Recession, Deficit, Growth… confusion galore !

“ How can a country, in a couple of months, suddenly pass from being a country with solid finances ( ‘ finanzi fis-sod ‘ ) into a recession and back into solid finances ?  ”  Such was a comment from an ordinary intelligent citizen in The Times ‘s reporting the Prime Minister stating that , although the recession was over, the economy was not yet out of the woods.

Like most others, including politicos and journalists, this gentleman confused growth movements in the economy with those in government finances.  Don’t blame him : people are always given to understand that they are parallel issues, always moving in the same direction.  Which is not the case.  Sometimes they don’t.  Unfortunately, such a phenomenon always happens when the country is administered by ‘spin’ rather than by stark reality.

The Fenech Adami administration was a classic example.  With its mantra ‘ money no problem ’ , it managed to create a feel-good factor for several years on excessive borrowings which didn’t just finance much-needed infrastructural works, but also a goodly part of its budgets’ recurrent expenditure.  It was only afterwards, when the government decided to join the European Union and four years later also the eurozone, that the incumbent PM had to put the brakes on debt-piling and monstrous budget deficits.  The price for assuming the Nationalist Party leadership, whilst also ensuring Fenech Adami’s unprecedented ( and wrong ) ascent to President of the Republic. 

By the time GonziPN took over the ‘finanzi fis-sod ’, they had morphed into ‘ finanzi mqanshin ’.  Probably the only bone of contention Malta has been having with the E U Commission over nigh 5 years since we adopted the euro as our currency.

In contrast, the Mintoff years 1971-84 were the most solid finance-wise, but at the expense of economic growth.  His successor, Karmenu Mifsud-Bonnici, was compelled to think outside the Mintoffian box as the times then demanded, especially with an intolerable rate of unemployment and in recessionary conditions everywhere, almost as deep as of lately during GonziPN.   Mintoff’s fiscal legacy to KMB was a sovereign debt equivalent to less than 15% of the GDP, and without hardly any government guarantees to parastatal entities.  GonziPN found one at around 80% and with another possible 15% of guarantees.

It is to the credit of GonziPN to have managed to mildly rein in the national debt  -  something the nations owes to our EU and Eurozone obligations.  Sadly, however, it should stop now doing this through ‘creative national accounting ‘ techniques as it has recently resorted to doing in order not to antagonise the EU Commission, e.g. purporting to transfer a € 50m borrowing requirement to Enemalta, thus not showing it up in this year’s budget deficit or in the computation of the total sovereign debt.  Which means, in effect, a deferral onto the next administration.

That the ordinary citizen mixes up economics with public finances is understandable.  What is totally unacceptable is that a leader in one of our English-language dailies      ( the Malta Independent 8.9.12 ) would incorporate such economic nonsense as :

1.         “ Malta has been in recession since June ”  -  instead of  ‘ up to June ‘

2.         “ Malta regisatered a GDP growth rate of 3% in the second quarter”  -  instead of 0.9% : growth can only be expressed in ‘real terms’, as every student of economics knows.

3.         “ Recession comes into effect when a country registers a contraction of its GDP in two consecutive quarters.  This does not mean that the GDP actually goes into negative figures..”    -  how can this ever happen unless all its citizens hibernate throughout the whole quarter ?

4.         “ Negative growth occurs when a country might register 2%, then 1.8%, then 1.5% growth in successive quarters.”  What a lot of balderdash !  A decreasing growth rate is not negative  :  common sense tells you this, otherwise reduced profitability for a firm would mean loss-incurring.

5.         “ We hope that the government takes a positive look at economic theory by keeping the prices of electricity and fuel down”.  Is any economist aware of such a theory?  Not me !

All in just one editorial.  Unbelievable, but true.

Maynard