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TMCNet:  With €6 bn of debt, a welcome Fiscal Responsibility Act [Malta Independent, The]

[July 20, 2014]

With €6 bn of debt, a welcome Fiscal Responsibility Act [Malta Independent, The]

(Malta Independent, The Via Acquire Media NewsEdge) Malta is in the process of establishing its first Fiscal Responsibility Act, through which the first Fiscal Council will be established. This should act as a guideline for all those who work in the civil service, so that responsible decisions are taken with a sense of accountability and more awareness of the obligation to conduct financial affairs with transparency, stability and effectiveness.


A bill to establish a Fiscal Responsibility Act was presented in parliament by Finance Minister Edward Scicluna, who was criticised by the Opposition who said it was 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 this legislation demonstrates the government's commitment to ensuring the sustainability of the public finances.

Simply put, the Bill gives the government a greater role in fiscal policy. The debate in parliament took a different twist when government back-bencher and chairman of the Finance Committee Silvio Schembri rebuked the former PN administration for increasing the national debt, citing as an example the spending of €2 million to build a bridge that led to nowhere and which did not create jobs.

Mr Schembri said that the government had to tackle the public debt issue at a national level but, of course, there are also local councils that had to pay for the excessive expenditure during previous administrations. He continued to chastise the Opposition for its past profligacy, comparing it with the government's positive measure of introducing child-care centres which, according to Eurostat figures, has led to an increase in the rate of female work participation and government revenue.

The Opposition, while painting a picture of gloom and doom, had to acknowledge that a Fiscal Council is now long overdue and, on the positive side, the island has received accolades from international credit rating agencies. They have all welcomed the government's economic and financial policies. Equally ebullient was Prof. Scicluna, who reminded the House that although the European Commission had given Malta a breathing space of two years to move out of the excessive deficit procedure, the government had managed to do so in just one year.

Let's have a look at what other EU states have achieved by setting up such a law – Croatia being a good example. Over the last five years, Croatia has made consistent efforts to improve the rules and relevance of multi-year fiscal planning, but efforts were 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 Programme 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 reinforce the link between budgeting and strategic planning.

The introduction of strategic medium-term plans with performance indicators was designed to support the preparation of budgets – which starts with the drafting of a medium-term government strategy, followed by the 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. This reduces political commitment to the achievement of the targets set.

Here in Malta, the fiscal rule that the authorities are planning, upon promulgation of this law, is opportune as it calls for expenditure-based consolidation with clear targets for reducing annual expenditure because revenue generation cannot be relied upon to balance the budget in the medium term. This rule should be in place until the debt-to-GDP ratio falls below the 60 per cent threshold, but not everyone is convinced that establishing a fiscal council will be the answer for a reduction in the debt-to-GDP ratio.

The Opposition is suggesting that, in the long run, it would be appropriate for the country to target a cyclically adjusted balanced budget in order to stabilise 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 to consider alternative rules. For simplicity of monitoring implementation, the fiscal rule and 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 the 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 will be 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 help the country walk up the crooked path towards a balanced budget? It is no mean feat to establish 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 will need the wisdom of Solomon to seek and identify non-partisan – albeit technical – members of the Fiscal Council.

Perhaps all the cynics will 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 such a council .Others will disagree, saying it looks like a case of locking the stable door after the horse has bolted.

It all seems very gung-ho, that the government has now turned contrite and wants to embrace the principle of transparency and openness. Gone are the days when we played musical chairs with unpaid bills at the end of each budget year, extolling the full flexibility of cash accounting ingenuity and budgetary wizardry .

The "tax and spend until the cows come home" style of the 1990s is slowly being thrown out of Castille's windows. Yet it speaks volumes that Malta has taken so long to pass such a law, when other EU 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 that when the deficit reached 3.3 per cent of GDP in 2013, this was simply blamed on temporary lapses due to election promises, and no tears were shed when this profligacy led to a tightening of the screws by the 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 a Fiscal Responsibility Act would be in force by the end of 2013 in fulfilment of the requirements of Directive 85/2011/EU on budgetary frameworks. It is the government's aim to continue reducing the national debt from a peak of 73 per cent of GDP in 2013, to 72.5 per cent this year and 71 per cent in 2015.

Needless to say, the members of the Fiscal Council members will be expected to act in a manner conducive to assuring prudent economic and budgetary management, including the provisions of the Stability and Growth Pact. Their powers to guide the Minister will be ample, but this does not mean that all their recommendations have to be accepted. In the event of the government not accepting an assessment of the Council the Minister will, within two months of receiving a copy of the assessment, publish the reasons for disagreement.

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

 George M. Mangion gmm@pkfmalta.com The writer is a partner in PKF an audit and business advisory firm.

  (c) 2013 Standard Publications Ltd. All rights reserved. Provided by SyndiGate Media Inc. (Syndigate.info).

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