Edward Scicluna, a Toronto trained university professor and an experienced economist has been busy discussing his pre- budget document with the MCESD and civil society groups, representatives of non-governmental organisations, businesses and unions saying that the 2014 budget will hold no surprises.  Prof. Scicluna noted that economic growth – which amounted to 1 per cent in real terms last year – is projected to increase to 1.4 per cent this year and to 1.6 per cent the next. Such modest growth will be spurred by a recovery in private consumption, which, he said, had slowed down ahead of the general election.

Domestic sales and retail business have reported brisk results this summer, together with a higher return expected from record-breaking tourist arrivals. Still, being prudent the government is projecting a deficit amounting to 2.7 per cent of the GDP – down from 3.3 per cent last year – a prediction that the EU Commission and IMF see as being too ambitious. The Ministry revised upwards the 2013 national deficit forecast by 1 percentage point – from the previous administration’s 1.7 per cent deficit forecast – to 2.7 per cent. Realistically, this was a reflection of fiscal slippage that continued in the first quarter of this year which partly resulted from the stretched and consequently wasteful 2013 pre- election period.

As a matter of fact, since the previous election of 2008, the deficit was estimated at €265.4 million, more than double the deficit of €118.9 million registered the previous year. In 2008, this was meant to be kept under wraps and not exceed 3 per cent, but due to the recession the deficit exploded to reach 4.7 per cent of GDP, compared to 2.2 per cent of GDP for 2007. This poor economic performance caused the consolidated debt to reach €3,626.2 million, or 63.8 per cent of GDP in 2008 (profligacy led to the debt increase to €5 billion in 2013 net of proceeds from selling most of the family silver). Naturally, being new to the job and having inherited a higher deficit than actually forecast for 2013, the finance minister is cautious not to promise too much in his first budget so as not to fall into the temptation of the previous government which went overboard with promises resulting in fiscal slippage, which is now, with hindsight, blamed on the pre-election euphoria.

The learned professor is even hinting that “dead wood” in the public sector has to be removed as the government moves to trim unnecessary expenditure. He wants to simplify processes and working practices to maximise efficiency, effectiveness and reap better economies of resources employed in the government. Already the slogan of a spending review is being whispered in the corridors of Castille. The minister reiterated that the Auditor General will be tasked to analyse the government's budgetary projections but more important he wishes to create a fiscal council coupled with a Special Review Unit. The question is who will be the henchman who will be brave enough to battle entrenched bureaucracy with its long tentacles deeply rooted in the system? Time will tell whether Prof. Scicluna will succeed in reducing the red tape commonly referred to as the Hydra and Medusa monster. But help is at hand as a Simplification Commissioner was recently appointed within the Prime Minister’s Office who is expected to gallop triumphantly on his white horse up Castille steps to commence talks with unions, the local government and the business community.

Moving on the subject of next year budget, we note with glee that the Labour government is committed to honour the unkept promise made by GonziPN in its 2008 pre-election manifesto –the one to reduce the top rate of income tax for those earning under €60,000 a year from 35 per cent to 32 per cent in 2013, 29 per cent in 2014 and 25 per cent in 2015. As can be expected, this tax reduction will encourage young married couples to work harder and enjoy the fruits of their work by having more money to spend, which in turn will percolate in the domestic economy through a multiplier effect. All this will contribute to a good prognosis of a future improvement in the economy, matching the IMF’s positive appraisals published in recent days, as well as by other external observer entities such as credit rating agencies Standard & Poor’s, Fitch, Bloomberg, and the European Commission. Of particular interest is the positive comments received on the strength of domestic banks at a time of widespread economic uncertainty in Europe. More good news continues in the IMF report, which states, despite the turbulence in the euro area, that the performance of Maltese banks was satisfactory and that they are adequately capitalised, liquid, profitable and well-positioned to transition into the Basel III regime. So yes, we need to work harder to make up for past profligacy but the future is encouraging.

Let us change subject and compare our situation with that of other EU countries that made progress since the start of the global recession .A fast track achiever that has bucked the trend of contracting economies is Poland. By sheer contrast to other ex-Communist countries, Poland is faring well and aims to achieve a lower deficit to GDP ratio of 1.5 per cent and its debt/GDP should be around 40 per cent, rather than a previous level of 54 per cent (compared to 73 per cent in Malta). Poland stands out as being in pretty good shape, with very limited fat, if any (it never entered recession), and appears to be insulated from any euro area slowdown. This advantage has come about because Poland has been vigilant in controlling expenditure and avoided profligacy in unproductive ventures aimed to hoodwink its voters into a false sense of security. Poland introduced serious reforms to its pension regime and boasts of a well funded first and second pillar scheme (both mandatory). Thus new entrants into its pension system contribute to a first pillar in a state controlled fund together with a second pillar, which is made up of private pension funds.

The poor man in Europe – Greece, is the classic example of a nation stuck in recession with an economic contraction of 1.5 per cent, as it battles to overcome a massive public deficit and debt crisis after years of rampant tax evasion and alleged sleaze in high places. The cure is bitter and includes severe spending cuts and some layoffs of public sector workers. Some economists now argue that taking such drastic austerity measures is counterproductive as it will lead to killing the stimulus needed for a speedy recovery, but others like the German Chancellor disagrees. She reiterates that there is no gain with no pain and all bailout countries have to repent by implementing an emergency budget, slashing costs and any surplus personnel in the public service. Yet, invariably, history shows that turning the screws on jobs at a time of recession can seriously jeopardise the very recovery one is trying to achieve.  Opinions differ but most agree that such austerity measures will certainly slow down economic recovery in the short run.

The ILO has said that global unemployment is now at its highest level ever, at more than 210 million; nations will need to create 470 million new jobs in the next 10 years to absorb new entrants into the labour markets. This is no mean feat. Youth unemployment has reached unacceptable levels creating perceptions of social injustice. Tensions and social unrest are increasing in the form of riotous public protests in Greece, Spain, France and Ireland protesting against austerity measures, unemployment levels, the raising of pension age and scarcity of jobs. The army of jobless youths in US had also reached an unpalatable high mark and as a sign of urgency a stimulus was to be put in place that has proved effective bringing down the unemployed rate to 7.6 per cent.

In Europe, governments ought to strengthen the deficit levels of the euro region as the currency has suffered a considerable drop against the dollar. More is expected to be done to round up laggards who continue to run high deficits and indulge in burgeoning national debts. EU finance ministers toyed with ideas to impose sanctions on Maastricht rule-breakers. At the same time, the patient can only address the plague of fiscal deficits and uncontrolled sovereign debt by taking painful measures, ie cutting waste, more taxes and regenerating new sustainable solutions. But not all is doom and gloom. Grass shoots are appearing and the euro-area economy, which expanded 0.3 per cent in the second quarter, the fastest pace in recent years reported a healthy jump in exports, while investment rose, ending two years of contraction. 

To conclude, we agree with the official reports that show how Malta, without undergoing any austerity measures or painful pension reforms (on the contrary it signed better collective agreements with State unions), is expected to perform better once the high energy tariffs are reduced next year .So far it registers only 6.7 per cent unemployed and more jobs being created next year. It is even beating Poland, which is itself galloping at a quick trot to recovery. Having seen the travails of other countries, we may be tempted to praise the 2014 budget even though we still aim to reach another deficit of 2.7 per cent of GDP, which is a far cry from the promise of achieving a balanced budget contemplated by the PN regime when signing the fiscal pact. Perhaps the recent bilateral agreement reached with Libya to furnish us with crude oil at discounted prices and to seriously contemplate joint oil exploration in disputed offshore areas will be the harbinger of good tidings that will partially redeem us from the sins of past profligacy.

George Mangion is a senior partner of the PKF audit and consultancy firm, and has over twenty five experience in accounting, taxation, financial and consultancy services.  Mr Mangion can be contacted at [email protected] or on +356 2149 3041.