The budget that will be presented tomorrow is a realistic one, which is conscious of the financial situation the country is in but which seeks to make the best of it nevertheless, according to Finance Minister Edward Scicluna.
In an interview with this newspaper, Prof. Scicluna emphasises that the budget will be doing so “by putting its money where its mouth is – towards growth”.
Malta had been placed under excessive deficit procedure earlier this year, after registering a deficit amounting to 3.3 per cent of the GDP last year – above the EU’s three per cent threshold. The European Commission set a 2014 deadline for Malta correct its excessive deficit, but according to the Finance Ministry’s projections, this target should be met this year, with a deficit of 2.7 per cent.
Next year, the ministry aims to bring down the deficit even further, to 2.1 per cent. But would this emphasis on bringing the deficit down hinder the government’s efforts to foster economic growth?
The minister disagrees, stating that one “cannot have growth over the long term while ignoring the bulging debt ratio”. Ignoring the deficit to focus on economic growth would only see investors and credit rating agencies lose faith in the country, he adds.
“There comes a point then when economies with huge debts will have to choose – and the risk is that undertaking onerous consolidation measures will stall the economy,” Prof. Scicluna continues.
“Thankfully we are not faced with that trade-off. We can still keep growing, but we have to be careful and be prudent with our public finances. We have to prioritise.”
Turning around a super tanker
Despite the Finance Ministry’s efforts to lower the deficit and keep expenditure in check – including by appointing British expert Maurice Mullard to carry out a comprehensive spending review – the Draft Budget Plan shows that the government’s expenditure will actually grow next year, from 44.6 per cent of the national GDP to 45.3 per cent. So what gives?
“Trying to contain growth in the public sector is like trying to turn around a super tanker: it has its own momentum and it takes time,” Prof. Scicluna explains.
“But the first seeds have been sown. Prof. Mullard is doing an admirable job in training ministries to start looking at spending in a different manner. You can call it lateral thinking. We just cannot change with the old mentality of keeping the status quo.
As the ministry prepared to present the first budget entirely drafted by this legislature – the 2013 Budget Prof. Scicluna presented was mainly the work of his predecessor, albeit with slight modifications – its approach to the process has already been reformed to help move away from the status quo, although the process will take time.
“The modern and effective budgetary approach which I am looking at, and which is needed, represents a big change to all the people involved in the process, not just in my ministry, but across all ministries. It will have to be phased in over the coming three or four years before it can fully materialise,” the minister explains, adding that such changes had to be made gradually.
But he insists that unless a shift away from the current process of “to do more, give me more money” takes place, the public sector will not be able to renew itself in a concrete manner.
Preparing for a budget also involves extensive consultations with social partners and, according to Prof. Scicluna, this year’s consultations have been good.
“But they could be much better. The ideas brought forward are often too fragmented,” he adds.
“I look forward to the day when the unions are able to come forward with a common position, and the employer organisations with another. That is what the Malta Council for Economic and Social Development (MCESD) is for – to distil and filter out the best ideas and stronger arguments. The country wants ideas for the common good,” the minister observes.
On taxes and growth
The budget’s actual measures, naturally, will only be made public tomorrow, but the recently-published Draft Budget Plan has confirmed that “a series of indirect tax measures” are to be announced, which would bring a projected €23.9 million in revenue next year.
At the same time, the government is continuing the reduction in income tax rates for higher-income earners planned by the previous government, whose first part was implemented in the 2013 Budget. Indirect taxes, however, are often regressive in nature – lower-income households tend to pay more indirect taxes as a proportion of their income – in contrast with direct taxation.
Such a shift from direct to indirect taxation, therefore, may appear to be in conflict with the principles of a social democratic government, but when asked to comment, Prof. Scicluna emphasises the need to view the budget in its totality.
“Approximately €3 billion worth of tax, and the same amount in expenditures, have many diverse distributional effects on family incomes. One can say whether particular measure is progressive or regressive, but the budget is composed of a myriad of measures,” the minister notes.
“It is the net effect of all these measures which matters, and it is that which we are monitoring closely.”
The indirect taxes will more than make up for the income tax reductions, which are projected to cost an additional €13 million in lost revenue in 2014.
The tax burden is also estimated to increase from 36.1 per cent to 36.8 per cent next year: ahead of the general election, Prime Minister Joseph Muscat had criticised the PN’s electoral programme on the basis of an expected increase in the tax burden.
When asked to comment, however, Prof. Scicluna insists that this increase will be reversed in short order.
“I can assure you that that ratio will fall back once we get the country’s economic growth going. But growth requires investment in key measures at first.”
This need to invest appears to be behind several expansionary measures that are expected to be announced tomorrow, which are projected to cost €27.7 million in total. What these measures actually consists of will have to wait a day, but the draft budget plan does point out that these include measures “intended to spur growth and employment”.
One measure that has already been confirmed, if not in detail, is the introduction of the so-called third-pillar pensions – voluntary privately-funded pension schemes – with the minister noting that it was about time that this took place.
The question is the last on the list sent to the minister, who seizes the opportunity to conclude the interview on an assertive note.
“As with all the recent changes, you will be seeing more examples of a government who decides. We have been talking too much and doing too little,” Prof. Scicluna remarks.
“Of course, the more you do, the more it exposes you to criticism. But doers are used to that.”
– Sunday, 03 November, 2013