Spinning out of control

For those who follow closely developments in the government's financial situation, the latest release of public finance statistics, covering September 2002, gives a feeling of dèjà vu. Indeed, the latest data shows absolutely no change in trends and the government seems to be right on track in missing its targets once again.

Until August the fiscal deficit had already breached the target set for the whole year by Lm1 million notwithstanding the irregular inclusion of Lm21 million receipts from the partial privatisation of MIA. During September the fiscal deficit widened further, rising by Lm7 million to Lm85.7 million for the first nine months of 2002.

Thus, by the first nine months of the year the fiscal deficit was already 10 per cent off the government's target for the year and almost six per cent higher than the balance recorded in January-September of 2001.

In reality, however, the receipts from the MIA privatisation process are of a one-time nature and, furthermore, are not classified in accordance with international statistical standards and practices, which state that these should be treated as a financing item.

Therefore, in truth, the fiscal deficit stood at Lm106 million during the first three quarters of the year, which is about 30 per cent higher than that of the previous year and 36 per cent wide off the 2002 target.

Given the trends in GDP during the first half of the year, this would amount to around 8.5 per cent of GDP, which is about two percentage points higher than that of the comparable period in 2001.

As observed in previous months, government revenue remains well afar from the pre-set targets, with the increase in total revenue amounting to almost 63 per cent of the projected rise after three-quarters of the year. Besides, over half of the increase in revenue was due to the inclusion of the MIA privatisation receipts, which were not included in the projected increase in revenue when such projections were presented during the last budget. Therefore, in reality the increase in revenue amounted to less than 30 per cent of the projected rise, with around half of the remaining increase being due to the one-off receipts from the investment registration scheme.

The under performance in revenue collection continues to signal weak economic conditions. Almost half of the increase in income tax revenue was underpinned by the MIA manoeuvre, while the rise in social security contributions amounts to less than Lm1 million and is merely 10 per cent of the projected growth for the year.

This essentially reflects the progression of the social security system from higher wages as a result of the cost of living adjustment and increments in the public sector, rather than any growth in employment.

As one would normally expect, in the absence of adjustments in tax rates and coverage, low growth in direct tax revenue is likely to be accompanied by low growth in consumption taxes. VAT revenue during the first nine months of 2002 was even slightly below the intake recorded in the same period of 2001, indicating a drop in consumption.

This obviously contrasts somewhat with the growth in private consumption which government official statistics claim, and indeed even the EIU found such developments in private consumption as "difficult to explain".

If the NSO insists that data on private consumption is correct, then the only possible explanation that remains is that, with VAT, tax evasion has increased substantially and therefore the system is failing miserably when this was heralded as a successful tool for tax evasion! At the same time, the increase in customs and excise duties appears to be attributable to the renewed rise in taxes on cigarettes and higher fuel prices.

As regards to the expenditure side of the government account, the situation seems to be clearly getting out of hand. Growth in recurrent expenditure has already exceeded the target set by Minister Dalli by 5.6 per cent or Lm2.2 million.

In part, this was due to the growth in debt during 2001 and 2002, as the increase in interest payments was almost four times that projected by the minister, indicating missed targets in the fiscal deficit and privatisation receipts in 2001 and 2002.

In fact, from the preaccession economic programme report published by the EU last year, we have already witnessed an underdeclaration of the fiscal deficit by government, while between 2001 and 2002 the government was supposed to net in some Lm130 million from privatisation. So far the result has been a receipt of Lm40 million from the sale of MIA, where over half of such receipts were simply borrowed funds from BoV.

Apart from interest payments, even contributions to government entities and operational and maintenance expenditure were in excess of projections, with the former also reflecting expenditure relating to the numerous authorities created by the government. The latter are costing millions of liri of public funds simply to build the administrative capacity for the adoption of the acquis communautaire as a result of the pursuit of EU membership.

By contrast, capital expenditure appears to be well below the targeted expenditure, and so far government has increased its capital expenditure by less than Lm2 million compared to the projected rise of around Lm15 million. However, it is well known that during the final months of this year the government is resorting to foreign borrowing to finance expenditure on the new hospital, which should push up capital expenditure by the end of the year.

The latest statistical release on public finances can be simply described as more of the same. The fiscal deficit continues to grow, both with respect to the projected targets as well as over last year, despite the irregular inclusion of the one-off receipts from privatisation.

Tax revenue has stagnated as the Nationalist government has completely failed to kick-start the Maltese economy.

At the same time, expenditure is spinning out of control and pressures on the government in this regard are likely to mount as the referendum and general election draw closer.

Indeed, the latest EIU report has unequivocally given a no confidence vote to Minister Dalli and his government when it states that the "underlying fiscal position is set to deteriorate further in 2002 and 2003".

Undoubtedly, the finance minister will once again engage himself in further creative accounting practices, as that of the MIA deal, to appear to have remained on track with projections. This is why Minister Dalli is now trying to rush certain sales of public assets, as that of public lotto. The latter in all probability will be also included as part of ordinary revenue, which as in the case of MIA, was not projected to be included as such in last year's budget.

However, no accounting gimmicks of such type, which are clearly in breach of intemational statistical standards and those of the EU, will hide the stark reality that the Nationalist government is failing miserably in solving the serious problem in public finances.

leo.brincat@magnet.nt