Debt lower than projected, could give govt leeway in managing public finances – Clint Flores
While one cannot expect the government to fully offset the impact of inflation, there needs to be a balance between this and controlling the deficit, economist JP Fabri has told The Malta Business Weekly.
This newsroom reached out to Fabri and Clint Flores after the publication of data, by the National Statistics Office, which showed that, at the end of March, General Government debt stood at €8,672.2 million, or 57.6% of Gross Domestic Product (GDP), the National Statistics Office said.
This equates to an increase of €1.17 billion over the corresponding quarter in 2021, largely reflected in Central Government Debt, which amounted to €8,669.9 million.
The NSO press release also showed that currency and deposits stood at €567.3 million, an increase of €98 million over March of 2021.
On the other hand, government revenue stood at €1.29 billion in the first quarter of 2022, marking an increase of €141.4 million when compared to the corresponding quarter in 2021.
Total expenditure in Q1 amounted to €1,692.0 million, an increase of €178.2 million over the corresponding quarter in 2021.
“A lot of the discussion has featured on the headline figures of debt and deficit. The fiscal situation remains important, however a discussion on the context is even more important,” Fabri said.
“When analysing the deficit and debt figures, one needs to keep in mind that COVID remains an unprecedented crisis that necessitated large-scale government intervention to sustain the economy and employment. This happened across Europe with the EU pausing the deficit and debt ceilings. In fact, Mario Draghi, Italy’s Prime Minister, and former ECB President said that economic growth is the most effective way to reduce public debt. Therefore, although we need to focus on debt, it is much more important to talk about economic growth and the investment being done towards supporting such growth.”
Fabri said that, nevertheless, a discussion needs to be held on the qualitative terms of the budgetary strategy.
“The operating environment is now different to a year ago. In fact, we need to be aware of the trade-offs once again given that borrowing costs are rising due to the increase in interest rates that have started and are set to continue. The inflationary spiral is also a critical element in this analysis. Government, as it is already doing, needs to adapt its spending strategy to mitigate the impact of higher inflation. This was attested to by Minister Caruana who highlighted the effectiveness of Government’s intervention, which comes at a price of contributing to our deficit. One cannot expect Government to fully offset the impact of inflation however a balance needs to be found.”
“Finally, we need to be conscious of the medium-term fiscal challenges which include an ageing population and therefore the need to press ahead with pension reforms. The need to transition to greener energy and the digital transformation. EU funds will be critical here however there will also be an impact on Government spending. Finally, Government needs to restore fiscal health by building up buffers as the availability of fiscal buffers allowed Government to intervene so directly during COVID.”
Fabri sadi the quality of spending becomes critical and therefore a concerted focus needs to be made on the effectiveness and efficiency of public spending. “It is also pertinent to note that in this vein the Ministry of Finance has already embarked on a spending review. Similarly, it would be good for the Government to start implementing a culture of impact assessments to ensure that programmes and initiatives are truly leaving their desired impact. This will allow realignment and readjustment of such spending.”
In his comments, Clint Flores noted that public debt is lower that what is projected in the Stability and Growth Pact, and this might give the government some flexibility and leeway to manage public finances. In the short-term, this could help sustain the negative shocks coming from the Ukraine-Russia war.
“The figures correspond to the latest (May) European Spring Economic Forecast for 2022. The government revenue is projected to increase in the Spring 2022 forecast, and is also reflected in the numbers released by the NSO. The increase in revenues is not related to inflation. It is true that when one takes the total government expenditure of Q1 2021 relative to Q1 2022 an increase of €178.2 million is registered. However, the Spring 2022 forecast estimates that the deficit is projected to decrease in 2022. In fact, when one takes the figures of Q4 2021 and Q1 2022, the expenditure is less,” Flores told The Malta Business Weekly.
“My understanding is that this expenditure (Q1 2022) also captures, the cash injection given before the general elections to sustain the inflationary pressures, the subsidies on fuels that covered the month of March, as well as the expenditure related to the pandemic measures including the wage support schemes to businesses; still in place at the end of March. If the downward trend is sustained the government deficit would decrease in 2022 relative to 2021.”
Flores warned, however, that we need to cater for any unforeseen geopolitical events, which are quite volatile and hard to predict.
“Crucially important is that the current government debt is less than the stipulated figures (60% of GDP) in the Stability and Growth Pact. This means that, ceteris paribus, if the deficit is lowered and the projected economic growth is sustained, then it would give the government some flexibility and leeway to manage public finances. This is quite important in the short to medium term to primarily sustain the negative shocks emanating from the war. If the government sustains its expenditure via public investment and stimulates domestic demand, such policy measures would support positive economic growth.”
The economist also warned that the shortages in the labour market might stifle economic growth, if not properly addressed.
“Lastly, one must bear in mind that the government subsidies are avoiding an upward spiral wage inflation that would otherwise be economically detrimental for Malta’s competitiveness in the longer-term.”