Issue link: https://maltatoday.uberflip.com/i/585015
16 Signs the economy is expanding Budget 2016 maltatoday, TUESDAY, 13 OCTOBER 2015 Stephen Muscat T he government budget is an annual exercise to show the state of the government finances, but also gives a snapshot of how the economy is faring. Obviously, the exercise explains results of income and expenditure. And when the latter surpasses the former, the government is out of pocket, and to has to resort to loans. So far Edward Scicluna has accomplished a reduction in deficit of 1.6%, but is still dependent on loans. As the economy expands, then the value of loans as a percentage of the value of economy continues to reduce. Government is succeeding in ensuring that annual government deficit as a percentage of the gross domestic product continues to reduce and remain below the allowable target number for Eurozone countries of 3%. In respect to government debt, again as a percentage of the gross domestic product, the percentage is reducing but we are still far off at 66.56% from the allowable percentage of Eurozone countries of 60%. But the constant reduction in both deficit and loan percentages of the Gross Domestic product is encouraging. The results which government has presented on the state of its finances show that the forecasts are reasonable and achievable. Reduction in the percentages of government debt and deficits as a percentage of the economy as the latter expands and grows, will attract the attention of International Institutions such as the EU and the IMF. They will conclude that Malta is credible and a stable economy. Moreover international rating agencies will be expected to give us a better classification and rating for government debt. The reduction in the government deficit will naturally mean that there is a lesser need for loans. Scicluna gave a comparative analysis of the results of the Consolidated Fund as resulted in 2014, forecast for this year end and for the next three years. This year the result is that the deficit is decreasing as more taxes were collected from direct and indirect taxes. For sure this is also ref lection of more profits generated by the private sector, more income for workers, more jobs created, but definitely a more efficient tax system for collection of tax dues. The statement made in the budget speech that Enemalta is now regularly paying for the dut y due to government on petroleum is helping the tax collection figures. The increased consumption from Maltese and tourists is ref lected in increased VAT due to government. Measures taken by the government to increase the levies on cigarettes and cement have added to government income so far. The momentum in the construction sector is also ref lected. And certain increased charges by government departments did result in more government income thus neutralizing any perception that such service requests are price sensitive. How has this increased government revenue been spent? Not all the increase was spent, automatically resulting in a reduction of the government deficit. But the normal culprits for increased expenditure remain. A higher government wage bill resulting from increased staff in health and education and probably from automatic increases resulting from collective agreements signed just before the last election and honored by this government. Additionally, because of government's stand to eradicate precarious work rates by its contracted service providers came with the result that these have cost more. As usual, government initiatives and programs continued to increase. This is ref lected in higher pensions paid, higher payments for medicines and surgical devices consumed this year, and more contributions to government entities. This government has also succeeded in securing local loans at a lower coupon rate. Though the government value of loans increased, the relative interest increase was marginal. Overall the fact that government succeeded in reducing its deficit but regularly miscalculating costs is annoying. But is the government projecting a reduced deficit at end of this year? The answer is yes, for absolute value after an adjustment, and yes as a percentage. And what about government's own projections for its deficit for the next three years? Well there will be a spike next year before an adjustment, than absolute figures go drastically down. But as a percentage, a constant decrease in the percentage of the deficit as compared to the GDP will be achieved. This is because the economy is growing at a stable momentum. Not just as a result of increased government expenditure, but also because the private sector will increase its contribution. This addresses the Opposition's concern in the pre-budget document that observed that economic growth should not be instigated from an increase in government expenditure. This can be seen as increase in government revenue from 2016 to 2018, is paired with slower growth in recurrent expenditure. Capital spending continues to be sustained over the next three years, as the country cries out for improved infrastructure. Going forward, the need for government to loan money will continue, partially to roll over existing loans, but at a lower coupon, until demand for new loans in 2018 decreases. With a year-on-year increase of half a billion euro in GDP registered from 2014, these are sure signs that the economy is expanding. One just has to make sure that the growth is registered in all sectors, be it tourism, gaming, financial services, pharmaceuticals, IT, and eventually manufacturing and the new wave of innovative and value added services. A skilled workforce should guarantee this. But controlling inf lation and adequate fiscal policies will ensure that Malta does not experience an overheated economy. Stephen Muscat is a CPA, and a former CEO of Maltacom PHOTOGRAPHY BY CHRIS MANGION