fiscal sweeteners.
No country in the world, no matter how rich pays its students to go for tertiary education but some provide it free of charge, while socially sensitive but not so rich countries offer education financing which graduates would have to repay during their professional years. No country in the world provides its citizens with universal free entitlement to public health and elderly care; social conscience would suggest that such entitlements ought to be offered only to the needy out of the taxation of the rich. Taxing the rich to provide the same rich with free health service is a wasteful and economic nonsense justified only by our inability to enforce reliable means testing. Rather than solve the means testing problem (through lower tax rates and better enforcements), we allow unsustainable two-way transfer payments between taxpayers and government, which delivers an oversized public sector and gross inefficiency in providing supposedly free health services.
An independent fiscal council would translate the Governor’s warnings into projected facts and figures showing alternatives, i.e. either higher taxation to sustain current wasteful and unsocial entitlements or trimming entitlements to a needs only basis allowing more competitive taxation leading to incentives and efficiency.
As to my arguments that our current fiscal position is not as rosy as it is made out to be, I take the existing position as that reported for 2009 under the Maastricht criteria, as explained in NSO News Release of 22n October 2010 showing a net deficit of 3.8 per cent of GDP and 69 per cent Debt to GDP, which although out of the Maastricht criteria are very moderate considering the fiscal problems in other countries caused by the financial crisis.
I would argue that this position is an inappropriate reflection of the true situation. A glimpse of the true situation can be had by leafing through the Auditor General Report Public Accounts 2009.
In addition to the measured deficit, I argue that the following should also be considered as a hidden deficit:
€117 million in the Treasury Clearance Fund being advances to our shipyards made prior to 2002, which will never be repaid and which eventually will have to be provided for from the Consolidated Fund.
A very large chunk of contingent liabilities in the form of letters of comfort or outright guarantees issued by government to cover bank borrowing by various public entities amounting to €893 million, up by €119 million from the 2008 position. Can anyone safely assume the government will not have to pay under a guarantee of €46 million for bank borrowing by Foundation for Tomorrow Schools, €9 million for Property Management Services Ltd, €69 million by Malta Industrial Parks Ltd, and €218 million by Malta Freeport Corporation. All these are public sector borrowers with little or no commercial revenue and can only pay interest on their debt, let alone the capital, by transfers from the Consolidated Fund.
Included are also €534 million borrowed from banks by Enemalta and Water Services covered by government guarantees. How much of this will be repaid from the increased utilities tariff revenue and how much will eventually have to be made good by central government is anybody’s guess.
Financings still going on outside the approved budgetary estimates like the City Gate project and the crisis loan to Air Malta.
If one were to take a realistic view of our state of public financing and start calling a spade a spade, our current fiscal deficit to bring into mainstream all hidden deficits would certainly explode into fearful double figures.
What is comforting is that even at such elevated level (budget deficits exposed or hidden have to be financed either through direct borrowings or through guaranteed bank loans), we have no problems in financing it internally without any recourse to foreign (scarce and expensive) lines of credit. But such a comforting situation is the direct result of fiscal prudence at micro level where households and most businesses (outside the property sector) are compulsive savers ensuring that our economy remains liquid and that all bank lending is covered by stable deposits.
Rather than macro-fiscal prudence, it is the micro thrift culture that saved us. A Malta Fiscal Council is required to ensure that macro-fiscal policies do not abuse such thrift culture to the point of destruction.