ALFRED SANT

Most people are heartily grateful that the budget season is almost over, so that they can settle to enjoying preparations for Christmas and the New Year. Debates on revenues and expenditures will have given many of those who failed to switch off, indigestion. From this perspective, it is a pity that the budget cycle matures in such a concentrated format, at a time of the year when people look forward to family and other festivities. Political gaming, financial number crunching and social analysis all come into the play of the debate. Which is as it should be, since the budget discussion affords a unique opportunity for an overview of the general state of the economy and of public welfare. These are clearly subjects that, when they do not bore you stiff, do mobilise opinions and sometimes passions.

There was a time when budget debates used to be held in a different season, the end of the government’s financial year then being end March, like it still is in the UK. Whether the change of the government’s financial year to a calendar year basis – as happens in continental countries – was a worthwhile move or not remains debatable. It occurred in 1980; at the time, government spending still did not have the big role it now has in the economy as a whole. Not so long ago, it was the fashion in government circles to claim that the budget debate had been taken out of the political do-all, end-all mode into which it had set in the past. And so budget day had become just another date in the calendar, when the government announced how it had fared financially in the past year and signposted the routine measures it intended to adopt during the coming 12 months.

Paradoxes

The 2005 budget has certainly not been framed in this manner. (It is a moot point whether recent past budgets were actually projected as coolly as claimed by the official rhetoric.) The controversies over the so-called social pact, plus the ongoing debate about how to deal with international oil prices, ensured if nothing else did, that there was a build-up of expectations. Moreover, there has been a growing awareness that government deficits do matter and that Malta’s public deficit has become something to really worry about. The fairy tales about the public deficit being itself a fairy tale have by now been discredited all along the line. People do want to know whether there has been genuine progress in the fight to control the deficit. They want to know the real truth, not the fake success reports on which they have been fed too frequently in the past.

So perhaps it might be a good idea to list some paradoxes and contradictions that today characterise public finance. For this subject, though it is infecting so much of our daily lives… and our future… remains cluttered with many half-truths that are still going strong.

Like, for instance, the point about the importance of the government in our lives. It used to be claimed that with liberalisation and with other moves to adopt deregulation, privatisation and what have you, the weight of the government in national life would decrease. Such a development would be a good thing, we were told, since too much government stifles initiative, besides creating economic deadweight and inefficiencies.

As of now, privatisation has taken its toll of government assets. The introduction of EU rules and regulations has gathered pace, not just in terms of the formal changes that were made to legal and commercial systems, but also in terms of actual implementation. Still, it hardly feels like the weight of the government has decreased.

In 1986, government expenditures as a proportion of Gross Domestic Product stood at 46.9 per cent. In 1990, this percentage stood at 51.9 per cent. In 2003, the figure read 49.3 per cent, hardly a climactic change. What has been going on?

Despite all the rhetoric about making government leaner and more effective, it seems like the contrary has been the case. No matter how much we liberalised or failed to do so, government spending grew and grew. Year in year out, such spending outmatched in growth that of our economy, our Gross Domestic Product. The analogy is with a family which continues to spend more and more on its household purchases, and does this faster than the growth of its total income.

In 1986, the economy grew by 7.5 per cent, government expenditure by 5.6 per cent.

In 1990, the economy grew by 9.6 per cent, government expenditure by 19 per cent over the previous year.

Last year, 2003, the story was still repeating itself. While the economy grew by 1.6 per cent, government expenditure rose by 4.6 per cent over 2002.

Overweight

The picture that emerges is of a public administration that gobbles more and more of the national cake. Even though it is grossly overweight, it still takes more. This happens at the expense of the productive sectors of the economy – those sectors which create the real wealth of this country by producing the goods and services that consumers and businesses want to buy.

Such arguments are immediately interpreted as, and turned by some quarters, into attacks on public employees. The latter are paid much for doing little – so the story goes. And the implication is that growth in government spending happens because of the lobby of people – public employees – who rely on the government for livelihood and perks, and who swing political decisions their way, no matter what.

This reductionist explanation of why the government spends so much swings between the naïve and the self-serving. True, there exists a powerful lobby of public sector employees. Equally true, a significant share of government spending goes on personal emoluments in the public sector. But over the years, I have been struck by the number of people outside public administration who, when decision time arrives, show how strong a vested interest they have in continued strong, government spending. For one, there is the business lobby, which is continuously on the look-out to ensure that a stream of government contracts is maintained through recurrent and capital procurement.

In a general sense too, a widespread expectation prevails that government is there to open cheque-books and pay for projects that people feel are desirable. This approach is hardly limited to lower income citizens who depend on social welfare to make ends meet. Consider for instance the recent controversy – one in a long series – over reported plans to rebuild the Opera House in Valletta. It was already mind-boggling that the government launched the controversy at a time when its financial situation was ragged, to put it mildly. But in my view, equally mind-boggling was the assumption by many citizens who participated in the arguments, that the state should just decide to carry out the project, as a Parliament, as an Opera House or whatever; the financial implications were merely considered a footnote to the whole issue.

Besides, there is another way by which government activity has continued to spread, despite official attitudinising about reducing the public reach. As society develops, new areas qualify for attention. Regulation and deregulation themselves set new requirements for further intervention by the state. The experience has been – certainly in our case – that while such new requirements are being satisfied, the old areas and the old ways of doing things are also maintained. There is in our case, no such mechanism as zero-based budgeting – by which every so often, projects are evaluated with an eye to seeing whether they need to go on functioning like they have during previous years, or even whether they need to be retained. Even less do we have sunset provisions, by which government projects are given a limited life – past a set date, they are wound down. So, the state administration ends up running new initiatives that reflect present day needs, alongside other projects that continue to function simply because they have been inherited from the past.

Recurrent expenses

These problems do not arise only in Malta; other countries have had their share of similar experiences. What might make them more difficult here is the size factor. Already, due to our miniscule dimensions, we suffer from administrative diseconomies of scale. With a population of under 400,000, we still need to run the central bureaucratic structures of any other nation-state, creating an administrative overhead that per capita must be higher than for other much bigger entities. If alongside this unavoidable feature, come problems related to an inability to shed or restructure outdated functions, then obviously operations will be run more expensively.

Which brings us to the question as to whether the bloat in government expenditure is fed by social spending. A conventional strategy, adopted by some, emphasises that the way forward is to curtail the welfare state. I am one of those who fail to be convinced that such an approach provides the ultimate solution.

True, there needs to be a much tighter administration of the welfare system, not least where it is subject to rampant political and other abuse. One needs only consider for instance, how in Gozo boarding-out of employees for “health” reasons goes over the top just prior to an election.

On the other hand, it is less than true that social spending accounts for the way by which government expenditure keeps rising faster than the economy as a whole. The real culprit is actually non-social spending. It has been allowed to rise without delivering corresponding results on quality. In the so-called public administration reform process launched in the late 1980s to early 1990s, the objective to restructure civil service positions in line with a realignment of pay scales was set. That objective has remained a dead letter to the present day.

As part of a packet of proposals I made in Parliament to counter the deficit and hopefully relaunch economic growth, there was one that is central to the project of bringing government spending back under real control. This was to cut recurrent spending in the non-social sector by three per cent a year for three years. The cuts were carefully defined to exclude social services (including pensions), education, health and expenditure on programmes for older citizens. If the process is managed successfully, compared to ongoing current performance, the government would save Lm60 million a year by year three. That tells us something about where the challenges lie.

Political choices

For no matter how boring financial discussions can become, they do relate to basic political choices. And when such choices are being made, confrontations will arise. Alternatives have to be framed not just in terms of what is best, or most feasible financially, but also in terms of what can be politically acceptable.

A big problem we are facing, however, is that what can seem to be politically acceptable is, in fact, becoming non viable, economically and financially. The truth must be faced: solutions that follow from it have to be devised and accepted. For too long, people who mattered found it expedient to ignore that we must deal with a crisis situation. Now that they are having to face the music, they must proclaim things that, up to some time ago, they fervently denied. Decisions which are being earmarked for the knife – like on workers’ holidays, health care charges, students’ stipends – were introduced with a huge political bravura by the very same people who now propose their reversal. Naturally, the way forward is being obscured by the manner that led us into this impasse. The pile up of problems was either blithely ignored for years, or just as blithely declared solved.

Which does not make the necessity to come up with an acceptable strategy any the less urgent. Such a strategy is not going to work if, all of a sudden, it shifts the burden of what needs to be done on to workers and middle classes. Give and take has got to happen and has got to be seen as happening. Getting a good grip on how the government spends and why it spends is a crucial issue.

The government has got to lead by way of itself offering to “give” – and this beyond cutting capital expenditure to trim public outlays, which is short-sighted at best.

Supposedly we are at a point in the political cycle where the government could have moved courageously – especially since it has an unfair five-seat advantage in parliament – to really restructure its expenditure. There is little evidence that this has happened. However, in economic and financial matters there comes a time when the scope for trade-offs with the truth becomes extremely restricted.

It seems to me that we are entering such a period.