The Malta Independent 27 May 2019, Monday

Surplus to deficit – long term sustainability

Thursday, 18 April 2019, 10:53 Last update: about 2 months ago

Ralph Puli

There it goes. Recent statistics confirmed what was being predicted. The government started spending on capital projects and despite registering high economic growth, a deficit was registered. Central government finances were €70 million in the red last year despite a surplus of €16.6 million being projected for year 2018 in the previous year’s budget speech.

A detailed analysis of the figures reveals that the increase in revenue amounted to €269 million whereas the increase in recurrent expenditure amounted to €278 million. And this despite the taxes and social security contributions paid by the foreign workers living in Malta! The increase in capital expenditure amounted to €255 million.

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The economic model based on significant increases in population being pushed by the current administration, requires heavy capital investments, outlays, which are much higher than if such increases in population did not materialise. The capital expenditure is not just needed to ensure better schools, hospitals and infrastructure. It is required because of the carrying capacity of the current facilities. If our schools, hospitals and infrastructure, as they stand today, were meant for a population of 400,000, there needs to be significant capital outlays to cater for a population of, for example, 600,000.

The significant capital expenditure required will have a significant impact on public finances. This is more important in view of the fact that government revenue is partly dependent on the tax-rich composition of high corporate profits and proceeds from the Individual Investor Programme.

The Country Report Malta 2019 projected that the general government surplus is expected to decline from 3.5 % of GDP in 2017 to 1.2 % of GDP in 2019. This projection of a surplus has already been reversed to a deficit in 2018. The Country Report also forecasts that Malta’s economic growth is projected to decrease from 2018 levels to an annual average rate of 5.2 % in 2019 and 4.6 % in 2020.

This confirms that one of the reasons why a surplus was being registered was the lack of capital projects, such as investment in infrastructure, schools and education, health and a number of other initiatives. One must also take into account that a number of capital initiatives are related to EU funded projects and so partly funded by the EU.

The budgetary situation which might hide the risk of financing permanent expenditure with potentially temporary revenue, is worrying. The budget has benefitted from the increase in revenues from one-off measures. On the other hand, public expenditure is projected to increase faster than revenue due to higher capital expenditure needed and higher recurrent expenditure. These situations give rise to challenges which arise on both the revenue and expenditure side.

There must be a drive to attract investment which generates high-value output to increase revenue. It is important that as a country we do not rest only, in economic terms, on what was inherited such as the financial, aviation and pharmaceutical sectors. In economic terms, Malta needs to continually reinvent itself so as to be better prepared for any economic shocks that might affect our existing sectors.

The government has to exercise extreme care on expenditure. It cannot act against the principles of good governance and value for money since this has a cost, resulting in a higher recurrent expenditure than is actually needed.

Long-term sustainability is essential. Yes, we have to plan for the long-term and not just for the next five years. This needs to be done to protect our future and those who come after us.

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