Capital projects could re-ignite economy

The capital projects proposed by government could be the key for public finances to recover from the current state which saw the deficit expand by EUR74m in January.

Statistics issued last week by the National Statistics Office showed that government debt increased by 117 per cent during January to EUR136.5m, more than double the amount of last year.

Speaking to The Malta Business Weekly, economist Edward Scicluna said that the islands should work hard on EU funded capital projects to receive payment for the work completed. While on paper, EU funded projects require partial government funding, the secondary linkages and tax proceeds from the economy leave a positive effect on public finances.

Prof. Scicluna, however, complained that the situation is precarious with expenditure rising in an unsustainable manner and figures for the whole 2008 still unavailable.

“As a Maltese citizen I feel annoyed that government supplies the data to the EU Commission with regards to the Convergence and Stability Programme but does not find it necessary to publish it in Malta. The figures for January 2009 were published while those for the whole of 2008 are still not. Worse we are told that we need to wait till March or April to see last year’s full figures published.

“The data for January, taken on its own, shows a bleak picture of government finances. They give the lie to what has been promised to the EU Commission that the excessive deficit at the end of last year was a one-off due to the energy subsidy and the Dockyard early retirement scheme. I find it hard that the Commission can believe such an excuse.”

We also seem to have convinced the Commission that apart from this one-off item we could quickly bring the deficit under control by increasing the tax burden and reduce the public expenditure portion of the GDP.

“End of January figures show that this could be a dream. How can you promise to squeeze the economy at a time when it is asking for financial oxygen? With a clearly declining economic activity, one would be expected to collect less income tax, less national insurance contributions and over time less VAT.”

Asked which sectors have contributed towards the deficit ballooning in such a manner, Prof. Scicluna acknowledged that the energy benefit and the ’yard’s early retirement scheme did contribute towards the deteriorating state of public finances, although he adds a caveat that expenditure “exploded” across all sectors.

“According to government, it is the one-time EUR100m spent on the energy subsidy and early retirement scheme. The figures show that public expenditure exploded across all sectors, with some more than others. Wages took a spike in 2008 and remained high thereafter. Transfer payments too have increased. Since none of these public sectors have been restructured, this upward pressure is to be expected. What we are seeing is government containing expenditure by making it difficult for the entitled consumer to get his deserved service. Out of stock pills and hospital queues are a symptom of this ‘expenditure containment’ method. We all know that this is not sustainable.”

Prof. Scicluna also explained that the deficit will continue to grow as the economy worsens and more public sector money is put into the economy to prop up ailing sectors.

“This is one of the tenets of macro-economic policy that during an oncoming recession the automatic stabilisers fire in. These are money from the public sector which automatically are paid to those who are being hit negatively by the current recession. This will benefit the economy, but obviously worsens the deficit. Beyond this, there is the more obvious fact that less income tax, national insurance contributions and VAT are collected when the economy falters.”

Asked whether government debt has become unsustainable in the long run, Prof. Scicluna explained that a slowdown in growth will further accelerate debt as the interest being paid by government to service the debt will probably be exceeded eventually.

“The debt ratio is made up of the gross debt and the GDP. For the ratio to stop growing we require that for the future, the rate of economic growth rises faster than the interest rate paid by the government to service that debt. Once the debt servicing rate of interest exceeds the rate of economic growth, the debt burden shoots up. The longer the recession the faster the burden grows.”

by Gerald Fenech, The Malta Business Weekly – 5th March 2009

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