In the cacophony of a ‘good’ budget that cut income tax for the second year running and dished out Children’s Allowance to each and every child, few had given heed to the warning of one man who expressed his concern at the fiscally expansionary budget Lawrence Gonzi presented in October.
That man’s apprehension was dismissed as pessimism, or by a few as downright anti-government sentiment.
He argued that it was an overtly optimistic gamble to present a budget that increased public expenditure, while at the same time reneging on tax revenue and banking on economic growth that almost topped four per cent, to ensure that 2008 will see the fiscal deficit drop further.
But those words of caution were lost in the euphoria of a government that needed to win a looming election on the basis of an economic turnaround that benefited everyone. The budget for 2008 was primarily intended to create a feel-good factor and leave more money in people’s pockets. It was described as “prudent” by the Parliamentary Secretary for Finance Tonio Fenech.
But prudence, as understood by Fenech, translated into a budget that is, in his words, “slightly off the mark”. The size of that ‘slightly’ has yet to be determined, but its implications are already clear.
From now until December, more government programmes will be cut to contain the discrepancy. Suspended schemes, such as the equity sharing scheme in housing and the subsidy for energy saving appliances, will probably remain suspended.
And for sure there will be no tax cuts in the budget for 2009.
Despite encouraging economic growth for the first quarter, the end of year result is expected to be far less than the 3.5% government was banking on when presenting the budget in October.
It is precisely this forecast that raised concern. The International Monetary Fund (IMF) deemed it too optimistic, and that man did too. He argued that with world markets being volatile, oil prices aiming for the sky and cereals soaring exorbitantly, it would be difficult for Malta to maintain the almost 4% growth rate it achieved in 2007.
Blinded by an election and shielded by a utility surcharge that was purposely kept constant at 50%, government went ahead with a generous budget.
As yet the increased revenue has not been enough to make up for the increased expenditure, and although government revenue tends to inflate towards the end of the year, projections show that the deficit target will not be met.
This was one man’s prediction: that man was Professor Edward Scicluna.
The economist and former MCESD Chairman expressed great caution on the same day that Gonzi presented the budget in October 2007. Those words of caution ring louder than ever now.
In these circumstances government needs to be clear about its targets, its failings and the corrective measures it intends to take. Politically, Gonzi needs to be clear about the extravagant promise he made during the election campaign to reduce income tax in the next budget.
When that claim was made, he knew full well what was in store on the horizon. An apology is the least he could offer to a cheated electorate.
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