Dad, political sociologist, local councillor, drummer from Malta

Monday, April 10, 2017

Deciphering the surplus

Image result for malta surplus 2016

For the first time since 1981, the government’s consolidated fund registered a surplus for the year ending 2016. Finance Minister Edward Scicluna said he expected the €8.9 million surplus to grow when the accrual accounts are presented.
As expected, this news led to opposing reactions from Malta’s parliamentary forces. Prime Minister Joseph Muscat said the country was performing an economic miracle without resorting to austerity measures.
The leader of the Opposition, Simon Busuttil, replied that the surplus was mainly achieved due to reduced capital expenditure. This was immediately rebutted by the government, which emphasised that the such expenditure was within normal levels.
Busuttil stressed that the government’s recurrent expenditure was growing in a way which reflected ‘vote-buying’ tactics by the ‘populist’ government.
So is the government’s surplus good or bad?
If you had to ask me, this is good news. Indeed, Malta is continuing a trend that was also present under the previous Gonzi administration, namely to navigate in a relatively safe manner amid rough economic seas in southern Europe.
The 2016 surplus shows that the present government is apparently now doing even better.
However, it has to be seen whether this surplus is the beginning of a trend or whether it will be a poisoned chalice that tempts the government to put fiscal prudence aside.
I hope this surplus is not a product of creative accounting, as was the case before the 1996 general election. The deficit of the time proved to be much bigger than what was stated by the previous Fenech Adami administration, thus presenting the new Alfred Sant government with unanticipated obstacles.
But today’s government accounting systems offer less possibilities for fiscal deceit. So let us assume that the surplus adequately reflects the current state of affairs.
The government can adopt different strategies to build upon this success.
First, it can opt for increased expenditure and investment in priority areas such as welfare, environmental protection and education. Such investment can arguably have an economic multiplier effect like the creation of employment (including green jobs) and it can also help improve people’s quality of life. In this regard, I commend the government’s current active-labour policies that are encouraging people to seek employment and avoid welfare dependency.
Second, the government can opt for an electoral shopping spree to encourage people to vote Labour in the upcoming election. Malta witnessed such examples of the power of incumbency in various previous elections. Government and parastatal corporations were used as employment agencies and various quick-fix infrastructural works were carried out at the expense of the taxpayer.
The government may obviously be tempted to take this route and my suspicion is that the cash-for-passports scheme will be used for this purpose. As I had written some weeks ago, this scheme is shrouded by secrecy and is not subject to the accountability characterising European Union and budgetary funds.
Another route the government may take is that of fiscal prudence. Perhaps Parliament should debate whether Malta’s Constitution should include a ‘golden rule’ that does not allow fiscal deficits, thus ensuring that future generations would not have to carry financial burdens.
In this regard, the government may also decide to adopt a Norwegian model and create a sovereign fund financed by surpluses that can then be used when the need arises in the future. Parliamentary consensus on such a policy can result in a fiscal pact and, thus, avoid certain unsustainable practices.
The above routes do not necessarily exclude each other and they may be complemented by different fiscal strategies with regard to income tax, VAT and so forth.
It is important to note that Malta also had a hefty national debt of €5,785,000,000 as at December 31, 2016.
Theoretically, if Malta’s surplus represents a trend rather than a one-off achievement, this will have a positive impact on national debt. But debt can also grow in absolute terms, decrease in relative terms and, thus, conform to the EU Stability and Growth Pact.
This takes place when the national debt ratio to the country’s GDP decreases, mainly due to three factors: a growing economy, a yearly deficit of under three per cent and a government debt ratio of 60 per cent of GDP. Malta is currently satisfying all criteria.

No comments: