Record low capital spend in 2016 did influence Labour government surplus

The Labour government’s budget surplus for 2016 – an €8 million positive that registered the first such surplus since 1981 – set the scene for yet another exchange of barbs between the PN and the PL.

Conspicuous by his absence was the PN’s shadow minister for finance, deputy leader Mario de Marco, who released no statement from his end on the positive figures. Instead, it was Opposition leader Simon Busuttil who dubbed the budget surplus a “gimmick”, noting that the big difference putting Malta in the black for the first time in three decades was a massive 46% cut in capital spending.

Labour was quick to denigrate Busuttil’s statements, saying it was rich of him to downplay an ‘historic’ achievement when the PN registered the highest ever deficit, €362 million, in 2012 – now zeroed in under five years. “Incidentally, capital expenditure during those years (2010 to 2012) was at the same level of 2016. A budget surplus then had remained a pipe-dream.”

There is however some truth behind Busuttil’s keen observation, although it may be more a game of intelligent planning than a mere ‘populist’ gimmick as the PN leader told his audience of centre-right youths during the EPP congress.

You have to consider that capital spending – mainly cash spent on infrastructure, social projects and EU-funded investments – tends to gradually increase every year of an administration.

Under the PN, capital spending increased slowly every year from €222 million in 2008, to €363 million in 2012.

Under Labour, capital spending increased from €394 million in 2013, to a massive high of €581 million in 2015, and then back down to ‘just’ €310 million in 2016.

That represents a massive 46% drop in capital spending over the past 12 months, but it also suggests that the high increase in spending in 2015 – a 33% increase over 2014 alone – could have rolled over in 2016… or else, Labour was planning to do just that: spend big in 2015, and then spend little in 2016 to balance the books. Reads well on the electoral playbook.

The PN administration had worse weather to contend with during the financial crisis and international austerity that greeted Lawrence Gonzi’s government in 2008. In 2011, income tax receipts – a mild indicator of growing incomes (or better tax collection) – suffered a 3.1% drop, puncturing a trend of always increasing revenues. 

During that same annus horribilis, capital spending fell from €311 million to €288 million (-7.3%), before picking up again in the pre-electoral year of 2012 and climbing to €363 million.

Whoever you choose to believe, the numbers don’t lie: Labour’s surplus year is dominated by an increase in revenue of €172 million (4.5%) over 2015, €72 million less recurrent spending (-1.9%), and a massive drop of €271 million in capital spending (-46%).

In fact, Labour itself describes 2015 as not being a normal year. “It was an exceptional one where capital expenditure reached an all-time high, for the simple reason that this government had the unenviable task of spending EU funds which had been left largely unspent by the previous government, during the 2007-2013 multi-financial framework.”

This massive absorption in 2015 meant that in 2016, the government returned to a normal expenditure year even though statistically, the spend is much lower than previous years.

Also keep in mind that when capital spending climbed up to €581 million in 2015, that also raised the deficit from €136 million in 2014 to €235 million in 2015. This alone shows how capital spending influences the deficit. While recurrent expenditure can sometimes be difficult to control – because of government salaries in the main, increased public sector jobs, and other spending on programmes – capital spending is what government can truly choose to close the tap on.

In fact, Labour’s record of spending on day-to-day operations shows that between 2013 and 2016, its recurrent expenditure was growing faster than it ever did under the last PN administration. But so did its revenues, consistently, on the back of greater tax receipts.

The week was also punctuated by the reaffirmation of Malta’s A- rating from Standard and Poor’s, now noting the consistent narrowing of the government deficit, a long-standing bugbear of the fiscally conservative Labour Party.

Malta now enjoys one of the strongest economic expansions across the eurozone, bolstered by a diversified economy and increased participation of the female workforce.

For Labour, it was an opportunity to hit out at Busuttil. “Many were the Nationalist administrations that could not achieve this fiscal target… a futile crusader’s search for the Holy Grail,” the party said in a statement on Saturday.