The Malta Independent on Sunday
Every first budget of a new legislature presents a rare opportunity to restore sanity to an economy abused for political convenience through budgets presented in pre-election mode.
If the first budget of a new legislature happens also to be the last one before we join the EU in membership, and one of the last before we join the Euro monetary system, than the rare opportunity turns into a unique one which would be fatal to miss. In presenting the budget for 2004, the Minister did just that. We can just as well cry for it.
There are two major problems which are drawing blood out of our economy leaving it lifeless and just ticking whilst the economies of other candidate countries keep roaring forward.
The first problem is the structural public deficit which in absolute terms is still were it was in 1996 when it was first discovered by an incoming Labour administration. Seven years later we still have a three digit million gaping hole in public finance. Over these seven years some Lm225 million of extraordinary funds (through sale of assets ` privatisations- and draw-down from the sinking funds accumulated in the more financially sober days to build a reserve for repayment of the national debt) were put through the Consolidated Fund. Without these the public debt would be Lm 225 million larger than it presently is.` Yet public debt has more than doubled since 1996, from Lm517 million as at December 1996 to Lm1175 million projected for December 2003.
Unless we address the structural public finance deficit, the public debt is destined to continue growing faster than the economy so that the percentage of public debt to GDP has risen from 40% in 1996 to 69% presently and still growing way out of the Maastricht limit of 60% necessary to gain a ticket into the monetary union. How is it that many (including the Prime Minister, the Minister of Finance and the Governor of the Central Bank) sing praises to the virtues of joining the Euro at the earliest possible date but stop short of explaining how we are going to reduce the debt level to within Maastricht criteria remains a mysterious local version of trivial pursuit.
The other even graver problem is that the economy is not growing healthily and the anaemic growth it is registering is dependant on unsustainable bad habits of over-consumption and government spending largesse.
The budget presented last Monday attempts to address the first problem over a medium term but gives scant, if any, attention to the latter graver problem of growth.` This is short sighted and counter-productive. Restoring healthy economic growth could of itself make a substantial contribution to the resolution of the public deficit problem.
Indeed during this very same week France and Germany forced the ECOFIN ( Meeting of EU Finance Ministers) to accept to interpret the Stability Pact underpinning the monetary union more flexibly to avoid tightening the fiscal screws to address the deficit and dampen the nascent growth.
On the contrary enforcing Lm59 million (3% of the GDP) additional tax revenue to flow to the government purely to reduce the fiscal deficit by less than 1% of the GDP will do nothing to restore growth. It will dampen it.
What was called for was a balanced solution which put as much emphasis on growth as on deficit reduction. Measures to render the economy more competitive globally and more agile internally should have been coupled with revenue raising measures. At least if domestic consumption is squeezed to make up for past excesses, our economic units, especially in tourism, manufacturing and tertiary services would have been in a position to use their spare capacity to compete successfully externally.
Making the economy more agile internally means identifying the under-utilised labour resources across the whole public sector and invest in their re-training to make them employable in the productive sectors. This is the social pact that is needed and that the unions so often demand, a social pact that re-balances the rights and obligations of employees whether they work in the public sector or in the private sector. A social pact where those remaining in employment give up a small part of their standard of living to permit those losing their job through re-structuring, to find alternative productive employment. This is the sense of real solidarity! Solidarity is not that abused by the political leaders when they expect citizens to accept the pain of more taxation so that the government can burn up more resources without addressing the real underlying problems.
Unless we make our economy globally competitive again we will not attract investment and without investment economic growth will grind as the government tries to squeeze within the EMU criteria solely relying on increased taxation through better enforcement and new fiscal measures.
We continue to stare at the problems looking us in the face and yet go for the wrong solutions. What skills does one need to raise more revenue by jacking the general VAT rate up by 3% What skills are needed to raise excise duty on cigarettes in each and every budget with monotonous regularity?
What we need is real solutions through leadership and creativity. Such solutions cannot be painless and fiscal enforcement would have a part to play in the whole package. But the greater emphasis must be on economic growth, on measures which though painful can give reasonable expectations that they can make us again competitive.` We need leadership to work a social contract where the pain of adjustment is equitably shared with the motivation that economic growth will be restored to roaring levels in the medium term.
Indeed an opportunity has been missed. It is a pity. Rather than devise real solutions the government is more bent on massaging the media so that they refer to hard tax increases politely in their next day headlines as `revenue raising measures`. Pull my other foot!
Every first budget of a new legislature presents a rare opportunity to restore sanity to an economy abused for political convenience through budgets presented in pre-election mode.
If the first budget of a new legislature happens also to be the last one before we join the EU in membership, and one of the last before we join the Euro monetary system, than the rare opportunity turns into a unique one which would be fatal to miss. In presenting the budget for 2004, the Minister did just that. We can just as well cry for it.
There are two major problems which are drawing blood out of our economy leaving it lifeless and just ticking whilst the economies of other candidate countries keep roaring forward.
The first problem is the structural public deficit which in absolute terms is still were it was in 1996 when it was first discovered by an incoming Labour administration. Seven years later we still have a three digit million gaping hole in public finance. Over these seven years some Lm225 million of extraordinary funds (through sale of assets ` privatisations- and draw-down from the sinking funds accumulated in the more financially sober days to build a reserve for repayment of the national debt) were put through the Consolidated Fund. Without these the public debt would be Lm 225 million larger than it presently is.` Yet public debt has more than doubled since 1996, from Lm517 million as at December 1996 to Lm1175 million projected for December 2003.
Unless we address the structural public finance deficit, the public debt is destined to continue growing faster than the economy so that the percentage of public debt to GDP has risen from 40% in 1996 to 69% presently and still growing way out of the Maastricht limit of 60% necessary to gain a ticket into the monetary union. How is it that many (including the Prime Minister, the Minister of Finance and the Governor of the Central Bank) sing praises to the virtues of joining the Euro at the earliest possible date but stop short of explaining how we are going to reduce the debt level to within Maastricht criteria remains a mysterious local version of trivial pursuit.
The other even graver problem is that the economy is not growing healthily and the anaemic growth it is registering is dependant on unsustainable bad habits of over-consumption and government spending largesse.
The budget presented last Monday attempts to address the first problem over a medium term but gives scant, if any, attention to the latter graver problem of growth.` This is short sighted and counter-productive. Restoring healthy economic growth could of itself make a substantial contribution to the resolution of the public deficit problem.
Indeed during this very same week France and Germany forced the ECOFIN ( Meeting of EU Finance Ministers) to accept to interpret the Stability Pact underpinning the monetary union more flexibly to avoid tightening the fiscal screws to address the deficit and dampen the nascent growth.
On the contrary enforcing Lm59 million (3% of the GDP) additional tax revenue to flow to the government purely to reduce the fiscal deficit by less than 1% of the GDP will do nothing to restore growth. It will dampen it.
What was called for was a balanced solution which put as much emphasis on growth as on deficit reduction. Measures to render the economy more competitive globally and more agile internally should have been coupled with revenue raising measures. At least if domestic consumption is squeezed to make up for past excesses, our economic units, especially in tourism, manufacturing and tertiary services would have been in a position to use their spare capacity to compete successfully externally.
Making the economy more agile internally means identifying the under-utilised labour resources across the whole public sector and invest in their re-training to make them employable in the productive sectors. This is the social pact that is needed and that the unions so often demand, a social pact that re-balances the rights and obligations of employees whether they work in the public sector or in the private sector. A social pact where those remaining in employment give up a small part of their standard of living to permit those losing their job through re-structuring, to find alternative productive employment. This is the sense of real solidarity! Solidarity is not that abused by the political leaders when they expect citizens to accept the pain of more taxation so that the government can burn up more resources without addressing the real underlying problems.
Unless we make our economy globally competitive again we will not attract investment and without investment economic growth will grind as the government tries to squeeze within the EMU criteria solely relying on increased taxation through better enforcement and new fiscal measures.
We continue to stare at the problems looking us in the face and yet go for the wrong solutions. What skills does one need to raise more revenue by jacking the general VAT rate up by 3% What skills are needed to raise excise duty on cigarettes in each and every budget with monotonous regularity?
What we need is real solutions through leadership and creativity. Such solutions cannot be painless and fiscal enforcement would have a part to play in the whole package. But the greater emphasis must be on economic growth, on measures which though painful can give reasonable expectations that they can make us again competitive.` We need leadership to work a social contract where the pain of adjustment is equitably shared with the motivation that economic growth will be restored to roaring levels in the medium term.
Indeed an opportunity has been missed. It is a pity. Rather than devise real solutions the government is more bent on massaging the media so that they refer to hard tax increases politely in their next day headlines as `revenue raising measures`. Pull my other foot!
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