Economists clash over EC assessment of Malta stability programme
There were differing views expressed by economists about the European Commission’s assessment of Malta’s stability programme for 2009, which was adopted by the European Commission (EC) recently. On 18 February, the EC said that it would not be taking any further action in the Excessive Deficit Procedure (EDP) against Malta despite the fact that in 2008, Malta registered a budget deficit of 3.7 per cent, well above the 3 per cent maximum allowed by the commission. The deficit was considered as being temporary in nature in view of the early retirement schemes for the Malta Shipyards and the subsidy for the utility bills that have been considered as one-offs that would not, in the Commission’s view, be repeated this year. Charlot Zahra reports
Karm Farrugia: A ‘fair assessment’
Veteran economist Karm Farrugia was very critical of the European Commission’s policy of insisting on its budget deficit assessments despite the fact that the European Union is still in a recession.
“The European Commission doesn’t seem to realise that Europe – and practically the whole developed world – is in deep recession which is still to hit its bottom,” Farrugia told Business Today.
“The 3 per cent budget-deficit-to-GDP it imposes as a maximum becomes a joke in the light of falling GDPs and the urgent need to raise government spending on capital projects,” Farrugia insisted.
Asked for his general views on the European Commission’s assessment of Malta’s Stability Programme for this year, the veteran economist told Business Today that it was “a fair assessment”.
Asked whether he agreed with the Commission’s assessment on Malta, Farrugia gave a conditional approval. “I do, but only if the 3 per cent and 60 per cent uppermost limits are increased to 5 per cent and 70 per cent for at least until mid or end 2010,” Farrugia told Business Today.
Farrugia explained that he agreed with the Commission’s insistence in its report on “the need to reduce the Recurrent Expenditure part of our National Budget, and heavily undertake capital (infrastructural) projects on the lines of President Obama’s ‘New Deal’ programme”.
However, the veteran economist disagreed with the European Commission’s “continuance of retaining the 3 per cent capping even for 2009. This is insensitive to the looming global meltdown,” Farrugia insisted.
Asked whether he agreed with those who said that the European Commission had let off the Maltese Government too lightly when declaring that Malta’s budget deficit at 3.5 per cent will be a “temporary” one and it will soon come in line with the 3 per cent reference value, the veteran economist told Business Today that “‘too lightly’ is not correct. ‘With understanding’ is more precise,” Farrugia explained.
In its report, the EC highlighted the fact a significant part of the reduction of the budget debt during 2004-2007 was the result of one-off privatisations and sale of property.
Farrugia told Business Today that he agreed with this assessment, “especially since the adjective used was ‘significant’ not ‘mainly’.
“I have always maintained that the revenue from privatisations and property disposal should not be reckoned with for purposes of budget-deficit calculation, but only for National Debt reduction,” the veteran economist insisted.
Asked about what other avenues government still had left to curb expenditure in view of the fact that there were very few public entities left suitable for privatisation, Farrugia did not mince his words. “Not many, I am afraid,” he said.
Farrugia explained that “waste cutting/reduction is an imperative, especially in human resources utilisation. Each Ministry should appoint an outsider to examine where economies could be affected in spendings, for instance - the Ministry’s very own secretariat.
“Not excluding, of course, parastatal entities, however independent of government they claim to be,” he insisted.
Another radical proposal for 2009 by Farrugia was “a freeze on all forms of wage increases in all the public sector – a moratorium.”
Asked whether in view of how the public finances had performed last year, when the budget deficit rose from 1.9 per cent of GDP as forecast in the 2008 Budget speech to 3.5 per cent as forecast at the end of the year by the European Commission, would the Government be able to meet its budgetary targets again this year of 1.5 per cent of GDP Farrugia said: “I will be the first to congratulate the government if it manages to contain the budgetary deficit to below 2 per cent and still retain social harmony.”
Asked about what would be, in his view, a more realistic forecast for the budget deficit for 2009 in Malta, and the basis of this calculation, Farrugia said that it all depended on “government’s ‘values’, both economic and, more so, social.
“I believe the government should not hesitate to plan for a possible 4 per cent deficit-on-GDP together with an undertaking that, when the recession is over and times normalised, the target of a balanced budget would not extend to more than two years, however much taxation would need to rise to achieve it.”
Edward Scicluna: EC ‘too naïve’ to believe Malta’s fiscal deficit was a one-off
Senior economist and Labour candidate for the European Parliament (EP) elections Edward Scicluna said that with its assessment of Malta’s Stability Programme for 2009, “once and for all the EU has clarified a point which I felt was being misunderstood by many local economic observers.
“This refers to the quick conclusion reached, that while the impending recession necessitates some form of economic stimulus, and that since the EU Commission itself was encouraging many EU countries to initiate such a stimulus, Malta would be allowed to exceed the three per cent deficit,” Scicluna explained.
“This, I had emphasised, applied only to countries which had enough room to manoeuvre. Surplus countries like the UK and Germany were given the go-ahead,” he said. “But an excessive deficit procedure was slapped on all those who have exceeded the three per cent limit.”
Asked whether he agreed with the European Commission’s assessment on Malta, Scicluna said: “Where I disagree is the politics played by the Commission vis-a-vis Malta.
“I cannot believe the Commission is so naive as to believe that Malta can actually fall in line in a short while in view that our excessive deficit was merely due to a one-off fiscal slip,” Scicluna insisted.
“Of course it could well be that the Commission is playing a game, calling Malta’s bluff that it would correct its excessive deficit in a few months,” he added.
Scicluna said that he agreed with the EC’s assessment “that the risks of Malta delivering on any of its promises are high. I would go one step further and state it is nearly impossible to deliver such promises at this stage of our economic cycle.”
On the other hand, Scicluna disagreed with the European Commission asking Malta to lower its expenditure in the health sector as proposed in the EC’s assessment.
“With Malta experiencing a record fall in exports throughout 2008, and the ramifications on future employment outlook, and with the whole business and private sector baying for assistance, I cannot see Malta increasing effectively its tax burden and lowering public expenditure in its most suffering sector – health,” Scicluna told Business Today.
Scicluna said the Maltese were “eager” to see efficiency being raised so as to expand the level of service in their hospitals without necessarily spending more. “But I cannot see the Government raising efficiency by cutting costs. I wish the EU Commission could elaborate more on this subject,” the senior economist insisted.
“In the meantime just wait to hear noises from the Government side about stipends blaming the EC for pushing for their downward revision,” Scicluna told Business Today.
Scicluna said that he “agreed fully” with the EC’s assessment that a significant part of the reduction of the budget debt during 2004-2007 was the result of one-off privatisations and sale of property.
“If we exclude one-off privatisations the debt ratio cannot fall by its own accord unless we manage a surplus on our primary balance.
“This was the only reason I thought the EC would fail us in the Euro test. They did not. Fine,” the senior economist told Business Today.
“Now we are facing problems and the EC is still saying it believes our Government’s conclusion that the public finances are sustainable and the glitch was a one time event. I fail to see the logic,” Scicluna insisted.
Asked to elaborate on what other avenues the Government has to curb expenditure in view of the fact that there were few public entities suitable for privatisation, Scicluna explained: “The Government has to bite the bullet and ensure that public expenditures fall in line within what the country can bear to pay in taxes. It is that simple,” he told Business Today. “But the Government has been trying to avoid facing this home truth for years on end.
“Of course we may scream and say that this is definitely not the time to do it. And perhaps this time round we are right,” Scicluna explained. “But would the EC listen? Promises are promises,” he warned.
In view of how the public finances performed last year, Scicluna was very sceptical about the Government’s ability to meet its budget deficit target of 1.5 per cent of GDP again this year, particularly in view of the economic recession that has hit the Euro area.
“Without giving figures from the top of my head, in the absence of an econometric model, I would say that I would be very surprised if we manage to squeeze ourselves inside the three per cent allowed cap during 2009,” Scicluna told BusinessToday.
Lawrence Zammit – EC ‘too tough with us’ on budget deficit
On the other hand, economist Lawrence Zammit was more upbeat about the European Commission’s assessment of Malta’s Stability Programme for 2009.
“It is a positive assessment because it gives a relatively clean bill of health about the state of our public finances,” Zammit told Business Today. “Removing the two key one-off expenditures, we would have had a deficit to GDP ratio of around 1.5 per cent.
“Up to a few years ago, it was felt that the public sector deficit was the major problem facing the country. This issue has now been successfully addressed,” Zammit contended.
Asked whether he agreed with the European Commission’s assessment on Malta, Zammit reiterated his positive outlook.
“I do agree that we have addressed the issue of the public sector deficit, and as such I am in agreement with broad message of the European Commission’s assessment,” he told Business Today.
Zammit would not answer when asked to elaborate on those aspects of the EC’s assessment of Malta’s stability programme for 2009 with which he agreed and those aspects with which he disagreed.
“I believe that it is still too early, given the current international scenario, to make a definitive assessment of Malta’s stability programme for 2009,” he told Business Today. “As yet we have to see what impact the international recession will have on this country and the public finances.”
Zammit disagreed with those who said that the European Commission had let off the Maltese Government too lightly when declaring that Malta’s budget deficit at 3.5 per cent would be a “temporary” one and it would soon come in line with the 3 per cent reference value.
“The European Commission did not let Malta lightly at all,” Zammit told Business Today. “I was actually surprised that the EU Commission actually went into this issue when it was evident that the 3.5 per cent deficit to GDP ratio is the result of the early retirement schemes for the Malta Shipyards workers and the fact that the water and electricity rates were left unchanged,” Zammit contended.
“Considering the level of budget deficits that other countries are running up, I believe that the EU Commission was too tough on us,” he told Business Today.
Asked on the issue of whether he agreed with the EC’s assessment that a significant part of the reduction of the budget deficit during 2004-2007 was the result of one-off privatisations and sale of property, Zammit replied that it was “the level of general government debt that was reduced because of revenues coming from the sale of property and privatisations and not the budget deficit.
“The budget deficit was reduced as a result of increased revenues and control on government expenditure,” Zammit told Business Today.
On the issue of what other avenues did the Government have to curb expenditure in view of the fact that practically there were very few public entities suitable for privatisation, the economist said: “Government should not be using privatisation just for the sake of curbing expenditure.
“Having said that, we still need to work very hard as a country to ensure that all tax revenues due to government are effectively collected and that we get value for money for every euro spent.”
To achieve this target, government needed “the wholehearted – and I mean wholehearted – support of all the social partners,” he told Business Today.
Zammit would not volunteer an answer when asked whether the Government would be keeping with its budget deficit target of 1.5 per cent for 2009 or not considering how the public finances performed last year.
“The reasons why the budget deficit reached 3.5 per cent of the GDP have already been explained. I do not believe that anyone can make any definitive predictions for 2009,” he said.
The governments of the leading economies were trying out all sorts of remedies to get their economies going once more and they had not yet succeeded. “Thus, as the saying goes, the jury is still out on this issue,” Zammit insisted.
Zammit also refrained from offering his own forecast for thebudget deficit for Malta this year.
“What we have learnt from the current international crisis is that those economists that have advised governments on the basis of mathematical models that they themselves had created, have all got it so wrong. I will therefore not go down that road myself,” Zammit told Business Today.