Is restarting the Excessive Deficit Procedure justified?

Business Today - Wednesday, 13 May 2009

The European Commission last Monday 4th May 2009 confirmed that it was going to restart the Excessive Deficit Procedures against Malta for its high Budget deficit in 2008, which reached 4.7 per cent for last year, 1.7 per cent in excess of the EU’s budget deficit limit under the Stability and Growth Pact. Business Today’s CHARLOT ZAHRA spoke to Labour candidate for the European Parliament elections Edward Scicluna on the significance of this procedure, what effective measures the government should take in order in order to curb this deficit, and the different forecasts issued by the different financial institutions in Malta, among other things.

What is your reaction to the Excessive Deficit Procedure Deficit against Malta? Do you think that it is justified in view of the high budget deficit reached by Malta last year?

What was surprising was not the Excessive Deficit Procedure which was slapped on us this time, but the strange decision that we were let off scot-free some weeks back because the EU believed our government, that the reported deficit was a one-off. Any local or foreign economist familiar with our economy could see that this was not so. We are now among the three laggards in the Euro zone. Definitely it is not a situation to write home about.

In your view, what concrete action should the Government take to curb the budget deficit that Malta has incurred last year and likely to incur this year as well?

It all started in October 2007 when Government budgeted an unprecedented revenue forecast unrelated to the expected outcome of the economy. It was clear to me that if this revenue forecast would not materialise, our public finances would revert back to an over 3 per cent deficit/GDP ratio. I am getting annoyed that what could be evaluated using a back of the envelope calculation was not caught on the EU radar screen with their sophisticated economic models. But then I am not yet sure they are taking us seriously. Or else we are misreading their style of evaluation. It looks that each time they just want to call our bluff and when we are caught in our own trap, they pounce. For our own good I just wish they would act much earlier. For the government, local economists are a bunch of gloomers and doomers. The EU can afford to be neither. But when the government transgresses the EU rules, we still have to see how they would look like.

In view of the fact that the European Commission is now saying that the GDP for 2009 will actually shrink by 0.9 per cent and that budget deficit for 2009 will reach 3.6 per cent, do you think that Finance Minister Tonio Fenech is still able to reach the targets set out in the 2009 Budget of 2.4 per cent growth rate and 1.65 per cent budget deficit rate for 2009? How?

This woolly and opaque way of reporting and forecasting must stop. It is an insult to the intelligence of all Maltese and Gozitans living on this island. How can we state with a straight face we have an international financial centre on the island and then let this fireworks of meaningless economic and financial figures be allowed to be banded about as if it is business as usual. The three public agencies must get their act together. I am referring to the NSO, the CBM and the Ministry of Finance. I am more than sure they can do it. I know they have qualified people. Their data must converge to the EU’s own estimates and forecasts. It does not necessarily need to be a replica but some convergence is required. It is quite disquieting that it is not.

What is your reaction to the latest economic forecast announced by the European Commission on Monday, especially with regards to the forecast for GDP contraction in 2009 and a budget deficit of 3.6 per cent for this year?

I think that the Government has never to date been in such a difficult situation with regard to the economic management of our economy. You have to either inflate or deflate. Either way, in our situation Government will have to pay a very high price whichever way it goes. Unfortunately it painted itself in a corner with no exit in sight. It cannot say it was not forewarned.

Prof. Scicluna will be contesting the European Parliament elections on behalf of the Labour Party.

www.edwardscicluna.com