A Dissonant Voice

This week we had the news that the government consolidated fund moved into a surplus position in 2016 for the first time in many years. As with anything else in life success has many fathers while failures are orphans. In this case I do believe that the success does have many fathers as having public finances moving into a surplus position is the result of many factors that go back at least for the last three decades.

On the other hand I do wish to express a dissonant voice in the midst of all this. Many believe that having public finances moving into a surplus is something good. I am not so sure that it is so positive for our economy with its peculiarities. As a country we should all be proud of our achievement but we need to keep the long term and the broad view into perspective.

Let us first tackle the factors that have led to the consolidated fund moving into a surplus position. Revenue from income tax increased by just under 25% in the last two years in spite of the fact that personal tax rates have gone down. Revenue from value added tax increased by 13% in the same period while revenue from social security payments increased by 15%.

These three increases are all indicative of a healthy employment situation – the result of having improved the potential of our economy. This did not happen overnight but is the result of decades of hard work.

The contributions received from the EU are also very significant on our economy and leave a positive effect on government’s finances. Again these did not happen overnight but a result of sheer hard work and good policies.

It is interesting to note that Malta moved into a surplus position in its consolidated fund not as a result of drastic cuts in expenditure (like other countries have had to do) but by growing the economy and increasing revenue. So we moved into a surplus position within a positive economic cycle, which is what economists consider to be good governance.

So why the dissonant voice? Is the elimination of a fiscal deficit in the consolidated fund necessarily a positive thing for our economy? I go back to the issue I raised in my contribution two weeks ago. How sustainable is our economy today? Just like in the past we rightly questioned whether the fiscal deficit we had was sustainable or not, so should we now question whether the current positive situation is sustainable or not.

How vulnerable is our economy to certain economic sectors that are generating the increase in tax revenue that we have experienced over the last two years? Are we putting a strain on the infrastructure that one day will require a total overhaul?

Once we have such a surplus should we use it to enhance the potential of our economy? What is the opportunity cost (the foregone alternative benefit) of generating a surplus in the consolidated fund instead of investing it to generate further wealth?

There used to be a great deal of criticism at the level of debt generated by previous governments. However one needs to emphasise that that debt was generated to modernise our infrastructure, to liberalise our economy, to strengthen the education sector, to enhance welfare services.

The policy makers of the time did not have the benefit of hindsight when they decided to run a fiscal deficit. However we do have that benefit and I would ask anyone whether they would rather have the education system we enjoy today which has reaped huge economic benefits to generate a surplus in the consolidated fund or whether they prefer to have an education system that closed the doors to tertiary education. I want to have the former option and the country benefitted because the policy makers of the time chose the former option.

There is another consideration to make as to why a surplus in the consolidated fund may not be such a positive thing for the economy. Deficits have been financed by Malta Government Stocks. These have provided an avenue for savers to put their money into good use. With a surplus, the public sector borrowing requirement will decrease. What avenue will these savers have for their funds? Will there be so much liquidity in the market that it will simply fuel inflation?

I repeat that achieving a surplus in the consolidated fund is an important milestone for our country. I am in favour of having a balanced public sector budget over the medium term. However we must use these funds to develop further the potential of our economy and we need to ensure that savers have adequate opportunities where to place their excess cash. We would not like this surplus to come back to bite us.

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