Friday, 16 March 2001

Wrong direction

The Malta Independent

Wrong direction

The message delivered by the local election results of last weekend is that contrary to government`s motto the country is moving in the wrong direction.

The two major areas of government policy where the direction has been certified wrong by the electorate are those` of` economic management and the European Union. The two are related, probably connected issues.

The government has lost the tools to manage the economy in an effective manner. Governments do not work miracles. They manage the economy by using three major policy tools that permit, if used judiciously and persistently, stable economic growth leading to sustainable prosperity. The tools within government`s immediate disposal are fiscal policy, monetary policy and exchange rate policy.

This government has worked up horrendous budget deficit leading to a rapid build-up of national debt that leaves little room for manoeuvring with fiscal policy.` So in spite of having very dull conditions of local demand the fiscal deficit is constraining the government to slap on taxes on to a slumping economy dampening local demand even further. Compare this to the enviable position of UK Chancellor Gordon Brown, who last week had the luxury of spreading tax rebates and social services on a wide cross-section of society. This whilst still applying a huge budget surplus to reduce national debt at a time when the British economy is on a prolonged sustainable boom.

Monetary policy also allows little room for effective management. The Governor has already signalled that interest rates are more likely to rise than fall.` This is quite understandable with government having a substantial deficit to finance and other debt to rollover at a time it is relaxing capital controls and taxing local investments. In any event as the Japanese are finding out, there is much truism in Keynes` teaching that in promotion of economic demand monetary policy is like pushing on a string.

Exchange rate policy management, which like Japan is the only tool left at our disposal to manage the economy, has been repeatedly brushed aside by the government as well as by the Governor of the Central Bank.

So how is the economy to be managed` By prayer` By hope`

The same applies to government`s policy for the EU. How can the government proceed regardless with a policy of such deep and irreversible magnitude when more than half the population denied government the endorsement sought, when one-third of the electorate was sampled last weekend`

Cosmetics and make-belief policies cannot address this country`s problems.` They can only be addressed by electing a government with a clear mandate to carry out the overdue deep structural reforms, giving it a clear mandate to demand national support for its programmes. A structural reform based on economic growth, investment incentives, tax reductions and efficiency and quality leaps in all sectors of the economy. Everything else is a waste of time and power enjoyment at the expense of the real needs of this nation that is crying out for a real sense of direction.

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