Veteran economist Karm Farrugia and John Cassar White talk with CHARLOT ZAHRA about the latest statistics issued by the NSO for September’s budget deficit figures, and the impact on the Government’s budget deficit figures for the 2010 Budget Speech five days away
John Cassar-White: “The effect is more pronounced because in the last budget this fall was not anticipated”
What is your reaction to the latest NSO figures which showed that in the first nine months of the year, Malta’ s budget deficit rose by €75.5 million over the same period last year to reach €333.9 million at the end of September 2009?
The trend of an increasing deficit in 2009 has been evident throughout this year. The first 9-months figures therefore come as no surprise.
The NSO figures show that in the first nine months of 2009, recurrent revenue declined by €32.1 million, while total expenditure increased by €43.4 million. What is your assessment of these figures?
At a time of recession, recurrent revenue often drops as a fall in demand signifies less income in the form of taxes. Expenditure increases because of the structural problems in the financing of our social services.
The NSO figures for September also show in the first nine months of 2009, recurrent revenue decreased 2.0 per cent when compared to the same period in 2008, reaching €1,556.3 million. Is this a sign that the Government has over-shot its budgetary targets for this year, an effect of the recession that has hit Malta, or both?
As explained earlier, it is normal during a time of recession for Government revenue to fall as it manages to collect less in taxation. The effect is more pronounced because in the last budget this fall was not anticipated.
But economic developments throughout the world in 2009 deteriorated perhaps even more than some analysts had expected.
On the other hand, total expenditure during the first nine months of 2009 increased in all expenditure categories, leading to a rise of €43.4 million when compared to the first nine months of 2008. How do you explain this shortfall?
The main items where expenditure increased were those related to social services. This trend will continue until structural changes are made to the way we finance these services.
The latest NSO figures for deficit in September show that the Government’s capital expenditure for the first nine months this year amounted to €169.0 million from €163.9 million last year, up by 3.1 per cent. Is this capital expenditure rate sustainable when considering all the budgetary strictures that the Government needs or should it be increased to stimulate economic growth?
Productive capital expenditure is necessary during a time of recession so that the economy starts growing again.
If any expenditure should be curtailed it should certainly not be capital productive investment. This is the seed of our future growth.
In the first nine months of 2009, debt servicing costs went up by €2.5 million, reaching €158.6 million. Is this figure of debt servicing manageable or worrying, in view of the budgetary commitments that Malta has with the EU? Why?
In the short-term it is tolerable. Government has spent more to mitigate the risk of job losses so the debt has had to increase and the debt servicing has of course gone up.
In the longer-term this issue cannot be left to run out of control because it would be in breach of the obligations we have as Members of the euro zone.
Which were those areas of income where the Government underestimated significantly its budgetary targets in the first nine months of 2009? Could you kindly elaborate more on this?
The point at issue here is that the 2009 budget did not anticipate the extent of the economic slowdown.
But once that slowdown started, it was inevitable that the Government’s income was going to fall because this is what happens when people spend less because they feel more insecure.
In your view, which were those areas of expenditure where the Government overshoot significantly in its budgetary targets in the first nine months of 2009? Could you kindly elaborate more on this?
Part of the extra expenditure related to the last part of the Shipyards terminal benefits scheme. This is a one-time issue that will not be repeated.
The other item of expenditure is that relating to the financing of pensions and social services. This is more permanent unless changes are made.
What concrete measures should the Government take for the rest of the year?
Apart from better management of tax collection and more efficiency in the day-to-day running of Government, the big-ticket item to remedy this situation is a deep reform of our social benefits schemes, and the downsizing of the public service to make it less of a burden on taxpayers.
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? Why?
The budget deficit for 2009 is more likely to be near 4 per cent. We have to wait for the 2010 budget to see how this figure will be reduced in the next year.
Karm Farrugia: “In a declining economy, it is to be expected that Government revenue goes down, especially when the budget itself was over-optimistic in the first place”
What is your reaction to the latest NSO figures which showed that in the first nine months of the year, Malta’ s budget deficit rose by €75.5 million over the same period last year to reach €333.9 million at the end of September 2009?
As was expected. We are deep down in recession and have yet to start the climb-up. Consequently, a worsening in Government’s finances is not unusual or disastrous.
The NSO figures show that in the first nine months of 2009, recurrent revenue declined by €32.1 million, while total expenditure increased by €43.4 million. What is your assessment of these figures?
The NSO figures for September also show in the first nine months of 2009, recurrent revenue decreased 2.0 per cent when compared to the same period in 2008, reaching €1,556.3 million. Is this a sign that the Government has over-shot its budgetary targets for this year, an effect of the recession that has hit Malta, or both?
On the other hand, total expenditure during the first nine months of 2009 increased in all expenditure categories, leading to a rise of €43.4 million when compared to the first nine months of 2008. How do you explain this shortfall?
The latest NSO figures for deficit in September show that the Government’s capital expenditure for the first nine months this year amounted to €169.0 million from €163.9 million last year, up by 3.1 per cent. Is this capital expenditure rate sustainable when considering all the budgetary strictures that the Government needs or should it be increased to stimulate economic growth?
I accept the revenue’s decline, but not the expenditure’s increase unless this was chiefly a capital item – which, of course, it was not since capital expenditure appears to have increased only by € 5m over the previous year’s.
In a declining economy, it is to be expected that Government revenue goes down, especially when the budget itself was over-optimistic in the first place.
Comparisons with this year’s budgetary targets no longer make any sense now.
Let’s hope next week we notice more realism from the Minister of Finance for 2010, the first quarter or two of which will likely remain under recessionary pressures and the second half in a recuperating mode.
I feel it is important that further stimulation to the economy via increased capital spending must continue throughout all 2010 irrespective of its impact on the fiscal deficit.
The experience of other countries shows unmistakably that a depression was avoided only because of the stimuli undertaken.
In the first nine months of 2009, debt servicing costs went up by €2.5 million, reaching €158.6 million. Is this figure of debt servicing manageable or worrying, in view of the budgetary commitments that Malta has with the EU? Why?
The latest NSO figures showed that the Central Government debt outstanding at the end of September 2009 amounted to €3.8773 billion, an increase of €359.2 million compared to September last year. What is your comment on these latest figures, in view of the fact that Malta ’s Government debt is now close to the €4 billion mark?
To me this in itself is not a worry, and has only indirect bearing with the commitments the country has with the EU. It is just an additional item to the budget’s recurrent expenditure.
It should, however, be reversed when times are growth ones and budget balancing or surplus becomes possible. Its “twin item”, that is, National Debt, will simultaneously be adjusted.
In your view, which were those areas of income where the Government underestimated significantly its budgetary targets in the first nine months of 2009? Could you kindly elaborate more on this?
Government overshoot significantly in its budgetary targets in the first nine months of 2009? Could you kindly elaborate more on this?
Except for income tax – where there is always a “backlog” to fall on to –the under-estimation of revenue has been practically everywhere, as to be expected.
The over-estimation of current expenditure shows that the administration is still not in full control as it should be.
What concrete measures should the 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 nine months of the year? Could you kindly elaborate more on this?
There is very little that could be done during the next 8 weeks of this year, except ensuring that only what has been committed is in fact incurred.
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? Why?
If not, what would, in your view, be a more tenable figure for the budget deficit in 2009? Why?
For a 1.7 per cent targeted deficit to be achieved, there must accrue a colossal surplus during this current quarter. An impossibility.
Personally, in present circumstances, I wouldn’t be shocked if this year’s deficit approaches 5 per cent of GDP.
I wouldn’t even be disappointed if next year’s budgeted deficit remains in the region of 4 per cent.
But the Government must undertake to balance in 2011 and create a surplus of 1 per cent for 2012. Such a commitment should, in my view, be included in the “social pact” that will soon start being negotiated between the social partners.
