Sunday, 2 December 2012

A budget for the others

This article was published in The Malta Independent on Sunday - 02 December 2012

The last budget before an election always requires interpretation with an added dose of caution. Politicians’ objectives rarely go beyond the next election and when the election gets so close, the temptation to front-load sweeteners for the short term, at the expense of long term sustainability, becomes irresistible.

A double dose of caution is required whenever governments are forced to put together the last election budget in the context of adverse opinion polls. We all remember how Labour spent unsustainably in the run-up to the 1987 election in an attempt to turn public opinion about Labour’s bid for a fourth consecutive term. And we equally all remember how the PN hid the true precarious state of a huge hole for 1996, when VAT revenue was not coming in anywhere near the budgeted levels, before losing the election of October 1996.

The budget before the last election for 2008 was read in the House on 15 October 2007. It planned a deficit of €68 million for 2008. That was before the election.
When, after the election, Minister Tonio Fenech read his first ever Budget, that for 2009, the actual deficit was declared at €200 million.
An election between two budgets makes a difference of €132 million adverse variation between the budget target and the actual out turn.
One can be a bit sympathetic as in between there was also the great financial crisis of September 2008 which derailed projections, though to be realistic the effect ought to result with a time lag in 2009 rather 2008 itself.
But consider what the Minister projected in his first Budget for 2009, read in parliament on 3 November 2008 and therefore with full knowledge of the financial crisis. He gave a three-year budgetary framework which for 2011 expected a budget surplus of €65 million equivalent to one per cent of GDP and debts of €3.68 billion equivalent to 56.30 per cent of GDP.
The actual for 2011 was a deficit of €219 million, equivalent to -2.7 per cent of GDP. Debt level was €4.60 billion, equivalent to 71 per cent of GDP.
I quote 2011 figures purposely. Firstly because that was as far a preview as was contained in the 2009 Budget speech. And secondly because 2011 is history and the figures are crystallised beyond scope for revision.
The budget actual out-turn for 2011 was an adverse variance €284 million from what was projected in 2009 and a debt level €1 billion higher. One billion has nine zeroes after the integer, so the difference is much more than just changing an ‘m' to a ‘b'.
The Minister can hardly claim credentials for reliable budgetary targeting.
So it is not without reason that I find two major cases of figure-fudging in the budget presented.
Firstly, someone has to explain how the government is going to find a cash bonanza by the end of this year.
In 2011, the government had a deficit of €188 million in the first nine months to September and by December, the deficit had grown to €219 million. So in the last quarter of 2011 the government deficit grew by €31 million. Taking the same figures for 2010, it results that in the last quarter of 2010 the government deficit fell by €3 million.
Let’s repeat that. In the last quarter of 2010 the government deficit was reduced by €3 million and in the last quarter of 2011 it grew by €31 million.
What is being projected for 2012? The published deficit for the first nine months of 2012 is €282 million but, according to the figures given in parliament, by the end of December this deficit will be reduced to €180 million. So the Minister is planning that the last quarter of 2012 will prove cash positive to the tune of €102 million compared to cash negative €31 million last year and cash positive €3 million in 2010.
Don’t look for any explanations in the budget speech as there are none, even though the minister found all the time to explain much less relevant items. What I can say is that the actual figure for the deficit of 2012 will only be announced late in March and by that time we could be in the post-election period.
The other question is how the Minister is planning to increase revenue from income tax in 2013 by 10 per cent, i.e. by €83 million from €840 million in 2012 to the €923 million projected for 2013.
All things being equal, tax revenue should increase at the same rate as the growth of the nominal economy. So normally, tax revenue should increase by some four per cent in 2013 – being 1.6 per cent real growth plus 2.4 per cent inflation.
But all things are not equal. Government is reducing the marginal rate of tax for earners between €19,500 and €60,000 from 35 per cent to 32 per cent. The revenue government forfeits from this measure has not been estimated but it does not come cheap.
So how come that, in spite of this concession, government is still expecting tax revenue to increase by more than twice the rate of nominal economic growth?
During a TV debate, the Minister – in a side remark – said this was due to economic growth. The Minister must be a firm believer in supply side economics beyond what empirical studies show if he believes that economic growth of four per cent nominal will generate increased tax revenues of 10 per cent, even though tax rates are reduced. 
And if the Minister believes so much in government finance inflows buoyancy from economic growth, it is a bit rich for him to deride similar claims by Labour about sources for financing the promised cuts in utility rates.
The budget for 2013 is a horror movie we have seen before, further complicated by its regressive stand and by the increase in the share of taxation revenue compared to GDP.
It has been put together by a Minister who expects neither that it will pass through the parliamentary approval process nor that he will be responsible for its execution. Fudged figures permit dishonest post-event criticism when the projections prove false and unachievable under another administration.

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