Government’s debt legacy

The debt issue is not just a Labour issue, it is a national issue. In actual fact I find it more of a concern among the business community which knows only too well its repercussions. Business persons know that debt burdens once incurred can only be transferred, as say from one generation to another, or from one sector to another as the Irish example shows, but whoever finally inherits them must pay the ultimate price of “pain without gain”.
Malta’s own history of how the debts grew to the size they are today is not too different from that of neighbouring Southern European countries facing more acute debt problems. It starts with the simple process of spending and delivering more than the country can afford. Year in, year out, this expansionary policy, much defended by Keynesian economics during recessions, was misused and overused even in good times, when the economy did not need further pumping up. Just like the invention of antibiotics, which could and did save millions of lives, was misused and overused to the point it lost its effectiveness in the battle against superbugs like MRSA.
At the time the electorate is duped by what appears to be logical reasons for high public expenditure growth. Sober economists who are not so convinced are obviously ignored. During the middle to late 1980s the Nationalist government put forward cogent and convincing reasons to justify the high expenditure. It was stated that the millions were needed to invest in Malta’s infrastructure especially in the energy and communications sectors. Obviously true.
But this valid reason was not the real cause of debts starting to rise. Capital expenditures by the national energy and communications utility companies were done on a commercial basis and though adding to the public guarantees did not contribute one iota to the deficit or debt growth.
But what about deficits incurred to finance public capital expenditure? Debts incurred to finance productive investment such as a new harbour or airport is surely a wise decision. Yes of course. But a capital expenditure which is productive does not contribute to higher debt-to-GDP ratios. By definition this expenditure is meant to be productive and by contributing to economic growth would keep the ratio constant. A constant ratio does not restrict debt from rising. It only has to grow at the same rate of the GDP.
Well the debt ratio did not stay constant. Debt incurred due to high current expenditure growth outgrew even GDP itself. The ratio kept crawling up from a mere 12 per cent in the mid 1980s to the 76.5 percent it is today. This is the legacy which our children will inherit from sheer bad economic governance which includes all the same horror stories we hear from Italy, Greece or Spain. If these are not uncovered and left uncharted in our Catholic country due to our ingrained omerta’, so be it. But we still have to bear the burden of these hidden financial and economic excesses of the past.
The final official picture is still a misleading one of what really took place. Our ESA95 system of public accounting measures national debts in gross values and ignores adding or subtracting the changes to our national assets. In short if we account for the fact that the debt has at times been “controlled” through privatisation – the sale of publicly owned assets – the national debt measured in net terms would be that much higher. It is not out of place to refer to this privatisation from this perspective as the selling of the country’s family silver. This sale is not supposed to add or subtract to our real debt. Privatisation, whatever its overall merits, only fools the population into thinking that it has controlled the gross debt. Even a simple shop-keeper is loathe to be fooled by such misleading accounting.
Be that as it may, even our gross debt ratio is continuing to crawl up. The debt dynamics bunches a collection of contributors which include the obvious deficit itself, the rate of economic growth, the rate of interest on the debt and a series of so-called stock-flow financial values. With our dismal economic growth as projected for us by the EU and the IMF we are close to falling into a debt trap where even stabilising the debt ratio becomes a difficult feat.
Where do we go from here? The priority of the government for the next five years is to contain and stabilise our national debt. It has to stop the debt ratio from growing. That has to be attained without any tricks or cosmetic accounting. No fiscal one-offs either. At the moment, looked at from this perspective, our deficit in 2001 was still in the region of 3.5 per cent. We do not hazard a guess what this structural debt is this year. It is no use, either, playing hide-and-seek games with these public finances. The Government has to come clean. The Maltese deserve transparent accountability in this very fundamental area of government.
Cutting back the debt to an acceptable 60 per cent level is not on the cards for the short to medium term future. The latest autumn EU forecast has put paid to all the false dreams and promises printed on expensive glossy paper in the Finance Minister’s Pre-Budget Document 2013, as to how this government will obtain a budget surplus or cut our debt ratio.
Our top priority is to see that our public finances are on a sustainable path. Only once we attain this goal can we turn the attention to reducing our national debt or obtaining a budget surplus.



– : Wednesday, 21st November, 2012


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