The budget that cried wolf

The Labour Party has been in government only 80 days, and already there are indications that it may repeat some of the mistakes made (and paid for rather heavily) by its immediate predecessor.

The most recent and arguably most worrying of these indications was the government's remarkably cavalier response to the European Commission's announcement of excessive deficit procedures against Malta last Wednesday.

For those unfamiliar with the term, EDP refers to steps taken by the Commission when a member state's deficit grows beyond 3% of its gross domestic product.

When the Commission decides that a deficit is excessive, it makes recommendations to the member state concerned and establishes deadlines for effective corrective action to be taken. The Commission monitors implementation of its recommendations and abrogates the EDP decision only when the excessive deficit is corrected.

If the member state fails to comply, the Commission can decide to move to the next step of the EDP, the ultimate possibility being to impose financial sanctions.

Malta is currently at phase one of the above procedure: we have been notified that EDP will be applied, and the Commission will presumably issue recommendations with which we will have to comply or face possible sanctions.

Officially it is not known what steps the Commission will consider taking. Unofficially, however, we know that it is unhappy with the rate of government spending and has reportedly urged reforms in two key areas - health, where expenditure is little short of astronomical, and pensions, where the government's reluctance to increase the pensionable age has a direct bearing on its revenue.

Paradoxically, the same Labour Party that now stewards Malta's finances was highly critical of the former government for refusing to take the threat of EDP seriously. When still in Opposition, the PL accused Finance Minister Tonio Fenech of playing with fire when he stolidly refused to accept criticism of his own budgetary projections by the Commission.

Technically Labour's concerns were justified at the time. All four budgets presented by Fenech in the years leading up to the 2013 election were in fact based on ambitious deficit projections which invariably had to be revised.

It is partly for this reason that the reaction of today's government to identical criticism by the Commission is so anomalous. Labour, in Opposition, had accused the Nationalist administration of repeatedly taking the entire country for a ride: selling us one rose-tinted budget after another, while constantly making promises of a future budget surplus which never materialised.

The result was akin to the Aesop fable of the boy who cried wolf. Year after year, Tonio Fenech promised that the deficit would be reduced, and year after year his promises were contradicted by the Commission and eventually disproved.

Eventually this undermined the one area where the PN had previously enjoyed a good reputation - its famous 'safe pair of hands' when it came to economic management.

The same state of affairs arguably tarnished the PN's credibility as a whole and may well have contributed to the enormous voter deficit which we all saw materialise in the last election.

Coming back to the present, it is worth reminding the Labour government that the budget which it has now committed itself to implementing in full is another Tonio Fenech creation: this means it fits neatly into the tradition of the administration which cried 'budget surplus' for four years.

These cries consistently proved to be false in the past. One can only wonder why the same Labour Party which expressed so much scepticism of former PN budgets should suddenly be brimming with confidence that Budget 2013 will be the first budget prepared by Tonio Fenech since 2008 to actually meet its own predictions.

Certainly the Commission doesn't share Joseph Muscat's newfound faith in the former Nationalist minister. Its 2013 spring forecast projects that the deficit will continue to be above the reference value in 2013 and 2014, respectively at 3.7% and 3.6% of GDP.

And it has made it abundantly clear that these budgetary projections are based on current policies, thus incorporating the 2013 budget that was endorsed by Parliament in April 2013 - which includes expansionary measures on both the revenue and expenditure side, as well as the already planned equity injection into Air Malta (0.6% of GDP), with a net deficit-increasing impact of 0.3% of GDP.

Moreover, the present government may wish to explain why it expressed so many reservations about overspending by the preceding administration yet is now digging in its heels and ignoring a Commission recommendation to cut back its own spending.

This is a blatant contradiction: if the former government was (rightly) chastised for embarking on an electoral 'auction sale' which almost literally used public money to buy votes, the same criticism will have to be levelled at today's government for failing to rein in the same bad habit of spending money to buy popularity.

Ultimately, this same cavalier attitude to public finance was among the factors that contributed to the economic downfall of countries such as Greece and Portugal. It is therefore distressing to see the present government repeating the same mistakes, while giving the impression that it is taking no risk at all.