Sustainability is the discipline of living within one's means. It means spending wisely and in a way that ensures that future financial commitments can be met. While balancing the books at the end of the year is a desirable it is not necessarily proof that one is living sustainably. A case in point is the manner in which the government achieved its budgetary surplus in 2016. The government was clearly keener to score a political point than to put Malta's finances on a sound and sustainable footing. For the sake of this article, I am not going to consider the environmental and social aspects of sustainability. Suffice it to say that we are running high environmental and social deficits. But let us focus on the fiscal side of sustainability.

Government expenditure can be divided into three main categories: capital expenditure, recurrent expenditure and debt servicing. Capital expenditure is the amount the government invests in infrastructure so that the country can function properly. Past Nationalist administrations were characterised by heavy capital expenditure to bring the country's infrastructure up to an acceptable level after years of neglect and second-hand mentality. This investment created the bedrock on which our present economy is based. We can welcome close to two million tourists because of the investment in tourism infrastructure, not least our airport. We are a transhipment hub in the Mediterranean, thanks to the investment in our Freeport. We grew as a financial services centre because of investment made in the country's information technology infrastructure. Investment in our education and healthcare systems allow us to function as a developed country. After becoming members of the EU, we had access to funding to sustain this investment. Prior to that, the government had to borrow, knowing that this was a sound investment that would help the country prosper. In order to have more money to invest in capital expenditure, successive Nationalist administrations sought to keep the cost of running government on a day-to-day basis as low as possible. During the last Gonzi administration, despite facing the worst economic and financial recession in living memory thereby necessitating more government spending, recurrent expenditure grew by an acceptable four per cent annually. To keep recurrent expenditure at bay, Nationalist administrations sought to do more with less, including fewer people on the public payroll. By hiring fewer employees than those who left or retired, the public sector headcount went down from 48,000 in 2002 to 41,000 in 2012.

This trend was reversed by the present government. During the past four years, government recurrent expenditure has increased at eight per cent every year on average. From €2.5 billion in 2012, it grew to €3.3 billion in 2016. This increase is not bringing about a proportional improvement in public services or generating new income streams for the economy and the government. As many damning National Audit reports show, much of this spending is being done with total disregard for the principles of good governance and value for money. As reports by the Central Bank and the International Monetary Fund point out, this increase in government's recurrent expenditure places its ability to meet its future fiscal targets at risk.

The government's income was influenced over the past years by a favourable international economic climate, thereby bringing an increase in tax revenue collected, the earnings from the IIP scheme and one-off events such as the sale of public assets. These income streams carry no guarantees. In fact, all the indications point to a drastic drop in income from IIP over the next two years as the legal cap of citizenships that can be sold will be reached. How is the government going to make up for this shortfall and for a shortfall in revenue if the economic cycle takes a downturn as inevitably happens in times of international crises? The government's irresponsible spending sprees have made it less fighting-fit.

While recurrent expenditure is shooting up, capital expenditure in 2016 as a percentage of total government expenditure and as a percentage of GDP was, on the other hand, at an all-time low. At 8.2 per cent of total government expenditure, capital expenditure in 2016 was the lowest in the past 10 years. In 2012, it was 11.8 per cent. Government's capital expenditure as a percentage of GDP is the lowest in history. Even in absolute terms, we spent more in capital expenditure in 2012 than in 2016 - €364 million in 2012 as compared to €310 million in 2016.

Moreover, while the government is claiming that it balanced its books, NSO statistics show that central government debt in 2016 increased by a further €140 million. Under this government, debt increased in four years by over a billion euros and the cost of servicing that debt by half-a-million euros a day. What investment in infrastructure and economic vision for the future has the government to show to justify this increase in debt?

This is the uncomfortable fiscal truth the government is not keen to talk about.

Dr de Marco is the Shadow Finance Minister

 

Editorial note:

Finance Minister Edward Scicluna had earlier in the week confirmed he would pen a counterpoint but pulled out on Friday because of commitments related to the meeting of EU finance minister in Malta