News | Sunday, 20 September 2009

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Capital spending suffers during ‘recession year'

Despite earmarking €347 million for capital projects in last year’s budget, spending at end-July is just at 40% of projected levels

The government’s take-up of European Union funds has slowed down, with spending on capital projects at just 40% of projected 2009 levels at the end of July, according to the latest data from the National Statistics Office.
Finance Minister Tonio Fenech has told MaltaToday that the cash for EU-funded projects for 2009 would not be fully utilised this year – while the Labour opposition has claimed the slow take-up in funds has turned Malta “into a net contributor to the EU”.
“It doesn’t mean any funding is lost,” Fenech said. “For major infrastructural projects that will be carried out over a number of years, the total amount used in the first year was less than that projected... the money allocated by the EU will be used over the coming years.”
Despite earmarking €347 million for capital projects in last year’s budget – a massive 52% increase over the 2008 programme – spending at the end of July was just 40% of earmarked spending.
At just €138 million at the end of July, capital spending has only grown by €6.5 million over the same period last year.
Gavin Gulia, the Opposition’s spokesperson for the economy, pointed out that this includes €5 million in subsidies to wages for companies on a four-day week basis, “which government is rightly giving [but] the slow rate of increase in capital spending, a far cry from that planned in the Budget, is inextricably linked to the government’s failure to utilise EU structural funds to finance capital projects.”
Gulia said that funds from the EU between January and July totalled just €13.5 million – a mere €200,000 over last year’s funds from Brussels.
“While in the last Budget government had projected an increase of €55 million in revenues from EU funds… the NSO records show that government absorbed only €13.5 million, far outweighed by Malta’s contribution of about €35 million, thus continuing to be a net contributor rather than beneficiary.”
While the funds will not be lost, as Fenech says, Gulia said the timing when the projects are undertaken is critical. “At a time when the economy is contracting by more than 3% in real terms… increasing capital expenditure, provided it represents good value for money, without excessive overruns from inefficiencies, incompetency, or worse still corrupt practices; and made on projects truly beneficial for the economy, is always commendable, and highly so during a severe downturn, as was the case in the past nine months.”
Finance Minister Tonio Fenech said the lower spend is also due to the fact that some projects funded by local cash, especially health and education, were likely to absorb funds provided in the 2009 budget. “Funds not utilised by the end of the year, but committed, would be provided in the 2010 estimates.”
He said government was not ignoring the need for stimulus spending during the ‘recession year’. “The IMF has acknowledged the stimulus package ‘focused on infrastructure projects and support to the manufacturing and tourism sector’.”
Fenech said he will focus on investment in capital projects that will enhance the country’s competitiveness in the upcoming Budget, and on creating more jobs.
But Gulia pointed out that while Brussels originally commended the government’s stimulus plans – “precisely because they supposedly hinged on a significant increase in capital expenditure” – the government has shown “once again its inability to deliver the goods.”
He said capital spending had not increased, and combined private and government capital spending had fell by 26% in the first half of 2009, down to 1994 levels. “While in the Euro Area investment also declined, this retreated only to 2005/2006 levels,” Gulia said
“This severe decline in investment clearly has negative implications for Malta’s growth potential… such results are hardly a testimony for the Minister of Finance’s claim in last year’s Budget that it was consonant with the government’s strategic direction of sustainable development. It’s another testimony of hollow buzzwords.”

Capital Expenditure

Government spending is divided into ‘current’ and ‘capital’ spending. Current spending is recurring spending on items usually necessary for the running of government operations, such as ministries and departments, wages and salaries, and consumables such as medicines.
Capital spending is on purchasing assets and creating projects that last in the long-term and are essential to the economy’s performance and growth, such as roads, hospitals, ports, or large data networks. This has a lasting impact on the economy and helps provide a more efficient, productive economy.
In a time of recession, government may choose to spend more to try to boost demand, or spend lower to avoid ‘crowding’ out the interest of private businesses in creating projects.
It is argued that when government increases spending, the knock-on effects are multiplied – hence, the multiplier effect. New projects generate more work for construction, creates new jobs which mean more wages being spent on goods and services.


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