By Matthew Vella
The Maltese government is expecting the budgetary deficit to decrease according to the medium-term fiscal framework presented in its economic recovery plan report to the EU.
In May, Malta presented its Convergence Programme to the Council of Economics and Finance Ministers (ECOFIN) in Brussels, an outlined programme for economic recovery covering the coming years up to 1997. The plan contains a framework for the consolidation of annual fiscal imbalances and for the containment and gradual reversal in the growth in debt levels for the period ending 2007.
According the European Commission’s opinion, the macro-economic scenario underpinning Malta’s plan for the consolidation of fiscal imbalances during the programme period is “plausible even if a cautious attitude is exhibited in relation to the exposure of the Maltese economy to exogenous shocks.”
Faced with the weakening domestic economic activity registered in 2003, the report said “a gradual and modest recovery” is expected in 2004 and subsequent years, reflecting the pick-up in the international economic environment. In contrast, interest payments are expected to rise during the 2004-2007 period, impacting negatively on the budget balance.
Foreseeing a decline in the deficit to 5.2 per cent of the gross domestic product in 2002, the report states this will be mainly informed by an increase in revenue that would exceed expenditure. A deficit of 3.7 per cent of GDP on the general Government finances is currently projected for 2005, followed 2.3 per cent in 2006 and 1.4 per cent in 2007.
Gross debt is expected to remain relatively stable during the two-year period to 2005, at around 72 per cent of GDP as registered in 2003. Subsequently, during the following years to 2007, the debt-to-GDP ratio is expected to decline to 70 per cent of GDP.
Government’s fiscal consolidation programme aims to reduce the deficit to below 3 per cent in 2006. As a result, the debt ratio will start to decline to around 70 per cent by the end of the programme period, from the 72 per cent level in 2003.
In order to achieve the fiscal targets, efforts will be undertaken to improve productivity and efficiency in Government departments as well as in public sector enterprises and to increase accountability in the use of public funds. Thus, better public services can be delivered whilst curbing public expenditure. At the same time, there will be strong prioritisation in public expenditure, with priority being given to growth-enhancing expenditure. As regards the welfare system, the aim is to preserve social cohesion through the availability of a social safety net. Hence, expenditure will be focused on those that need most government support whilst measures will continue to be taken to avoid abuse of the system.
Government revenue is expected to increase to 45.3 per cent of GDP in this year, and increase by an average of 2.2 per cent annually until 2007, however the real ratio of revenue to GDP will decrease in 2006 and 2007.
A “stricter tax enforcement” is expected to increase tax receipts from 36.8 per cent to 38.2 per cent of government revenue in 2004, which is however mainly attributable to the VAT increase, as well as higher licenses, taxes and fines, namely: licence fees received following the privatisation of the National Lotto; higher receipts from duty documents on transfer of immovable property. These are expected to offset the impact of complete removal of import levies on May 1. Meanwhile, direct tax receipts are expected to increase at a rate close to the nominal GDP growth rate.
During the 2005-2007 period, tax revenues are expected to increase by an annual average rate of 3.6 per cent, closely reflecting the increase in nominal GDP. Direct taxes, which constitute around 56 per cent of total taxes, are projected to increase over the same period by an annual average of around 3.4 per cent.
A curb in government employment will be the main attribute of a decrease in government expenditure, coupled with an improvement in “value for money” for expenditure incurred and the prioritization of expenditure. During the period 2004-2007, employment with government is expected to remain constant at 2003 levels with recruitment being undertaken only in the technical and professional grades in which there is a shortage of staff while other grades are expected to decrease in employment levels due to natural wastage.
The share of total Government expenditure to GDP is expected to decrease from 52.4 per cent in 2003 to 44.4 per cent in 2007, expecting that government expenditure will rise at a much slower rate than GDP at less than one per cent, with the exception of 2006 when it is expected to decrease by 1.6 per cent. Growth in recurrent expenditure is projected to decelerate to reach 1 per cent between 2006 and 2007.
Retirement pensions are projected to rise from Lm89 million in 2004 to Lm104 million in 2007, with the increase in the number of pensioners and the cost of living adjustments, with expenditure on contributions to government entities expected to increase by five and six per cent respectively in 2004 and 2005, slowing down to one and three per cent in 2006 and 2007 respectively.
Contributions to Government entities between 2004 and 2007 will increase mainly for the new hospital and the post secondary education institutions while it will decrease for other Government entities reflecting their restructuring, namely the Malta Shipyards, where it is expected to decrease by about 50 per cent between 2004 and 2007, in line with the commitments under the EU Accession Treaty.
Capital expenditure should decrease from 6.7 per cent of GDP in 2004 to 4.1 per cent of GDP in 2007 with an absolute decrease between 2004 and 2007 of about 30 per cent mainly due to lower outlays on the new hospital as the mega-project is completed.
Projects tied to the EU’s Structural and Cohesion funds and other foreign financing are the main components of capital expenditure during the 2004-2007 period. Most outlays on the hospital will be spent till 2006 and those on roads under the Italian protocol are expected to be spent by 2005, while most expenditure on projects tied to EU funds will be spent between 2006 and 2007.
The interest payments on government debt should remain constant at around four per cent of GDP between 2004 and 2007. Expenditure on interest payments is projected to rise by five per cent during this period, with increases slowing down each year to reach 0.1 per cent in 2007. These figures are premised on the assumption of constant interest rates. The figures are also a reflection of the slowing down of debt growth between 2004 and 2007.