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The parliamentary secretary in the finance ministry appears to be heeding ex-President Reagan’s assessment of bad government: “The government is like a baby’s alimentary canal, with a healthy appetite at one end and
no responsibility at the other.”
Reacting to the European Commission’s report chastising six of the ten new EU members for their unduly high budget deficits last year (only the Czech Republic’s was worse than ours), he was reported as phlegmatically dismissing any ‘major worry to the government’ because the report focused on the deficit figure reached at the end of last year which also took into consideration the Lm 57 million soaked up from the drydocks. And yet, concurrently, his minister and premier has publicly pledged to make the budget deficit reduction his number one priority.
A true politico, even for a newcomer. And an accountant to boot. Brimming with confidence. A priori excluding any additional taxes, he mentioned two variables in the binary equation: curtailing expenditure and stimulating the economy.
It is, therefore, not amiss to point out the magnitude of his set task in the fashion ministers are normally confidentially advised by their top executives, but not for the consumption of the press or the public.
The finance ministry has already asked cabinet’s approval to cut expenditure by Lm10 million to prove its determination to tackle the country’s fiscal imbalance and ‘place Malta’s finances on a sound footing.’ In budgetary terms there is really not much to write home about on such a figure. By way of example, last year’s ordinary revenue resulted in a shortfall of Lm 32 million from that budgeted, but recurrent expenditure was down by only Lm 25 million, and this thanks to the not-yet-introduced, but ardently awaited, accruals accounting system.
In is annual report published last month, the Central Bank put the fiscal deficit at around Lm 108 million. Earlier this month the Accountant General showed this to have been Lm 116 million - receipts 741, expenditure 857. A mere adjustment from revised estimates (Central Bank) to actuality (Accountant General) is alone to the tune of Lm 8 million.
Incidentally, the persistent harping by the media and politicians on the ‘drydocks millions’ is at best irrelevant and at worse a red herring. So is the 9.7 percent-on-GDP ratio. A realistic ratio for 2003 as providing the take-off pad for the next 3 or 4 years before seeking entrance into the eurozone is 6.5 percent. Still more than double the EU’s transgression threshold of 3 percent.
If this is not a ‘major worry,’ I don’t know what could possibly be. Except for a dismal failure to agree on a social pact. Or perhaps the obverse of the deficit coin: the national debt-to-GDP ratio, which stood at 72 percent at the end of last year.
To an economist this latter should not really be such a big headache, in the sense that, unlike the deficit, there is nothing ‘structural’ in it.
It is not the volume of any national debt as such that is frightening, but the annual budgetary charge for servicing it. And yet the EU caps it at 60 percent. Whereas I can fully understand the deficit ratio capping, I cannot fathom the raison-d’etre for the debt one. In practice it all means that, no matter how hard a government tries to contain its annual deficit without hurting the economy too much. It will not be reducing the debt-GDP ratio unless the nominal expansion in the economy (not its real growth as we know it) is exceptionally high and most probably bolstered by an unduly high rate of inflation. Which, in its wake, would jeopardise another of eurozone’s constrictions, inflation, causing a breach of yet another EU rule.
Just to give a simple example by way of illustrating the debt/GDP ratio issue as proving harder to achieve - our economy would need to expand by over 7 percent in nominal terms for the government’s target budget deficit of Lm 95 million to allow the debt/GDP ratio merely to stay put at its current level of 72 percent. It would need to expand by 14 percent to bring the ratio down to 68 percent if a three-year span is contemplated until we become eligible to seek entry into eurozone.
A Herculean task indeed. Especially for a parliamentary secretary whose second variable is the stimulation of the economy, ceteris paribus itself adversely affected by his first variable, cutting down on government’s expenditure.
It is obvious that for this to happen the only expansion envisageable must necessarily come via new export-oriented firms, ie foreign direct investment through Malta Enterprise, which incidentally has yet to show signs of its virility.
To gauge the extent of the task, it is opportune to quote from the current issue of ‘Corporate Location,’ the foreign direct investment magazine. This is what it has to say about Malta: “FDI played an important role in the country’s GDP, eg 18 percent in year 2000, but the subsequent FDI collapse (negative 375 million US dollars in 2002) has meant that the government is keen to attract new investment.”
It quotes Malta Enterprise for our investment incentives as being: corporate tax rates as low as 15.75 percent, investment tax credit up to 50 percent of total investment, investment allowances of up to 50 percent on machinery and 20 percent on buildings and factories, factory space at competitive prices and staff training incentives and assistance.
By way of ‘obstacles to investment’ there is only one: location requires shipment of all raw materials and finished products.
With such an array of incentives, why are we lagging so far behind in FDI?
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