News & Events

Network News - 19/07/2014

With €6 bn in debt – welcome Fiscal Responsibility Act



Author:  George Mangion
Published on the Malta Independent, 19 July 2014

fiscal responsibilityMalta is in the process of establishing its first Fiscal Responsibility Act, through which the first Fiscal Council will be set up. This should act as a guideline for all those who work in the civil service, so that responsible decisions were taken with a sense of accountability and be more conscious of obligations to conduct financial affairs with transparency, stability and effectiveness. A bill to establish a Fiscal a Responsibility Act was presented in parliament by Finance Minister Edward Scicluna, who was criticisied by the opposition that is too little too late .

The Bill imposes a statutory duty on the Treasury to meet specific targets for the reduction of government borrowing and debt. In parliament Prof Scicluna was reported to say that he believes that this legislation demonstrates government’s commitment to ensuring the sustainability of the public finances.  Simply put – the Bill gives Parliament a greater role in fiscal policy. The debate in parliament took a different twist when Mr Silvio Schembri -a government back bencher rebuked the former PN Administration for increasing the national debt he cited as an example spending €2 million to build a bridge that led to nowhere and which did not create jobs.

Typically he said that government had to tackle public debt issues at a national level but of course there were also local councils that had to pay for the excessive expenditure during previous adminstrations. He continued to chastise the opposition on past profligacy and compared this with the government’s positive measure of introducing child care centres which, according to Eurostat figures, led to an increase in the rate of female work participation and in government revenue. Mr Schembri who acts as the chairman of the finance committee criticized  the Opposition, who while painting a picture of gloom and doom, had to acknowledge that the Fiscal Council is now long overdue while on the positive side the island has received accolades from international credit rating agencies.

They all had welcomed the government’s economic and financial policies.Equally ebullient was Prof Scicluna who reminded the House that while the European Commission gave Malta a breathing period of two years to move out of the excessive deficit procedure, the government managed to do so in just one year. Can we stop and contemplate what other EU states had achieved when setting up such a law. One may find the example of Croatia a good indicator. Over the last five years Croatia has made consistent efforts to improve the rules and relevance of multi-year fiscal planning, but efforts are needed to make planning more credible. Croatia’s  efforts were driven by the need to introduce a three-year perspective for the Pre-Accession Economic Program  and to improve the quality of macroeconomic forecasting and fiscal planning. The 2008 Organic Budget Law introduced mandatory three-year rolling budgets to make the Medium-Term Expenditure Framework more relevant and reinforced the link between budgeting and strategic planning.

The introduction of strategic medium-term plans with performance indicators was designed  to reinforce the preparation of  budgets which starts with drafting of  a Medium-Term Government Strategy followed by adoption of the Guidelines for the three-year period. The documents also provide an analytical and strategic basis for the three-year rolling budget, of which the budget for the first year is mandatory but projections for the following two years are not binding. The latter factor reduces political commitment to achievement of the targets set. Back home, the  fiscal rule that the authorities plan upon promulgation of this law is opportune as it calls for expenditure-based consolidation with clear annual spending reduction targets because revenue generation cannot be counted on to balance the budget over the medium term.

The rule should be in place until the debt to GDP ratio goes below the 60% threshold but not all are convinced that setting up a fiscal council will be the elixir needed to help reduce the debt-to-GDP ratio. Opposition is suggesting that over the longer run it would be appropriate for country to target a cyclically adjusted balanced budget so as to stabilize output and reduce public debt, provided such a rule can be implemented effectively. However, because cyclical adjustments are technically demanding and data-intensive, the government might be tempted  consider alternative rules. For simplicity of monitoring implementation, the fiscal rule and the fiscal reporting should rely on the European System of Accounts 95 definitions. This would also facilitate eventual compliance with Maastricht or Stability and Growth Pact criteria. Incorporating pre- and co-financing-related costs of EU projects into the fiscal rule would also be important for reducing the fiscal deficit and the debt to GDP ratio.

The question is -who shall be the councillors elected to the fiscal council with powers to guide and where necessary question treasury documents.Can such people of trust and integrity come forward to aid the country walk up the crooked path to a balanced budget.It is no mean feat to set up a legally and effectively independent council to transparently monitor compliance with all elements of the fiscal responsibility framework—especially the fiscal rule, the three-year budget plan, and fiscal forecasts—this looks too Utopian and Prof.Scicluna needs the wisdom of Solomon to search and decide to hand pick non partisan albeit technical candidates on council.The members on the Fiscal Council carry all such powers as are necessary for, or incidental to, the performance of its functions. Perhaps cynics may rise in unison and claim that having created our own debt mountain and sold all the family silver the government of the day seems to be wanting plaudits for proposing a fiscal council .Others disagree saying it looks like locking the barn door after the horse has bolted. It looks very gung-ho that the aims of government have turned contrite and now wants to enhance the principle of transparency and openness . Gone are the days when we play musical chairs with unpaid bills at the end of each budget year extolling the full flexibility of cash accounting ingenuity and budgetary wizardry .

The policy of the nineties styled “tax and spend until the cows come home”  is slowly being jettisoned out of  Castille windows. Yet it speaks volumes that the island took so long to pass such a law when other member states  have already made use of such a tool to ensure fiscal responsibility aimed at the execution of certain rights and obligations arising from the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union. Remember how the deficit reaching 3.3% of GdP  in 2013 was simply blamed on temporary lapses due to election promises and no tears were shed that this profligacy led to a tightening of the screws by EU with the onset of an Excessive Deficit Mechanism .

It comes as no surprise that after signing the Fiscal Compact ( unanimously approved by all in parliament in 2012 )the EU had expected that the adoption of Fiscal Responsibility Act had to come into force by the end of 2013 to fulfill the requirements of the Directive 85/2011/EU on budgetary frameworks . It is the government’s aim to continue reducing the national debt from 73 per cent of GDP which peaked in 2013 to 72.5 per cent this year and to 71 per cent in 2015. Needless to say Fiscal Council members are expected to act in a conducive manner to assure prudent economic and budgetary management, including by reference to the provisions of the Stability and Growth Pact. Their powers to guide the minister are ample but this does not mean all recommendations have to be implemented and when the Government does not accept an assessment of the Council the Minister shall, within 2 months of being given a copy of the assessment publish its reasons for disagreement.

In conclusion, the battle cry is – no more taxes please we are Maltese and as no oil was discovered this month in Hagar Qim it is best for industry to marshal business development executives from behind their desks to market our products overseas and for government to cut bureaucracy so as to improve competitiveness. Anything less will lead to the creation of more debating societies in the Babylon of councils within the hegemony.

Author: George Mangion
Published on  Malta Independent, 19 July 2014