Deliverable No 8 – No Dew Debt

The Malta Independent - Friday Wisdom

No new debt until we get the debt level down to 60% of the GDP. Any capital expenditure has to be financed by one off revenues (privatisation, sinking fund and similar arrangement) to avoid recourse to new debt issues, other than roll-over of maturing debt.

The official public debt of central government at the end of 2003 is estimated at 69% of GDP and at the end of 2004 it is estimated to increase to 70.5%. Is this too much or too little?

Figures in absolute have little significance. To get a feel for the real state of play one has to use relative benchmarks. Of all the acceding countries to the EU Malta has the biggest relative debt to the GDP followed by Cyprus and Hungary. At the other end Estonia and Latvia are virtually debt-free. Again taken on its own this thus not necessarily mean that we are doing better or worse than the others because much depends on the state and effectiveness of the country’s infrastructure which is the foundation for economic growth. It is no use having low debt ratios if infrastructure development is neglected. What it does mean however is that we have already used much of our debt capacity whereas our competitors still have a lot of their debt powder dry.

One must take into consideration that we have a commitment to join the Euro single currency at some not too distant future point in time and that to gain admittance we have to get our government debt level down to 60%. We can gain an exception to be admitted with a higher debt ratio level but only if we prove that ratio is diminishing sufficiently and approaching the reference value at a satisfactory pace.

At a time of anaemic economic growth no one has yet seriously explained how this is going to be done. A feeble attempt was made in last budget speech where a table was given showing that the debt would remain at 70.5% in 2005 and reduce to 68.4% in 2006. However this is dependant on achieving success in nearly halving the budget deficit from Lm108 million in 2003 to Lm59 million in 2006 and on generation of special one-off revenues amounting to Lm135 million from privatisation of state entities over these 3 years.

Government’s track record offers little room for optimism. Unless the new man at Castille can change the ‘money no problem’ mentality, cultivated by the outgoing Prime Minister, and ensure that the whole cabinet puts its collective weight behind the budget targets and not just force the Finance Minister’s hands to resort to additional taxation at a time when our competitors are relaxing their fiscal stance, we will never hit these targets.

My feeling is that hitting these targets, unlikely as it is, is really not enough. We need to do more. We cannot just play around with figures and argue that we will solve the problems two years down the road. It sounds so much like the smoking addict promising to stop smoking tomorrow. If we mean it we have to start today. And believe me it will not be one day too early.

Whilst the level of debt is worrying when seen in isolation and in comparison to size of the economy, it is far more worrying when one studies the trend line for the accumulation of such debt. In 1992 when the present Minister of Finance presented his first budget and promised us growth based on good financial housekeeping, the government debt was Lm246 million equivalent to 28% of the GDP. When Lino Spiteri in 1996 exposed the camouflaged but worrying state of government finances left behind by the outgoing PN government the public debt was Lm517 million equivalent to 43 % of the GDP. At the end of this year it is projected to reach Lm1288 million being 70.50% of the GDP. And this is not the whole story. At some point in time, government debt hidden in the Treasury Clearance Fund and in the banking sector through non-performing loans covered by the State’s guarantee s will have to be tacked on to the government debt measurement.

The speed of accumulation of the debt is more worrying than the debt level itself. We have increased debt fivefold over a period of 12 years in spite of cushioning the impact by about Lm294 million of extraordinary revenues from privatisations and the winding down of sinking funds.

If we really mean business we cannot just promise to stop ‘smoking’ tomorrow hoping that EU accession and Euro entry can put on us the discipline which we have not been capable of putting on ourselves. We have to stop ‘smoking’ today. Debt accumulation must no longer remain a variable to balance the budget. Until such time that the government debt reverses its growth trend and is steadily heading towards the 60% EMU criteria for Euro entry, the government should change the other variables (especially the expenditure side) to ensure that no new debt is required, whilst maturing debt will keep being rolled-over.