Pre Budget Document 2006-2010 Just Do It

The Malta Independent of Sunday

Early in 2004 I had published a series of articles in my Friday column in The Malta Independent suggesting a ten point plan to get us out of the economic logjam we were and still are in.

The main headings of the ten point plan were:

1. Rebalancing the rights and obligations of workers across the whole economic spectrum facilitating the mobility from public to private sector employment.

2. Funding a massive training and re-training mechanism in order to render our employees multi-skilled and employable as technology continues to kill old jobs and create new ones.

3. No new taxes/tariff deal from the government to ensure that we stop the addiction to tax and spend policies.

4. A deal whereby additional revenues from better tax enforcement are allocated specifically as to 50% for reduction of the tax burden to the lower and middle sector of society, especially those in employment who never needed any tax enforcement mechanism to pay their tax dues, and 50% to fund re-training schemes.

5. A freeze on public employment recruitment and on public sector payroll costs ensuring that benefits are mostly given in re-training opportunities and in subsidising/promoting transition of excess public sector personnel to productive jobs.

6. A freeze on all public sector operating expenditure

7. Restoring flexibility to the labour market by rendering the economy more market driven by moving away from COLA wage increases and adopting only increases in minimum wage level to keep the protection for non-unionised employees who normally operate at or near minimum wage levels.

8. No new debt until we get the debt level down to 60% of the GDP. Any capital expenditure has to be financed by one off revenues (privatisation, sinking fund and similar arrangement) to avoid recourse to new debt issues, other than roll-over of maturing debt.

9. A cap on social transfer payments. Keep social benefits at their current real level and forget all possibility of giving tax incentives for private pensions before government finance comes in good shape to make this affordable.

10. Make a one-off adjustment to our rate of exchange to re-establish our international competitiveness and prepare for joining the EURO at a rate which is sustainable and which attracts FDI and promotes economic growth.

With the exception of point number 10 which has been flatly refused, all the other nine points not only find themselves in different shapes or form in the 2006 – 2010 pre- Budget consultative document but are essentially the backbone of the visions expressed therein.

I am therefore enthused by the contents of the consultative document and by way of negative criticism I would just list the following:

1. It severely understates the severity of the economic performance we have had since the year 2000. Clearly government has political difficulty in underwriting the paternity of the dull economic performance best exemplified by the fact that GDP in 2004 was stuck at the same real level of the year 2000 and that the GDP for the first quarter of 2005 shows yet a further real contraction.

2. From a practical point of view whilst it is an inspiring document in defining the final destination quite a few years down the road, it is pretty void on defining an action plan of how to get there. It very much resembles a wish list. Often the solution is the formation of a committee, task force or some other cross-disciplinary subset which has to report on the specific measures necessary to enable us to hit the road to economic salvation. Experience shows that problems are not solved by committees but by true leaders.

The Prime Minister seems irritated by columnists/economists/commentators who have no inhibitions in calling a spade a spade and in defining an economic problem by its real name. He ought not be, as economists and commentators like yours truly, unlike others on government payroll, are doing the country a service in raising awareness to the true state of the economy.

Only by so doing can the government expect to garner wide acceptance for the necessary measures needed to get us where we are all now agreeing we should be. These measures are no piece of cake. They are measures that no government would like to take on its own. To limit the political fallout from such measures government will make a further attempt to seek broad consensus in order to share the burden of their guilt. As the social pact experience has shown consensus for guilt sharing purposes is quite elusive.

Perhaps this is best represented, purely as an example of which there are many others, by the evident need to introduce co-financing in health service in order to lighten up government’s burden in financing the status quo of universally free entitlement. The Central Bank has been making it clear that the deficit targets cannot be met unless co-financing is introduced, meaning that health services would no longer remain universally free of payment but would start being rendered against some sort of financial contribution from consumers.

In para 04.4.1 of the 2006-2010 pre budget document government lays down the financing problem of the health services flatly and clearly. Health services will not be funded from the N.I. fund. It will be funded from the 3% Vat revenues introduced in 2004 and from excise duties from cigarettes, beer, spirits and tobacco. On 2004 and 2005 figures this leaves a gap of Lm20 million in the annual financing and we are told that in order to preserve the sustainability of the health sector “a number of institutional and structural reforms will be introduced in 2006”.

Reports are as easy to write as measures are hard to take, especially in the last half of a legislature when the next election starts appearing on the horizon.

So I can only say I will only believe it when I see it, though I hope that in the national interest, government would choose to sacrifice its political fortunes rather than avoid doing what should have been done much earlier. Just do it.