26 November 2003

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It's a deficit attack

With the deficit for 2003 projected to reach 6.3 per cent of GDP, or Lm108 million, Finance Minister John Dalli had one target in mind when drawing up the budget for 2004: scaling back the deficit.
And the minister's preferred option to tackle the problem was once again by increasing taxation, primarily by changing the VAT rate from 15 per cent to 18 per cent. The deficit remains the single largest problem tying government's hands.
Deficit and revenue
The deficit for 2003 is expected to overshoot the projections made last year by Lm33 million. The increase in deficit was due to lower than expected government receipts as a result of poor economic growth. Finance Minister John Dalli partly attributed the sluggish growth to international factors such as the war in Iraq and the Sars virus, which had a negative impact on world economies. The extensive election and referendum campaigns during the first four months of the year were also mentioned as possible contributors to the domestic slow down because of the instability created.
However, the economy also saw lower exports in the overbearing semiconductor industry, which accounts for a large chunk of Malta's total exports.
In 2003 government revenue from customs, VAT, licences, social security contributions and other income fell below projected levels. VAT alone yielded Lm6 million less than had been projected while the funds from the Italian protocol were not forthcoming thus contributing to a worsening of the situation. Government also had no receipts from privatisation as had been the case in previous years.
Income tax was the only revenue source that surpassed government's expectations by yielding Lm203 million, Lm4 million more than had been projected.
For 2004 the finance minister forecasts increased revenue from all sources of income, particularly VAT (expected to yield Lm141 million) and other revenue (expected to yield Lm116 million), which includes funds made available by the Italian protocol and the EU.
The projected deficit for 2004 is expected to be Lm95 million or 5.4 per cent of GDP. But on Monday the minister was bullish about bringing the deficit below the magical three per cent mark by 2006 in time for the adoption of the Euro.
Government is expected to fork out almost Lm10 million more in public debt servicing during 2004, which is forecast to rise to Lm72 million. The bill for capital expenditure is also set to rise from Lm106 million in 2003 to Lm127 million in 2004. This is partly due to the expenditure on the new Mater Dei hospital expected to reach Lm43 million in 2004 to finance the purchase of medical equipment. The hospital continues to be a major burden on government coffers and even if Minister Dalli stated that the capital expenditure on Mater Dei would go down drastically in 2005, it will then start contributing to exorbitant recurrent costs.
Minister Dalli is projecting that 44 per cent of all government expenditure in 2004 will go to finance social services and benefits while public sector wages will account for 21 per cent of all expenses.
The budget steered clear from announcing any cuts in expenditure opting to wait for the finalisation of welfare reforms in six month's time, which are expected to be discussed between government and the social partners.
Total budget expenditure for 2004 is estimated at over Lm900 million.
Economic growth
Slow economic growth in 2002 and 2003 has put pressure on government finances. This year is expected to conclude with a dismal real growth rate of 1.5 per cent, which is down from the 2.8 per cent registered in 2002. For 2004 Minister Dalli is forecasting a nominal growth rate of 3.5 per cent, which translates into a real growth rate of just below two per cent.
Inflation for 2003 is projected to reach an all-time low of one per cent by year's end, which helps to cushion the projected cost of living increase expected next year because of an increase in the VAT rate.
Minister Dalli is forecasting an inflation rate of 2.3 per cent for 2004 as a result of the announced measures.
During 2003 there was a steady increase in registered unemployed and for 2004 Minister Dalli is forecasting an unemployment rate of around 5.2 per cent.

Copyright © Newsworks Ltd. Malta.
Editor: Saviour Balzan
The Malta Financial & Business Times, Newsworks Ltd, Vjal ir-Rihan, San Gwann
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