Friday, 6 April 2001

Simple Truism

The Malta Independent

Simple truism

Lately the Minister of Finance favoured us with a stark simple truism. Taxes will be reduced after the public fiscal deficit gets addressed, he promised. This is an invitation to accept the pain of martyrdom for securing a place in heaven.

No one has ever suggested that any minister of finance raise taxes for the fun of it. When taxes are raised it is normally for one or a combination of three motives: as a macro-economic measure to calm down an overheating economy; to finance an increase in public expenditure, or to reduce an existing fiscal deficit.

In Malta`s case the first motive if out of the question. If anything our economy needs a kick-start not a cold shower. So the Minister is being forced` punish a frigid economy with net additional taxation of significant proportions through a combination of the second and third motives.

The question which should be addressed is who is responsible for creation of` the deficit in the first place and whether there is any other way of addressing the deficit without imposition of additional net taxes.

The short tenure of office by the interlude labour Government of 1996-1998 is conveniently blamed by the present administration for the galloping deficit which additional taxation is endeavouring to address. This cannot be further from the truth. Not even if Labour government really meant to create such deficit` it would take more than 22 months to do it especially if during such administration there is a conscious attempt to freeze the intake of personnel into the public sector, no collective agreement is signed for existing employees and 33 additional taxes get imposed. Such measures in fact caused the pre-mature and unfair demise of the Labour administration when it had to seek confirmation of its mandate right in the middle of fiscal surgery to a patient suffering from a deep-rooted malady.

I totally agree with the Minister when in a more sober mode in the budget speech for 1999 he said `the state of public finances is in very bad shape. The tragedy is that such a serious problem is packaged in cheap propaganda. To arrive at a solution it needs to be acknowledged that the present financial position is the result of huge structural faults which were layered on each other over a long number of years.`

Is there another less painful method how to address a problem that everybody agrees that it needs to be addressed The simple answer to this is yes.` Emphatically yes. More than that I say that increasing taxes could in fact aggravate not solve the deficit problem.

The Minister is doing a fair` job in building tax structures necessary in a modern economy. Structures which are also necessary for the sake of social justice.` But unless such measures are accompanied by reduction in direct tax rates they could cause the economic growth to seize in its tracks.` The fiscal deficit cannot be solved by tax enforcement alone. It needs to be sustained by a growing economy and by sensible cuts in public expenditure.

But how do you do this if the first thing you do when elected is signing double digits salary increases to public sector employees without extracting commensurate productivity gains` No wonder the collective agreements of other public sector employees outside central government are piling at the Ministry of Finance that has a weak case to refuse rate increases benchmarked to the last collective agreement to employees of central government.

Hence why I continue to maintain that whoever created this problem is hardly in a position to solve it. More likely is that sooner or later privatisation is resorted to generate one-off revenues gaining time to avoid finding real solutions.` When even these posterity reserves are frittered away then we will be left with the sole awful` option of facing reality straight in the eye.

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