Edward Scicluna

Malta’s own austerity programme

The Minister of Finance had been warned. The European Commission has now got teeth. They were given to it by the European Parliament in the economic governance package. And Olli Rehn, the European Commissioner for Economic and Monetary Affairs, has said from day one that he meant to use them.

The media cannot be blamed for almost completely ignoring a short and cryptic announcement published practically over the weekend by the Minister of Finance that our Budget for this year will be “partially revised” by a fraction of a percentage of the GDP.

The volumes of speculative comment and reporting on the personal tragedies befalling two Sliema families together with the political high wire walking drama involving the Prime Minister did not leave space for the attention of as yet another bombshell.

Malta has been set its own austerity programme by Brussels and it has to be carried out now.

The information was camouflaged in percentages of this year’s forecast GDP. Hands up those who can recall a rough estimate of this figure in billions of euros, let alone work out on the spot 0.59 per cent of that figure, this time in millions of euros.

The where and how the cuts are to be carried out were covered by a liberal use of euphemism. No wonder the news passed on unobtrusively as something to be dealt with later.

What is interesting are the reasons given for this surprise partial revision: the ministry claiming “high levels of instability in economies worldwide” and the Prime Minister pointing to “the increasing risks in the inter­national economic situation”.

Presumably, these were not discounted in the Budget itself some eight weeks ago.

Let us be serious. The Maltese population is indeed very aware of the gravity of the eurozone crises and the importance that deficit and debt reductions have in containing it.

But weren’t we all bombarded with the message that this is what this year’s Budget was about?

Lest we were not sure of the gravity of the situation, correspondents from our national broadcasting station were sent packing to travel to the two crises’ epicenters, east and west of the eurozone, to report in real time the pain felt by the population of those countries that have committed fiscal governance transgressions.

So what has happened over the festive season which a sober ministry picked up while we were all inebriated? A check on the internet finds that the situations had remained as bad as it was before. We have to look elsewhere for the real reasons.

If truth be told, the key to understanding this enigma can simply be found within the Budget discussion. The undersigned, together with the Labour leader and other spokesmen, had pointed out ad nauseam that the Budget was not sustainable for the simple reason that its forecast GDP was too optimistic.

This phenomenon was not new. It was observed to have been used many times before and most significantly in 2007 in the pre­paration for the 2008 Budget.

What happened in the third quarter of that year is now history. It is a known fiscal ploy that, if you want to aim for further expenditure growth while being asked to reduce the deficit, you are left with no avenue but to raise taxes, or, easier still, project on paper a increase in tax revenue. These, in turn, require a tweaking up of the projected GDP growth.

This time around, the inde­pendent Commission’s forecast for the Maltese economy showed a similar more modest though still positive growth but very worryingly a deficit that just touches down the three per cent mark at the end of 2011 but takes off again in the follow­ing years.

As for the debt ratio, nothing showed in the model that it could be stabilized, let alone start to be brought down.

A worried Mr Rehn had then sent a letter to the minister asking him for “convincing evidence” that the deficit will be “reigned in” to a lower value in a “sustainable manner”.

Unlike the Cypriot authorities, who announced at that time an “austerity package” to impress on the EU and the rating agencies that things are in hand, our own fiscal authorities did no such thing. Instead, the response of the minister was that the model of the Commission was wrong in the sense that it has always given conservative projections, in the past, and, in any case, the Commission had not yet seen what our 2012 Budget was holding in store.

It now turns out that the Commission has not been impressed with our Budget. Whether the one-off revenues were ignored or the estimated revenues brought down to credible proportions, the upshot is that the Commission found that the 2012 Budget has a 0.59 per cent of GDP hole to fill up. How this is done is for our government to decide. What is important is that this is done and done now. Or else the “six pack” penalty regime will come into force.

The government has at this point hinted that it means to do this through an expenditure cut. A shaving off of about €10 million in government wages. This can be translated into a one-time suppression of about 400 to 500 jobs in government departments and a reduction of overtime by about 400,000 hours.

That leaves still €30 million to go. Maintenance would be cut by €5 million. Some €14 million will be shaved from Programmes and Initiatives, which contain all sorts of expenditures from institutes and other assistance related to a ministry.

The balance of about €12 million is still left for the government entities to decide where to slice.

The €40 million figure, whether in taxes or expenditure cuts, is not an impossible figure but still very significant coming on top of the commitments promised by the government some weeks ago and which makes it impossible to retract now.

What is more difficult is that the population at large is confused as to how strong or weak is our economy due to the conflict­ing statements often made by the government.

The people can understand that sacrifices may be needed by the country but they need to be informed in the most transparent and consistent manner.

The government must lead by example but these examples must be convincing. To date, these qualities have been conspicuous by their absence.

The Times, Wednesday, January 11, 2012 

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