EC ‘too naïve’ to believe Malta’s fiscal deficit was a one-off

Senior economist and Labour candidate for the European Parliament (EP) elections Edward Scicluna said that with its assessment of Malta’s Stability Programme for 2009, “once and for all the EU has clarified a point which I felt was being misunderstood by many local economic observers.

“This refers to the quick conclusion reached, that while the impending recession necessitates some form of economic stimulus, and that since the EU Commission itself was encouraging many EU countries to initiate such a stimulus, Malta would be allowed to exceed the three per cent deficit,” Scicluna explained. “This, I had emphasised, applied only to countries which had enough room to manoeuvre. Surplus countries like the UK and Germany were given the go-ahead,” he said. “But an excessive deficit procedure was slapped on all those who have exceeded the three per cent limit.”

Asked whether he agreed with the European Commission’s assessment on Malta, Scicluna said: “Where I disagree is the politics played by the Commission vis-a-vis Malta. “I cannot believe the Commission is so naive as to believe that Malta can actually fall in line in a short while in view that our excessive deficit was merely due to a one-off fiscal slip,” Scicluna insisted. “Of course it could well be that the Commission is playing a game, calling Malta’s bluff that it would correct its excessive deficit in a few months,” he added.

Scicluna said that he agreed with the EC’s assessment “that the risks of Malta delivering on any of its promises are high. I would go one step further and state it is nearly impossible to deliver such promises at this stage of our economic cycle.” On the other hand, Scicluna disagreed with the European Commission asking Malta to lower its expenditure in the health sector as proposed in the EC’s assessment.

“With Malta experiencing a record fall in exports throughout 2008, and the ramifications on future employment outlook, and with the whole business and private sector baying for assistance, I cannot see Malta increasing effectively its tax burden and lowering public expenditure in its most suffering sector – health,” Scicluna told Business Today.

Scicluna said the Maltese were “eager” to see efficiency being raised so as to expand the level of service in their hospitals without necessarily spending more. “But I cannot see the Government raising efficiency by cutting costs. I wish the EU Commission could elaborate more on this subject,” the senior economist insisted.

“In the meantime just wait to hear noises from the Government side about stipends blaming the EC for pushing for their downward revision,” Scicluna told Business Today.

Scicluna said that he “agreed fully” with the EC’s assessment that a significant part of the reduction of the budget debt during 2004-2007 was the result of one-off privatisations and sale of property. “If we exclude one-off privatisations the debt ratio cannot fall by its own accord unless we manage a surplus on our primary balance. “This was the only reason I thought the EC would fail us in the Euro test. They did not. Fine,” the senior economist told Business Today.

“Now we are facing problems and the EC is still saying it believes our Government’s conclusion that the public finances are sustainable and the glitch was a one time event. I fail to see the logic,” Scicluna insisted.

Asked to elaborate on what other avenues the Government has to curb expenditure in view of the fact that there were few public entities suitable for privatisation, Scicluna explained: “The Government has to bite the bullet and ensure that public expenditures fall in line within what the country can bear to pay in taxes. It is that simple,” he told Business Today. “But the Government has been trying to avoid facing this home truth for years on end.

“Of course we may scream and say that this is definitely not the time to do it. And perhaps this time round we are right,” Scicluna explained. “But would the EC listen? Promises are promises,” he warned.

In view of how the public finances performed last year, Scicluna was very sceptical about the Government’s ability to meet its budget deficit target of 1.5 per cent of GDP again this year, particularly in view of the economic recession that has hit the Euro area.

“Without giving figures from the top of my head, in the absence of an econometric model, I would say that I would be very surprised if we manage to squeeze ourselves inside the three per cent allowed cap during 2009,” Scicluna told BusinessToday.

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