Sunday, 31 October 2010

Like October rain

The Malta Independent on Sunday

Like October rain - 31.10.2010
The budget for 2011 read out in Parliament last Monday was as predictable as October rain.

The middle budget in any legislature has a particular feel that, in the absence of any crisis, delivers more political convenience than economic logic. It is probably the last real opportunity for the government to raise taxes and squeeze the middle class so as to lay the groundwork to ease up on the middle class in the remaining two budgets before the next election. On the other hand, that squeezing must be more restrained than in the first two budgets, lest public perception suffers irreparable damage that cannot be repaired by any fiscal back-pedalling in the remaining two budgets.

That is exactly what we got, and in clinically precise measures too. The middle class has been squeezed explicitly through higher taxes on fuel, tobacco, beer and alcohol spirits and implicitly by keeping the tax bands rigid, thus increasing the impact of taxation through normal revenue crawl. In compensation, the middle class only got minimal tax credit increases for private school fees due next year, a tax credit that has already been absorbed by the atrocious 12.5 per cent increase in private school fees that middle class parents have already faced in the first quarter of this scholastic year.

I suppose we should be thankful that, in the middle of international economic turmoil, our budget was a non-event, and indeed our economy seems to have recovered its growth path. Maybe it is indicative of elusive normalcy that while the Irish, the Greeks, the Spaniards and the Portuguese, among others, are having to absorb bitter austerity medicine, and while the French protest in the streets and paralyse the country with widespread strikes against the restructuring of the pension system – something we have been through already without a whimper – our national agenda is more concerned about whether we should continue to wear our Catholicism on our sleeves through the no-divorce-we’re-Maltese syndrome.

As an aside, I wonder whether the Minister would consider a religion tax to replace the controversial increase in the tourism tax. It would be ideal if we could persuade tourists to contribute to our national budget through higher taxation. But tourists have a choice of destinations and, coming at an uncertain time when Air Malta is removing seat capacity as part of its restructuring (I would have thought that Air Malta should cut expenses and non-core operations rather than revenue-generating seating capacity if it is to restructure effectively), a tourist tax increase could risk stalling tourism growth (a major contributor to our economic engine) in its tracks. Through a religion tax, we would be able to judge how many of the fundamentalists who insist on imposing their religious values on the rest of society would be willing to dip into their pocket to pay a tax for hearing Sunday Mass.

Lest I be misunderstood, I am not proposing a religion tax, just questioning the religious persuasion of the anti-divorce fundamentalists.

What is questionable is whether the budget is a cause or a consequence of the economic normalcy we are enjoying while all around us is in turmoil. My impression is that it is neither a cause nor a consequence. It is irrelevant! A lot of trumpets are being blown on how the deficit is being controlled and getting it back under three per cent of the GDP and then keep it cruising towards a balanced budget. But frankly there is so much massaging of figures going on in the computation of the budget that it can be made to hit any target one wants.

Let me give a couple of examples. We have no real idea how much the Citigate projects will cost. €80 million has been mentioned but, take my word for it, this is a very indicative estimate and as things go now that the project has been extended, and rightly so, to include the exterior approach to the main gate, the ultimate bottom line will be much bigger than first estimates. There is nothing in the budget that evidently votes money for this expenditure. If this were a revenue-generating project, like for example building a highway on which toll fees would be charged, then I could understand that the investment can be carried out on a commercial basis outside the Consolidated Fund. But Citigate is a non-revenue generating asset and should be financed fairly and squarely from the Consolidated Fund.

Take another example of how the budget deficit can be massaged to whatever one wants it to be, at least in the short term. Since 2005, under the capital expenditure vote of the Ministry of Finance, vote 7189, an increasing amount – estimated at €17 million for next year – is voted under the heading ‘TCF Advances’. TCF stand for Treasury Clearance Fund, which is a sort of a dirty fund where expenditure is funded without it being captured in the Consolidated Fund. So each year we vote capital expenditure, which in reality was incurred long ago in the past, probably without any economic benefit if the supposed capital expenditure was some sort of subvention for the shipyards or similar loss-making organisations, and which only now is being brought gradually in the mainstream books. With two-way transactions going through the TCF, what is the point of judging fiscal performance by the massaged fiscal deficit that the Minister sees fit to declare for any particular year?

If one is to judge the budget exercise on its own, immaterial of the impact it has on the overall economy, that judgement should be based on the actual out-turn on the budgetary position for 2010, which has now been revised from the original estimates. The bottom line is that in 2010 the government will have €64 million less revenue than projected. Recurrent expenditure is expected to exceed original projections by €41 million. The deficit will not show a combined deterioration of €105 million, being the sum total of these two adverse variance. The adverse variance will be ‘only’ €58 million because capital expenditure voted is being under-spent by €47 million.

What the economy needs is for the government to strengthen its revenue structures through efficiency and enforcement, control its recurrent expenditure through control of entitlements and social fraud, and strong capital expenditure to upgrade the infrastructure (maybe one day we can have decent roads and free flowing traffic, clean valleys and natural water reservoirs, protection of water resources in the geology underground table, and green energy). The 2010 fiscal performance merits a fail on all three tests. The government collected less revenue, spent more than planned in recurrent expenditure – which leaves no long-term beneficial impact on the economy, and spent less on capital expenditure, where we need to spend more, much more.

If our economy is rumbling along gracefully and can afford to have people discuss divorce rather than austerity, then credit should go to the people, to their resilience and ability to adjust even in the face of the most adverse circumstances. This was achieved in spite of, not because of, the government.

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