Values before votes

 

This articles was published in the The Malta Independent on Sunday  9^th September 2012

Last Wednesday we breezed through, quite unobtrusively, the fourteenth anniversary of the 1998 elections that brought the PN back to government after a short break of 22 months in opposition following two terms between 1987 and 1996.   

That election of 5^th September 1998 had brought to a premature end the solid mandate Alfred Sant had won for Labour in 1996 and  brought to power the present PN government for three consecutive terms which seem to be drawing to an end as we approach elections.

The Prime Minister discretely celebrated this anniversary when he gave an impressive speech to the EPP political group stressing that in politics values must come before votes.   The problem, as Obama is finding out as he struggles for re-election in the US presidential campaign, is that great speeches without concrete action don’t impress, they don’t deliver the bacon, they keep the electorate asking where the beef is.

In 1998 Alfred Sant gave the most tangible demonstration that for serious politicians who see their role as a mission to improve the lives of their people, values must come before votes.   When it was clear that his majority in parliament was conditional and unstable, he put aside all calculations of risks to his own political career and restored the mandate to the people.

It is hard to reconcile Lawrence Gonzi’s assertion of values before votes with his action when faced with a similar or worse situation of parliamentary instability.   Rather than adopt Alfred Sant’s gentlemanly way out and restore the mandate to the people, he actually mocked Alfred Sant for taking such route and in fact and in deed is still doing whatever it takes to hang on to power even though shorn of a parliamentary majority.   Can anyone honestly believe that in so doing the Prime Minister is putting values before votes?    To me and to whoever has eyes to see it appears that for the PN, votes and power come before everything else, even before the interest of the country and the parliamentary stability needed to safeguard it.

The Prime Minister remains in denial of what is obvious to all.   Not only he has no parliamentary majority but he cannot even rely on the vote of all the 34 MP’s that put government on the same count as the Opposition in parliament.

It would seem inevitable that circumstances will soon eject government out of its denial suite.  Parliament is due to be recalled on 1^st October and without a majority and rebel MP calling votes of confidence and controversial private motions, government will find it inevitable to go for elections this fall, probably in the first half of November before presenting a Budget for 2013, or at least without voting on it after its presentation.

Equally in denial is the Minister of Finance.  This week he had Moody’s pulling his ears for strong evidence that government finances are suffering serious fiscal slippage during 2012, a typical performance in an election year when governments throw fiscal caution to the wind and try to spend their way to re-election.   

Moody’s warning is well placed and supported by NSO data for government finances for the seven months to July 2012.   The deficit, rather than narrowing compared to the same period of 2011 ( so as to even out seasonality in the flow of government revenue) widened by 40% from Euro 238 million to Euro 333 million.     The Prime Minister and the Minister of Finance assurances that the performance in the last five months will recover lost ground so that government will hit the projected deficit of 2.3% of the GDP seem to have impressed no one, certainly not Moody’s.   Indeed the Minister of Finance seem to have not even convinced himself.  Soon after Moody’s report he changed his tune somewhat, saying though we might not hit the 2.3% deficit we will certainly stay within 3%.

To stay within 3% of the GDP the end-of-year deficit has to reduce to about EUR 195 million meaning that in the last five months of 2012 the government will have to register a surplus of some EUR 140 million.   Is this realistic?

It is true that government revenue flows are much stronger in the last five months not least because this period captures two instalments of provisional tax payments in August and in December where the bulk of the annual tax payments fall due.  But taking the performance of the last three years 2009 -2011 the average surplus  for the  August to December period amounted to EUR 45 million.

So even to hit the shifting target of 3% of the GDP ( which in itself involves a deficit increase of EUR 45 million over the original projection in the 2012 Budget Estimate) it would require that this year during the five months August to December government will  generate a surplus more than three times higher the average surplus for the same period in the last three years.   This leaves me with no doubt that the Minister is either living in denial or that knowing that he will not be presenting a budget before the election it is safe to take risks with assertions that will only be tested after he is gone.

The only way that the Minister can come anywhere close to the revised 3% deficit figure is by leaving a tray full of unpaid invoices for his successor.

For me the deficit was never below three percent and will not be for quite some time.   Enemalta remains a serious deficit hole.    Up to last year Enemalta was hiding the government deficit by transferring the shortfall on its books which was then borrowed commercially against government guarantee.   This year Enemalta has run out of its borrowing capacity even with government guarantees and all.  The tide is turning.  Enemalta does not even have enough liquidity to pay the excise duty and government is having to extend  temporary loans or grants to keep it afloat.   This explains a good part of deterioration in government financing this year which before was being buried in Enemalta’s books  and is now resurfacing on central government accounts.

Enemalta is a wholly owned state enterprise.   It capacity to raise revenues by charging higher utility rates is very limited by the political implications involved.   It has a massive capex budget yet to finance and banks have turned on the screws on its borrowing.

Measuring government deficit and debt without consolidating Enemalta’s position gives a very incomplete picture.   Whoever gets elected will face the Enemalta problem in the urgent tray.   A blue print for a long term plan on how to restore Enemalta to health can be found in my contribution in this series of 11^th March 2012 titled ‘A dockyard in the making’.  In solving Enemalta’s problem, values need to come before votes.  This is unusual in the run up to an election.

 

He's starting to get it!

 

At last! He's starting to get it!   He's starting to understand plain English!   Possibly it is because he has no alternative - TINA - There Is No Alternative - as Margaret Thatcher used to say.

Finally the Budget Minister admits that he will be unable to meet the year end target.   And this just a few days after both himself and the Prime Minister assured us they will still hit the end of year target in spite of the official government finance figures for the first 7 months of 2012 showing a fiscal position suffering very material slippage, 40% worse than last year.
Suddenly a backtrack and admission  that Moody's are right, there is fiscal slippage, the end of year deficit will be worse than last year, but we are told still below 3% of GDP.

timesofmalta.com/20120906/Minister-s-doubt-over-deficit

To stay within 3% the Minister needs luck and "skill".  I put skill in inverted commas as it refers to the skill to cook the books by shifting expenditure to next year and allocating revenues after the year end to this year.  Luck in the sense that the international economic scenario keeps improving rather than having any tail risk event which would blow away any expected growth.

But reflect a bit on what is reported in the Times article:

The Government has repeatedly helped prop up the ailing energy corporation within EU state aid parameters, and that is likely to continue. Enemalta has so far withheld excise payments it owes the Government to ensure liquidity, explaining much of the €15.8 million shortfall in the government’s excise duty revenue in the first seven months.

At the beginning of the year the Government injected €25 million into Enemalta to keep utility bills static as the firm’s oil costs rose.

If you reflect hard enough you will realise that the budgetary improvement reported in previous years leading us to have a below 3% deficit in 2011 is illusory.   For as long as Enemalta had debt capacity, even if against the sovereign guarantee, government shifted the debt onto Enemalta's books as government milked the Corporation with excise duty, VAT and removal of subsidy to inflate its revenues. Now that Enemalta has exhausted its debt capacity and has exhausted any political manoeuvring space to raise its end consumer prices, the tide is turning again.

Government is having to absorb on its own books the financing Enemalta needs to keep afloat.

So, as I have been repeating these last few years, analysing the government budgetary figures without taking Enemalta's financial position in the consolidation ( Enemalta is wholly owned by the Malta Government and government is directly and indirectly responsible for its debt either through guarantees or through the Act of Statute) gives a very incomplete picture.

Now let me make another suggestion.  Government has financed the City Gate project outside the mainstream budget.  To do so it has sold the project to a 70% owned subsidiary company( Malita Investments - 30% private sector shareholding) for a fixed sum of EUR 80 million.  Any cost overruns will have to be borne by Malta Government.    Any bet that these cost overruns will be in high double digits percentage higher than the base figure is quite safe.   The Minister will leave his successor a lot of unpaid invoices in his pending tray.

Don't they understand plain English?

The opening paragraph in today's Times reporting Moody's sovereign credit report on Malta reads as follows:

Moody's rating agency this evening affirmed Malta's A3 rating and negative outlook. It praised the government for fiscal consolidation, particularly for bringing the deficit below 3% at the end of last year but warned of slippage later this year.

But it seems that the Ministry of Finance don't understand plain and simple English. In their statement following Moody's report they say:

"Such a statement contradicts the Opposition’s repeated statements over the past month where the Opposition Leader and spokespersons branded Malta’s financial position as negative, claiming that it had worsened over the past months. Government’s rebuttals and explanations have now been confirmed by Moody’s independent audit of our country’s finances,"

So I went back to read the full Moody's Press statement just in case the Times had misreported them when saying that Moody's had warned of fiscal slippage later this year.   Moody's in fact stated:

Nevertheless, Moody’s notes the continued presence of significant macroeconomic and fiscal downside risks. Further plans for fiscal consolidation target a deficit of 2.2% of GDP in 2012 and 1.8% in 2013.The consolidation strategy is mostly underpinned by additional revenue raising measures, and appears to be optimistic given the weaker economic environment at home and abroad, additional expenditure related to the restructuring of Air Malta, utility subsidies and the current stage of the political cycle, with the deficit traditionally widening in pre-election periods. Given these factors and a susceptibility to stop-and-go policies, Moody’s believes that there remains a risk of fiscal slippage in 2012.

Should instability due to the euro area debt crisis hamper macroeconomic performance, negative debt dynamics could persist beyond 2013 despite a narrowing of the deficit. Such ongoing dynamics could lead to a significant further deterioration in the sovereign's key credit metrics and as such underpin Moody’s decision to maintain a negative outlook.

Moody's is agreeing with the Opposition's recent criticism that the NSO public finance figures for the first 7 months of 2012 show a deterioration of EUR 95 million on the fiscal deficit for the same period of last year equivalent to 39.9% adverse movement.    Government has assured that it will still meet the end of year targets  through compensatory positive variances in the last 5 months but that remains a gratuitous assertion.  Both Moody's and the Opposition are absolutely right in expressing concern on the fiscal slippage that is happening in 2012, as normally happens in an election year.

So I have to conclude that at the Ministry of Finance they don't understand plain and simple English when they say that Moody's statement contradicts the Opposition’s repeated statements claiming that the fiscal deficit had worsened over the past months and that government’s rebuttals and explanations have now been confirmed by Moody’s independent audit of our country’s finances.

May be they should read NSO Press Release with the July 2012 fiscal figures as per link hereunder.

NSO Release re July 2012 government finance