Budget 2012 | Fenech awaits Commission's pronouncement on 'fiscal surveillance'

Finance minister Tonio Fenech has every reason to be concerned. What euro and economic affairs commissioner Olli Rehn is set to officially announce sometime today has the potential to trigger further economic uncertainty and disrupt revenue and economic growth targets, as the country faces the prospect of early elections.

Prime Minister Lawrence Gonzi dropped a bombshell last Friday, when he announced his government was revising Budget 2012 and slashing some €40 million in expenditure.

Gonzi, who later admitted receiving a communication from Brussels, said that the cuts were needed to ensure "further protection" from the growing threat of the economic crisis.

But while government insists that the cuts are due to the "increasing risks in the international economic situation," finance minister Tonio Fenech told MaltaToday that government has deemed it "prudent to take adequate precautionary measures. Such measures are taken on a regular basis in the course of any financial year."

Budget 2012 is only two months old, and while Prime Minister Gonzi expressed himself "confident" that the measures were to be acceptable to Brussels, he discarded suggestions by the media that government's projections for economic growth were too optimistic.

The statement made on Friday, later accompanied by an official note from the finance ministry spelt out the dramatic cuts that come to the tune of €40 million (0.6% of GDP).

Commissioner Olli Rehn warned Malta and four other EU countries in November that they were in danger of missing their budget targets for 2012. At the time, the Commission said it expected Malta's deficit to widen to 3.5 percent this year.

Gonzi said that his government will lead by example and suspended the controversial parliamentary honoraria which all ministers started to take in 2008.

The budget cuts come at a time when Gonzi's political support is eroding, increasing the chances of early elections following MP Franco Debono's announcement that he will be withdrawing his support for government.

Speaking to MaltaToday, Debono stressed that he will "definitely not be voting in favour of government - especially on the Budget - when it is obvious that the Budget looked nice, but now turns out to be a simple wish list."

Finance minister Tonio Fenech says however that "parliament approval is required when expenditure is exceeded, as estimates establish expenditure maximum limits."

 "What we are planning is further expenditure restraint due to the increasing climate of uncertainty and not an austerity programme. I remind you that our deficit targets are well below the 3%," Fenech said.

But as the finance minister attempts to diffuse speculation that Brussels orders may fall through and complicate Malta's position within the eurozone, Fenech is faced with the daunting prospect of having to steer a beleaguered government into a general election without any room to manoeuvre financially and make it look good with the electorate.

"Government is committed to ensuring the reduction of our deficit in a sustainable manner," Fenech told MaltaToday, and added that the "precautionary revised budgetary allocations were made with this objective in mind."

According to the finance minister, the spending cuts are to result through savings emanating from restraints in recruitment (0.1% of GDP), overtime (0.04% of GDP), operational and maintenance Expenditure (0.07% of GDP),  programmes and  initiatives (0.21% of GDP) and government entities (0.17% of GDP).

He made it clear however that government "will not be making redundancies, but will tighten further its policy in replacing resignations and retirements, a policy which the Minister had already announced two years ago."

Monday's Cabinet meeting focused on the emergency revision of Budget 2012, where all ministers were urged to submit their decisions on where the cuts had to be made. Until last night these details were being finalised and were to be submitted to finance ministry's permanent secretary.

But Labour's authoritative voice on finance and economy, MEP Edward Scicluna, has taken government to task on the budgetary review, insisting that the fall-out for the government for being caught out with a €40 million gap in its estimates is mostly political because the electorate will have to bear the economic brunt of these painful  cuts.

"The Prime Minister and his Minister of Finance gave their word that their calculations were correct in the face of criticism from the Opposition. It turned out that government has been proved wrong, and the arbiter this time was the European Commission," Scicluna said.

Speaking from Brussels, Scicluna said that it was correct for government that it was not the time to raise taxes. "But since these adjustments come eight weeks after the Budget was announced, such cuts are not planned and would not be the most ideal and efficient ones," he said.

He added that this is why it would have been better to come up with a credible and sustainable budget in the first place.

But what do the cuts announced by the Prime Minister and the finance ministry really mean?

"Pain! when government is committed and tied with so many wage agreements with unions, assistance to industry and various legal obligations, it has very little room to manoeuvre," says Scicluna.

He said that the first lever which government suggested is a sort of freeze on recruitment and on overtime. "I reckon some 400 to 500 jobs need to be wiped off the government sector and the suppression of 400,000 hours of overtime. That leaves €30 million to go....

"Government entities would have to follow suit apparently with a more deeper cut. Then a €5 million reduction of maintenance and finally a €14 million euro cut in expenditure from an assortment of expenditures," Scicluna warned.

But would the prospect of an early election impose further implications on the economy?

"By itself this revision adds to the current political crises, but also not warrant an early election. The electoral campaign itself would complicate the successful completion of a revised budget. If there is any fiscal drag it would complicate the political life of a new administration whether this is Labour or Nationalist. After all it is the country which has to bear the final price in terms of  a further higher debt burden and EU penalties to boot," the MEP said.

But while Malta awaits an official statement from Brussels, Commissioner Olli Rehn, yesterday warned on fiscal debt.

"We cannot solve a debt crisis by piling up further debt," he said, adding that today he would be presenting proposals concerning fiscal surveillance for the five countries that it identified last year as  likely to exceed the EU's 3% fiscal deficit limit. This "fiscal surveillance" is expected to include Malta.

Under tough new fiscal discipline rules adopted by the EU last  year, the European Commission could subject such countries - in this  case Belgium, Hungary, Poland, Malta, and Cyprus - to intensified scrutiny and even propose additional measures, and ultimately financial penalties.

"This year needs to mark a turning point," said Rehn. "2012 will be  a year when future governments of the euro area will be determined and a  year when our strong monetary union will be completed by an even closer economic union."

"This crisis is by no means behind us and the time has come for a new and deeper economic integration," he said.

At the same time Fitch and Standard & Poor's credit rating agencies have placed Malta among the eurozone's downgrading creditwatch list, and revised ratings may be announced later this week.

The EU's new governance rules give the  Commission the power to impose financial sanctions on member states that do not abide by deficit and debt rules. The sanction amounts to a deposit of 0.2 per cent of a country's GDP, which can be turned into a fine if the member state ignored Brussels recommendations to rein in the deficit.