Economists - 'For Malta’s sake, let’s hope Fenech is right'

Reactions to Budget 2012 were mixed among economists in general. Some expressed cautious scepticism regarding the financial predictions upon which so many individual measures depend; others interpreted clear political messages in the measures themselves.

Among the latter category was former Mid Med bank chairman Alfred Mifsud - a one-time contender for the Labour Party leadership.

Mifsud discerns echoes of the political scenario in 1996, when an overconfident Nationalist administration called an early election, with fatal consequences for its own administration.

"The Budget is clearly keeping the Government options to make it the last one before the next elections," Mifsud explained. "Government clearly wanted to keep the option that if the economic scenario worsens to a considerable extent, making a pre-election budget for 2013 unappetising, it will go for elections, as it did in 1996 before presenting the last budget of this legislature..."

According to Mifsud, this is the only explanation that can make sense of the following factors: government's ignoring of the guaranteed debt now exceeding €1 billion, equivalent to 15% of the GDP and thus pushing the official debt to GDP ratio from 70% to 85%; it refusal to acknowledge he fact that the increase in government guaranteed debt amounts to some 3% of the GDP, pushing the annual deficit from the reported 2.8% to nearly 6%; unrealistic projected revenue growth in VAT and social security contributions at double the rate of nominal economic growth;  a planned recovery of capital amounting to €25 million and €6.3 million in interest from Air Malta, which in reality needs new funds to restructure and cannot pay back its debts.

Mifsud argues also that government plan to raise €32 million as one off revenues in Concession fees and Possession and Use, without any explanation, is also suggestive of an possibly early election scenario.

"Government is also saying it cannot afford the electoral pledge of broad spectrum tax cuts, but then it can afford various measures focused on particular political sensitive sectors, which collectively amounts to more or less the same quantum..."

Like all economists who spoke to this newspaper, Mifsud saw no indication of any attempt to reduce either national debt or deficit.

"Recurrent expenditure is planned to increase by 3.2%, which is broadly in line with the EU estimate for real growth inflation: i.e. broadly in line with nominal GDP growth," he said. "Therefore no measures were in reality taken to reduce the national debt or restrain government spending.  On the contrary the revenue side has been very optimistically calculated to hit the bottom line ratio which government wishes to hit. Reality will however prove they are not sufficient."

Regarding government's projection of 2.3% economic growth realistic  - when EU estimates have been revised downward for all eurozone countries - Mifsud said much will depend on what happens in unternational markets.

"The growth rate for next year is anybody's guess. If Greece and Italy overcome their fiscal problems with effective discipline cum growth measures, then 2.3% is realistic. If Greece fails, as it is likely to do, and Italy stumbles - as it is quite possible given the political tensions and fractiousness in the Italian parliament - than 2.3% could be grossly optimistic. What I know however is that it is imprudent, in the face of a darkening economic scenario, for government to base its revenue estimates on twice the real growth rate estimated by the EU. Prudence would demand a budget on the basis of conservative growth, to ensure that we will not have 1996 all over again: when VAT revenues were grossly over-estimated with the consequences we all remember.

Former finance minister Lino Spiteri, who presented his fair share of budgets over the years, is less overtly categorical in his reaction... though he does express scepticism regarding both the economic direction as a whole and some of the individual forecasts.

"Overall in social terms it's a positive budget, in particular with regards to small businesses and measures regarding the family, which are welcome. In economic terms there are measures to help small businesses but at a macro (general) sense it is not enough emphasis on direction. As regards the forecast of revenue for 2012 this seems to be overly optimistic under various heads..."

Spiteri rejects the idea that measures were taken - or even could be taken - to reduce the public debt. "In fact the forecast budget deficit will be larger in amount, but the minister projects it will fall in relation to the gross domestic product, in part because of the forecast rate of inflation in 2012."

Like Mifsud, he argues that the accuracy or otherwise of these predictions remains dependant on economic factors outside the government's control: namely the performance of other eurozone countries and EU member states.

"The government would have made the forecast on the basis of its economic model. It would have had its assumptions. I cannot tell whether these assumptions have taken in to account the likely impact on the Maltese economy of the expected downturn in economic activity in Malta main market such as the UK and Italy."

Elsewhere, veteran economist Karm Farrugia struck a slightly discordant note by praising the Finance Minister for his courage in defying the European Commission.

"Tonio Fenech should be the envy of his colleagues at the next Ecofin meeting, especially finance ministers from the southern members," he said. "He not only confronts the EU Commission's predicted targets, but manages a budget which would have been generally acceptable even without a recession risk in the EU on the near-horizon." 

Farrugia acknowledges that deficit reduction was in part addressed, but seems moderately concerned at an apparent increase in government expenditure.

"In absolute terms the national debt can only be decreased through a surplus budget, but as a proportion of the country's GDP (which currently seems to matter most), it is only through nominal (not necessarily real) growth that it can decrease and this provided that the envisaged deficit is kept lower than the increase in economic growth. In this budget the Minister will try to reduce the deficit from 2.8% of GDP to 2.3%, not the national debt which would still be kept at 68.9%, more or less static, perhaps marginally lower.  I see little in the budget in the way of restraining government over-spending, indeed an overall increase of € 92.6 million in the recurrent part of the budget, an amount which is quite acceptable considering the several new social benefits or incentives to be introduced."

However, this must be counterbalanced by inefficient work practices, which can affect financial performance.

"I strongly believe that there is a lot of 'wastage' in most government departments which should be the object of investigation and eventual action," he said. "We would not need to pay consultants' fees to foreigners for this exercise, locals can do it if there is the political will.

For all his praise of the minister's efforts, Farrugia nonetheless shares the concerns of less enthusiastic economists when it comes to appraising Fenech's projection of a 2.3% economic growth rate.

"I think it's too optimistic in my reckoning, especially when the Organisation for Economic Co-operation and Development itself yesterday announced that not one single member had uplifted its growth forecasts for next year. And we depend so much on the fortunes (or misfortunes) of OECD countries...  I hope the Minister has a side-line plan worked out in case events outside Malta turn out worse than he is envisaging. For Malta's sake, let's hope that Tonio's vision is realistic."