News | Wednesday, 02 September 2009

The latest budget deficit figures: an analysis

The latest NSO figures published on Friday showed that Malta’ s budget deficit soared by €85.7 million in the first seven months of 2009 over the same period last year, totalling €368.5 million at the end of July 2009. Charlot Zahra spoke to two leading economic analysts – John Cassar White and Karm Farrugia – about the significance of these statistics and their effect on the Government’s projections for the budget deficit for 2009

Karm Farrugia “In the 2009 Budget Speech the Finance Minister was too upbeat on the way our economy’s performance”

What is your reaction to the latest NSO figures which showed that in July, Malta’s budget deficit rose by €85.7 million in the first seven months of 2009 over the same period last year?
Exactly as I expected – very much in tune with recessionary conditions still prevailing here.

In your view, which were those areas of income where government underestimated its budgetary targets in the first seven months of 2009?
When this year’s Budget was drawn up, around 9 months ago, the Minister was too upbeat on the way our economy was likely to overcome the pressures emanating from our trading partners, especially in the European Union (EU) – too much talk of “resilience” being interpreted as combative rather than capable of readjusting quickly after the “storm”.
Hence the let-down by the revenue side of the budget with the exception, perhaps, of direct taxation which is hardly ever truly reflective of current happenings in the economy.
On the expenditure side, the Minister couldn’t possibly deliberately make substantial cut-downs as this would have been deleterious to the economy.
As Minister for the Economy, he had to add to his programmed expenditure in order to save dwindling jobs and stimulate the economy where, in my view, he could have been more forceful even at the expense of widening the fiscal deficit.

What concrete measures should government take for the rest of the year to ensure a more discipline management of its income and expenditure for this year and prevent further fiscal slippage as we have seen during the first seven months of the year?
In times like this a “more disciplined management” to me translates only in ability to curb wasteful expenditure, not in chopping down capital projects.
“Discipline” is more important in times of positive growth when one is likely to forget that any budget deficit, however small, must be justified as inevitable for the growth process to continue.

How will the latest figures affect the Finance Ministry’s projection of a budget deficit of 1.7 per cent of GDP for this year as stated in the 2009 Budget Speech? Is it still possible?
Anyone who still believes that this year’s deficit could reach only the projected 1.7 per cent of a contracted GDP is a believer in miracles. I am not.
Anything less than 4 per cent would be acceptable in my estimation.

John Cassar White: “The trend for increasing costs on social services is too serious to be left unmanaged”

What is your reaction to the latest NSO figures which showed that in July, Malta’ s budget deficit rose by €85.7 million in the first seven months of 2009 over the same period last year?
The trend in the deterioration of the fiscal deficit has been evident for several months. The fall in government recurrent income and expenditure comes as no surprise to me.

In your view, which were those areas of income where government underestimated its budgetary targets in the first seven months of 2009?
VAT income was bound to fall as a result of people being more cautious about their consumption as a result of the recession.
This trend may continue for some more months unless we see some surprisingly good results in tourism, manufacturing and services industries.

Which were those areas of expenditure where government overshot in its budgetary targets in the first seven months of 2009?
It seems that pensions and health costs are escalating. Predicting increases in pension costs should not be too difficult as the government knows exactly how many people will be retiring every year and claiming their pensions.
Expenditure on health and other social services is more difficult to predict with accuracy. But the trend for increasing costs on social services is too serious to be left unmanaged.

What concrete measures should government take for the rest of the year to ensure a more discipline management of its income and expenditure for this year and prevent further fiscal slippage as we have seen during the first seven months of the year?
I do not believe that there is much that the government can do in the short term to improve this year’s fiscal results.
The medium and long term is a different story. We need to have more sustainable social expenditure and this necessitates a reform of our social security system.

How will the latest figures affect the Finance Ministry’s projection of a budget deficit of 1.7 per cent of GDP for this year as stated in the 2009 Budget Speech? Is it still possible or not?
It is unlikely that during the rest of the year the government’s finances will improve in such a way that last years projections for the budget deficit will be achieved.
The government, the IMF and the EU are already resigned to the fact that the fiscal deficit in 2009 will exceed the 3 per cent limit.

What would be a more tenable figure for the budget deficit in 2009?
I do not have the tools to calculate the likely final figure for the fiscal deficit. But I would not be surprised if this year’s deficit will exceed 4.5 per cent.

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