Sunday, 30 October 2005

Banking on Short Memories

The Malta Independent on Sunday

In announcing the harsh hikes in utility and energy prices, a government wrapped in guilt of mismanagement, is attempting to get away with it banking on short memories. In doing so it is well assisted by accommodative media and government’s own ability to manage expectations. But for those who refuse to be manipulated by rhetoric and public relations I will attempt to refresh memories so that government’s decisions can be judged on their true merits.

Let me make it clear that I am not in any way in favour of government incurring debts or raising taxes in order to hide the reality of high oil prices from energy users. On the contrary I blame government for taking too long to wake up to its responsibilities, duping us along the way that we are immune of the oil price plague that has tortured consumers in most other countries throughout this year.

Ultimately government’s responsibility is to procure our energy supplies at the cheapest possible price, manage its use and distribution efficiently in order not to load unnecessary costs on it, promote consumer education and give incentives for economisation in the use of energy, and finally charge the consumer a fair price which recovers costs and leaves commercial profits necessary to service past and future investments so as to ensure reliability of future energy supplies.

If government is open and frank with us and explains clearly and honestly why it is necessary for macro-economic reasons to create cross-subsidies to keep the productive sector stable and competitive, as well as to ensure that the bottom layer of society, with its limited capacity to carry further loads, does not get crushed by such harsh developments, we are not stupid and we can understand.

But government is manipulating us and people like me revolt at being treated like idiots. I invite you to flash back to this time last year. Oil was hitting a peak of USD 55 per barrel and government was massaging public opinion to accept the surcharge that was shortly to be introduced at 17% level. Last year such a surcharge was justified by government on the basis of the explosion in the cost of crude oil from some USD 35 per barrel a year earlier.

 Writing in my Friday column in The Malta Independent of 3rd December 2004 I had stated:

The oft quoted price of crude oil is irrelevant to our case. Enemalta does not import crude oil. Enemalta imports refined products. The correlation between the prices of crude oil and the prices of refined products is tenuous. For example between August 2003 and November 2004 the cost of crude oil increased in US dollar terms by 48%. On the contrary the cost of Fuel Oil, one of the main refined products imported by Enemalta to generate electricity, went down by 15% in case of the High Sulphur version and by 4% in case of the low sulphur version.

Dollar depreciation in the meantime means that every Lm1, one gets 17% more US dollars now than one used to get in August 2003. So in Maltese lira terms the Fuel OiI that Enemalta burns to generate electricity is cheaper than it was in August 2003. It is also cheaper though by a lesser margin than the price levels for such fuel oil in Lm terms as at January 2004.

So why on earth are we being fed false information forcing to us accept utility rate increases on the basis of increased acquisition cost of crude oil which we do not import, when in fact the finished refined products we do import are cheaper than they were last year?

The truth, for those who want to know the truth, is that because of EU regulations we are being obliged to burn low sulphur fuel oil which is far less environmentally offensive than high sulphur fuel oil. The problem is that low sulphur fuel oil is about 40% more expensive (approx. US dollars 50 more per metric ton), and this on its own runs up an increased import bill of some Lm7 million more.

If government were to keep the same tack as last year the price of crude oil went up from USD 55 this time last year to somewhere just over USD 60. How can one justify, using last year’s logic, that the surcharge should increase from 17% to 102%?

Government could not use this logic that suited it fine last year to introduce a surcharge to cover, not the pretended market increase in the price of oil, but EU environmental obligation to burn higher quality oil. So this year government could not make its case based on the price of crude oil as it conveniently and erroneously did last year, but on the cost of refined oil for our energy needs.

In doing so government has failed to explain why it is using the spot price to justify its case. If this means that government has been sleeping over the last year and just took the spot market price as it comes, than where is our supposed skill to procure energy at the cheapest possible price? I readily consent that with energy prices at such high level, long term strategic hedging is inadvisable and risky. But short term technical hedging for at last 50% of our procurement needs is an essential risk spreading tool.

Government has now informed us that it has started to use hedging techniques. As I wrote recently, timing is everything, and it could very well be a case of too little too late. For Malta’s sake I hope that the hedging now being undertaken is the tactical short term type and no long term hedging is being entered into at such high price levels. Long term hedging was advisable in 1999 when oil fell below USD 10 but the then responsible Minister refused to consider the suggestion outright, much to Malta’s loss.

Government is playing on short memories again in trying to wipe out from our brains the way it behaved when it was in Opposition in 1998 when Labour government had announced much smaller utility rates increases. It is fair to say that it was the beginning of an early end for Labour government as the PN opposition marshalled all forces, in and out of parliament, to obstruct a democratically elected Labour government in doing what was clearly necessary and in the national interest.

Unlike the present, utility rates then had not been raised for a full 17 years ( indeed they were reduced twice in the interim) and the price of oil had increased in 1997 to make the upward price revision unavoidable. Nobody could foresee in November 1997, when the utility rate increases were announced, that the price of oil would revert to a downward trend from mid-1998 to well into 1999.

What is so acceptable and unavoidable in the multiple times much harsher increases announced this week that was not similarly acceptable and unavoidable in 1998? Granted a PN government has much better skills in massaging people’s expectations before announcing drastic measures but price hikes remain price hikes whichever way expectations are managed. May be the media and the unions are more docile to a PN government than they were prepared to be with a Labour government. Or probably such measures needed a parliamentary majority much greater than one which the district gerrymandering bestows freely to the PN but was very scarce with an MLP government in 1996.

Or may be some would argue that Labour’s price hikes were much more unsocial than the PN price hikes. I grossly beg to differ. The utility rates announced this week are much more unsocial than Labour ever dreamt of doing. What is social about keeping the price of diesel at the pump untouched, allowing owners of expensive SUV and luxury pleasure boats, to party at the expense of middle income families that will face some 30% overall increase in utility bills?

What would have been wrong if utility rates were kept steady for average consumption (which could easily be calculated on a per person basis to exclude all luxuries such as air-conditioning, and multiple use of freezers and water heaters) and have such consumption cross-subsidised from high marginal rates for excessive consumption and fuel prices at the pump?

Hikes in prices of fuel at the pump are much less socially offensive as by and large they involve discretion of use. People can choose to change from private to public transport or transport pooling system to move around. But there is absolutely no discretion in the use of average household utility consumption. Most houses use gas or kerosene for heating purposes already and one cannot do without hot water, freezer, tumble drier or washing machine.

Government may be extending itself beyond prudent limits of self confidence in banking on short memories to assume that while Labour was tortured for burdening us with a kilo it could walk away with honour for burdening us with a ton.

Friday, 28 October 2005

Small Mercies

The Malta Independent - Friday Wisdom

Thank God for small mercies! Our economy has grown again in the third quarter, the Prime Minister proudly proclaimed to PN councillors last weekend.

If we have come to a stage where we are satisfied and take pride in registering consistent small growth, when all around us are growing much faster, then our biggest problem is not the budget deficit, the lack of investment, the comparatively higher inflation, the expensive energy or lack of competitiveness. Our biggest problem is in not acknowledging that we have a problem and are happy to pretend that we are doing well.

I tried to trace GDP/GNP figures related to the third quarter to make an objective assessment on the size of the proclaimed growth and its nature – because being happy with a plus sign is not enough. The figures behind the plus sign are as important as the need for growth to be balanced and spread across all-important sectors of the economy.

Unfortunately, no such GDP third quarter figures have been published by the National Statistics Office. It seems that we cannot reach sufficient maturity where important economic data is placed in the public domain before politicians start drawing whatever conclusions suit their narrow interest in the partisan media before anyone can challenge their assertions.

I have to do with bits and pieces of indicative economic data that frankly give little scope for jubilation.

Manufacturing is clearly contracting. According to the Manufacturing Survey for the third quarter of 2005 (NSO News Release 223/2005 dated 20 October), sales by manufacturing enterprises fell by Lm21 million (eight per cent) compared to the third quarter of 2004, and year to date sales are down Lm65.9 million (nine per cent) compared to the first nine months of 2004.

Manufacturing employment reduced by 155 during the third quarter of 2005 and by 332 since September 2004. Investment in manufacturing was down by Lm 8 million (19 per cent) in the first nine months of 2005 compared to the same period last year.

The unmistakeable conclusion is that manufacturing has not participated in any growth. On the contrary, it has contracted.

The inflation report for September 2005 shows a rate of 2.76 per cent, up from 2.74 per cent in August 2005 and 2.57 per cent in September 2004. For an economy that is growing well below its potential, this level of inflation – higher than that of our main trading partners – is disquieting.

NSO News Release 225/2005 shows that cruise passengers declined by 11.7 per cent in September 2005 compared to the same month last year, but for the nine months passengers are up 10 per cent on 2004, though still way below 2001, 2002 and 2003.

Finally, I found the report on Government Finance Data for August 2005 (NSO News Release 210/2005 of 30 September). The structural deficit is down Lm21 million on the same position last year and this is totally due to an increase in grants of Lm22 million and an increase in VAT and other consumption taxes of Lm20 million. Collectively these two sources produced an improvement of Lm42 million, half of which went to finance increased expenditure and half resulted in the improvement in the structural deficit.

There was a time when grants, given their temporary nature, were considered as a financing item rather than ordinary revenue, as one can hardly build the durability of public finances on temporary grants. More promising is the increase in consumption tax revenue of Lm20 million. Such growth is normally indicative of economic buoyancy.

But there is irrefutable evidence that the economy is anything but buoyant. The fact that other tax sources, like income tax and social security, have stagnated is not indicative of buoyancy. Furthermore, GDP figures for the first two quarters would in no way support increased consumption as the reason for a 24 per cent increase in government’s receipts from consumption taxes.

Given that special amnesties were in place for a waiver of penalties for overdue payments, the increase in VAT takings is more indicative of one-off efficiency in collection rather than recurrent increased consumption as the Prime Minster tried to indicate in his weekend speech.

As the Prime Minister puts the final touches to the government budget for 2006 to be presented to the House on Monday, he should bear in mind that, above all else, priority has to be given to strong growth in our productive sectors, particularly those that are geared to export demand. We cannot continue building our little statistical macroeconomic growth on real estate/construction and on the duopoly of the financial sector that are driving our dangerous asset price inflation.

Friday, 21 October 2005

Timing is Everything

The Malta Independent - Friday Wisdom

The difference between crisp fresh salad and trash is timing. In life, it is not only important to make the right decisions but also to make them at the right time.

Two clients holding exactly the same investment portfolio could look at its performance quite contrastingly. The one who invested at the peak of the tech bubble in March 2000 will still be nursing losses, whereas the one who moved into the market at the bottom of the trough in March 2003 is smilingly considering whether it is time to lock in the profits and move to safer grounds.

This particularly applies to the issue of the oil price and its inevitable bad consequences on the economy in general and the consumer in particular, which has been the flavour of the week since the minister responsible for Enemalta put the proposed price hike bombshell on the MCESD table.

Before coming to the substance one must necessarily condemn the style with which the minister placed the issue in the public domain. It smacks of political opportunism in creating as dark a picture of the international background as possible, so that the eventual decisions taken, painful as they will be, will, in comparison to the needlessly dark black background, feel like a sweet balsamic cure. It is an insult to our intelligence.

The price of oil did not go above the $50 benchmark, which was used at the last budget to justify the 17 per cent surcharge on utility bills, last week. It has been almost consistently above this mark for most of the year. In any event, Enemalta does not buy crude oil but refined products, the price for which has a tenuous link to the crude oil price.

Why has the government neglected taking timely corrective adjustments, thus giving us the illusion that while the Americans and Europeans are having to pay much higher prices for utilities and for fuel at the pump, we were blessed with a superhero government that could insulate us from such harsh realities? The rude awakening to reality is as much due to the pain of the proposed price increases as to the realisation that our superhero is in fact fragile and fallible, capable of disguising reality for a short time rather than offering long-term painless solutions.

Much is being said about the cure of hedging. Hedging is a commendable risk management technique that has to be used with care and professionalism. But timing with hedging is of the utmost importance. Hedging at the peak of the market could involve additional pain and buy security very dearly. In the current circumstances, it is very doubtful if hedging is a timely solution, given that the oil price is well above its long-term average price and the US dollar is fundamentally overvalued.

Tactical short-term hedging in small quantities could be resorted to at any time, as a risk-spreading measure, but long-term hedging should only be considered when both the price of oil, as well as the price of the US dollar, reverts to within the long-term price trends.

I know that in the market there are always two contrasting opinions about future price developments, and this, in fact, is why a market exists. If everybody shared the same opinion there would be no market. A market needs buyers and sellers, rather than only sellers or only buyers.

However, one of the most credible market views is that while the price of oil will continue to hover between $60 and $70 for the next few months, once the Northern hemisphere’s demand for heating during the cold months are behind us, the hurricane disruption is repaired and demand adjusts to the reality of the price rises and alternative energy sources are resorted to much more widely, we could, over the next 24 months – save for natural or terrorist disasters threatening stability of supplies – see the price of oil draw back to around US$40.

Before the government can come up with firm decisions about how to pass on the pain of the oil price increase to consumers, it must form a long-term opinion about the market, with all the risks and uncertainties that this will involve.

Because only by forming such a long-term view, which will of course need to be re-evaluated and validated from time to time, can the government come up with solutions that do not break our social fabric and our international competitiveness. If, for example, the government forms a view that the long-term price of oil is $40, it should price energy products for sensitive sectors on this basis, irrespective of the current spot price of oil, in order to avoid damaging shocks. Sensitive sectors would, in my definition, include household utility rates up to average consumption levels, tourism operators, manufacturing operators, public transport and small retail establishments.

The difference between the spot or hedged price and the basic underlying price used for pricing energy supplies to the sensitive sectors would have to be carried by the non-sensitive sectors which would include household utility rates above average consumption levels, retail prices of fuel at the pump and utility rates for large retail and service establishments.

Such a system has to be implemented with clinical promptness, with prices for the non-sensitive sectors being adjusted monthly while prices for the sensitive sector being reviewed annually and changed only if the underlying base price assumption proves incontrovertibly outdated by new market realities.

It has the benefit of avoiding permanent subsidies and helps to smooth out the impact of exaggerated price fluctuations on the sensitive sector, leaving the impact on the less sensitive sector. This is socially just, as there is more discretion of energy use in such sectors. We would thus create a flexible market mechanism to promote energy conservation without disrupting our social fabric or compromising our international competitiveness.

As part of its input, the government has to agree to use the extra revenue generated by ad valorem taxes on energy supplies to subsidise public transport, to promote its usage in preference to private transport, and to give one-off price compensation adjustments to social cases.

Under this mechanism the environment might be a hidden beneficiary of the oil price hike through reduced traffic-generated contamination. Those who are sufficiently well off to continue using their private transport in spite of hiked pump prices will at least benefit from calmer traffic conditions.

Clearly there are no perfect or painless solutions to long-neglected problems. But whining and complaining will not deliver. Only practical and sensible solutions will, while bearing in mind that timing is everything.

Sunday, 16 October 2005

Reality Knocks

The Malta Independent of Sunday

News flow from the economy this week indicates that reality is again knocking at the door as the budget consultation process gathers momentum. We have had three inputs from different sources showing that when all is said and done the country is facing tough economic choices that cannot be postponed any further. Indeed they have been postponed for far too long and reality is knocking compellingly with more urgent demand for immediate action.

The Minister responsible for Enemalta informed the MCESD and the public at large that the sharp increase in the cost of oil (to which one has to add the appreciation of the US dollar during 2005) is causing Enemalta financial pain it can no longer bear. Energy price increases have to be passed on to consumers in one way or another.

Quite simplistically, we were informed that either the surcharge on utility rates will have to increase from 17 per cent to over 100 per cent, or a litre of petrol/diesel at the pump will have to go up by 20 cents. A combination of the two spreading the load on both sources of energy rather than an either/or solution should also be possible, indeed probable. Failing this, the government would have to neutralise the increased cost of energy by subsidies conflicting with public finance deficit commitments for Euro entry.

Even if government were in a financial position to afford such subsidies, which clearly it is not, economists are very averse to building such huge subsidies into the system rather than let the price cascade down to consumers in order to motivate economisation and conservation in the use of expensive energy.

I do in fact find fault with government’s procrastination in leaving such decisions for the budget consultation process rather than being more prompt with corrective action to reflect the reality of high oil prices over which Malta, the government and consumers alike, have absolutely no control. No matter how unpalatable it is, there is no sound housekeeping to commend incurring debts to cushion consumers from price hikes realities that would lead to much needed immediate changes in consumption patterns.

In the US, where prices are allowed to cascade down to the pump with fluidity and immediacy, there was a long overdue change in car acquisition patterns with consumers shunning large gas-guzzling US-made SUVs in favour of more fuel efficient smaller autos, generally of Japanese or Korean origin. The government has done us no favours hiding this reality from us. On the contrary, it has duped us to continue buying energy-consuming appliances, negating the reality that next year we have to make up for the subsidies that were made this year.

It is noteworthy that the Minister has, in fact, not put on the table the possibility that government freezes its income from indirect taxation of energy consumption (excise duty and VAT), rather than keeping ad valorem tax system, which effectively raises government’s tax take the more the basic underlying oil prices rise. He could have and should have put such concession on the table lest government simply means to recover next year the Enemalta shortfall it incurred this year.

We also had the Federation of Industry (FOI) putting on the Minister’s budget table, straight out of the skeleton cupboard, the need to have more flexibility in the rate of exchange value of the Maltese lira in the run up to euro adoption by 2008. For the government this is a closed issue, which was sealed by the decision to enter the ERM II mechanism at a fixed rate of 2.3294 euros per Maltese lira.

Over the last four years I have been one of the most vociferous critics of government’s rigid exchange rate policy, which was neglecting the adverse inflation differentials we were registering against our trading partners that was consequently eroding away our competitiveness. All this was ignored by the monetary authorities when they persuaded the government to lock the existent uncompetitive rate into the ERM II who piously hoped to transfer the restructuring necessary to the real economy (cut wages, increase efficiency, increase working hours without corresponding pay increases and so on).

By resuscitating the rate of exchange issue the FOI is clearly telling the government that the restructuring in the real economy is not happening, or is not happening fast enough, that it needs an immediate shot in the arm lest its members become extinct before they can restructure at the slow tempo which seems to prevail in our maniana mentality.

Then we had the request from the GWU for the tax bands to be reviewed to exclude more low wage earners from the tax net and to ease the progression of the tax bands. It suggested that government compensates for the lost by increasing the tax burden at the highest marginal rates, which would go directly against international tax trends for reducing the maximum marginal rates to stimulate investment. The GWU’s suggestion would give further motivation for tax evasion.

With respect to all proponents of these various measures, it is unfortunate that they are all seeing the issue from their narrow point of view without paying much heed to the big picture. Granted Mr Minister, consumers cannot expect the government to subsidise them to avoid the pain of higher oil prices. But should not consumers be given due account why Enemalta keeps employing much more people then it really needs to perform an efficient job? Does not all this build into the price of utilities over which Enemalta has a natural monopoly to distribute?

Granted FOI, I definitely agree we need much more flexibility in our rate of exchange regime. I am on record as going further in advocating a one-off adjustment to bring back international competitiveness in one fell swoop. But we also need to give more security and training to private sector employees to preserve their long term employability if we are to maintain equity in our labour market.

And yes unions, we need to keep tax thresholds and bands regularly adjusted for inflation to maintain their real value, but we also need not to compound government finance problems, which can only be done if government finds union support to launch schemes to ease the transfer of excess labour resources in the public sector to productive jobs in the private sector. This would save the government huge millions in recurrent expenditure and increase productivity, which ultimately is the only solid foundation for further sustainable improvements in general standards of living.

As reality knocks on our doors it is imperative that we respond with holistic solutions to our problems, rather than just propose measures that take care of our bit at the expense of the bit guarded by the other guy. We are all in this together.


Friday, 14 October 2005


The Malta Independent - Friday Wisdom

In religion, faith holds that the Almighty is infinite. In maths, numbers keep counting to infinity. In science, space is synonymous with infinity. In Maltese politics, infinity can be associated with the capacity of the left to shoot itself in the foot.

Last week, twice on the same occasion – the general conference of the General Workers’ Union (GWU) – we had yet another masochist demonstration by both constituents of the left, the MLP and GWU, to harm themselves in full witness of many who wish them permanent opposition at best and extinction at worst.

I have already expressed the view that an organisation that espouses the democratic process where incumbents can be challenged through the ballot box is healthy and dynamic. This is fine in so far as it goes. But there is another side to it.

Non-commercial organisations are generally dominated by a strong culture of loyalty towards the leader. In business organisations, such loyalty is very much dependent on the commercial success of the enterprise. Business leaders come and go with much more fluidity than political leaders, unless they are some rare species of the Jack Welch type that return measurable commercial success and growth with consistent regularity.

In non-commercial organisations such as unions and political parties, the loyalty culture to the leader is so strong that leaders are not contested. Take the example of the British Labour Party. Gordon Brown’s aspirations to take over from Tony Blair are well-known and documented but he would not dare contest Blair through the ballot box. Leadership change comes through retirement or resignation but it simply does not come through a ballot box contest with the incumbent.

So when in such organisations the leader is contested, then it is surely time for the incumbent leader to look himself in the mirror and ask what is he is doing so wrong that provides enough motivation to contenders to sacrifice their own ascendancy in the organisation, probably leading to their extinction within it, for the miniscule – I would say non-existent – chance of obtaining change through the ballot box.

What is it that motivated Manuel Micallef to challenge Tony Zarb, knowing full well that his chances of success were inversely proportional to the strong probability of being labelled disloyal, untrustworthy and consequently lacking the basic ingredients to make it to the top post? What is it that persuaded John Attard Montalto and Anglu Farrugia to contest against Alfred Sant in the last election for Labour leader, knowing full well that the very probability of failure to beat the incumbent would clearly compromise their political career?

If the incumbent leaders in loyalty culture-driven organisations, rather than performing such inner soul-searching to arrive at an altruistic decision as to whether they serve their organisation better by going than by staying, simply react by defending their position through the maximum use of the loyalty culture, then the result can only be pleasing to opponents.

Such an organisation, following a divisive election contest where gloves are taken off and incumbents still in command of the soft resources of the organisation give themselves a huge advantage, inevitably turns exclusive. Those whose genuine love for the organisation forces them to challenge for change through the ballot box rather than through more subtle but disloyal sabotage, will find themselves edged out of the organisation for which they gave up their career.

The organisation loses some of its best human resources, those who are loyal to the organisation beyond their self-interest, and retains within those who are loyal to individuals ensuring their personal ascendancy through the hierarchy of the organisation, which thus becomes more defensive and introspective just when it needs to become outreaching and inclusive.

Through such shooting itself in the foot by allowing personal interest to prevail over that of the organisation, and by failing to install corporate governance systems to ensure that in the process of an internal election contest, incumbents do not use their position with access to all resources to claim an advantage beyond what is already naturally available through the loyalty culture, the left of Maltese politics has already lost some of the best brains. They remain left at heart but cannot fully participate to ensure that the left can have its fair share of the democratic rotation in governing this country.

As if this trauma of reported block votes, threats, undue pressure and all the other detestable side of the electoral process were not enough, we then had the opposition leader in his speech to the conference reiterating the privileged position of the GWU with the MLP.

Have you ever heard the PN referring to the UHM as their privileged union partner? Everybody knows that the UHM is more comfortable with a PN government than with a Labour government. History cannot be changed. Gone are the days when the UHM made wage increase demands of Lm9 a week or ordered work stoppages at the Freeport on trivial issues which could be resolved through thorough negotiations. Yet the PN will never admit that they give privileges to the UHM which they deny to the GWU. They clearly do, but would never admit it.

What is there to gain for Labour to admit giving privileges to the GWU? And what privileges, may I ask? In sharing more coffee chats? In having cross access to their respective media? Or in introducing unsocial utility rates without any evident prior consultation?

Only when this apparently infinite capacity of the left to shoot itself in the foot can be brought to an end (a contradiction in terms, as infinity has no end) can a new breeze blow over Malta’s political scene with a credible alternative to a clearly fatigued government which has grossly overstayed its tenure.


Friday, 7 October 2005

Flat Progress

The Malta Independent - Friday Wisdom

The debate about the appropriateness of flat direct tax systems for energising our economy and attracting investments seems to be gradually washing our shores.

In international circles the debate has long been going on and is gathering momentum. Only recently in the German election campaign, the fact that Angela Merkel’s economic adviser was known to favour the adoption of a flat tax model , was enough to cause substantial political damage to the CDU’s chances of a more substantial victory.

Even though the CDU did not have a flat direct tax model in their manifesto, the SPD could credibly argue that a CDU in power will favour its adoption. In a social democracy like Germany where the state channels tax money to give support for the lower ranks of society, it is easy to prospect that flat tax models can only co-exist with substantial dilution of the state’s ability to sustain such social support.

The argument against flat direct taxation is that it is regressive and socially unjust in comparison with progressive direct taxation where the rate of marginal tax increases as the taxable income skips from the lower to the higher bands. In a society like
Germany with substantial fiscal adherence and a strong sense of fiscal morality the argument against switching from progressive direct taxation to a regressive flat direct tax system is very forceful.

In our particular circumstances where fiscal adherence is still sub-standard, though improving, and fiscal morality is still a pipedream, the argument against flat direct taxation due to its regressive properties is much less valid. On the contrary some would argue that a flat tax model would be socially just as it would remove the incentive to evade taxation by reducing the marginal tax rate and it would help to render tax enforcement much more effective through the very simplification of the tax system.

Imagine as a hypothesis the introduction of 18 per cent flat tax rate. To simplify the tax system we would have a uniform 18 per cent tax rate for direct taxation, for VAT (retaining the current exemptions and lower tax at 5 per cent of particular sectors to avoid a double dose of regressive taxation) and a withholding tax rate of 18 per cent (up from 15 per cent) for income subject to final withholding tax systems. This would in a way eliminate one of the social injustices in our tax systems where earned income is taxed at a high marginal rate of 35 per cent while unearned income (bank interest, investment income) is subject to a final withholding tax of 15 per cent. Why should the fruit of labour be taxed at more than twice the fruit of capital?

Obviously before one can take a firm decision on such dramatic strategic shifts in taxation one has to study models to ensure that government income is not impaired. Our fiscal position is hardly in a position to take risks regarding sustainability of government revenue, even in the short term, notwithstanding any prospect of economic growth and resultant enhanced flows of taxation in the long term.

This underlines the need to achieve fiscal manoeuvrability in order to have access to some real levers to manage the economy. As long as we remain with unacceptable deficits in our public finances, it is impossible to consider creative shifts in tax systems. Fiscal deficits are a stranglehold drawing blood out of our economy, constraining it to no or slow growth which will constrain us to fall back on the EU average GDP as new entrants race forward with growth and investment.

In fact the flat tax direct tax model has worked wonderfully well in the economies of the previous communist states. The example was set by
Estonia. Inheriting a no tax system from the previous communist regime, and not having the obligation to carry legacy cost of a working social economy, it was easy for such states to adopt a flat tax model. They had no tax revenue to prejudice as in the case of a switch from progressive direct taxation to flat direct taxation. Their objective was to keep taxes low to encourage investment and simple to permit easy enforcement in an economy void of any tax culture.

This system has worked wonders and was quickly copied by most former communist states including Russia as its mainstream direct tax system (with different arrangements for particular sectors like the oil industry as Khodokovsky of Yukos found out in his jail cell for tax fraud). This success has led to economists in developed countries to press for the adoption of such a flat tax model in order to remain competitive against such new countries that were learning to run very quickly.

Large developed economies with ingrained social models are finding it impossible to consider the adoption of such a model, irrespective of their economic effectiveness, as the legacy costs of their social models act as a democratic barrier to leaders who need to promote economic growth as well as preserve power.

In our case we have the worst of both worlds. We have the legacy barrier of a social economy that makes it difficult to switch from progressive taxation to flat taxation. We have a fiscal deficit that permits little room for manoeuvrability and we have a system that rewards inefficiency through protected employment in the public sector, easy early retirement adding to the cost of our social model, and a government that cannot even admit we have serious economic problems. Frank acceptance of such problems should force us to think the unthinkable and to open a debate on certain shift changes, including direct tax models

Sunday, 2 October 2005

Militant and Relevant

The Malta Independent On Sunday
Alfred Mifsud

It is almost tragic that media domination in the hands of the PN, and the one dimensional thinking of some powers in the GWU, have allowed the contest for the most senior posts of the union’s hierarchy being held this week, to be portrayed as a head- on fight between the militants and the moderates.

Firstly it should be emphasised that it is a sign of a dynamic and healthy organisation that de facto permits the possibility of incumbents to be challenged through the ballot box. It is this fact that the contestants and the organisation should have emphasised, rather that allow themselves to be depicted as militants or moderates in order to gain an advantageous position in the forthcoming contest.

The GWU should be proud that it is a true democratic organisation where deputies have no inhibitions about challenging incumbents and the contest is between colleagues who think they can do a better job in reaching common objectives.

Whether one is labelled or permits oneself to be labelled as a militant or a moderate, the ultimate aim is the same: that of defending social justice and create employment for the benefit of the working class.

And to do this GWU has to be militant and has to remain relevant. Let’s go into the details to define militant and relevant lest I am interpreted as favouring a constant belligerent attitude with employers whenever the union is in negotiations on behalf of its members.

The union, and this applies to all true unions and not just the GWU, must be militant when protecting the workers’ rights and social status and promoting social justice. There were days when legislation provided poor protection for the workers and when the workers were exploited. Unions then had to be belligerent to the point of taking industrial action, including strikes, in order to ensure that workers got their fair share of the economic wealth they helped create on the capital.

This attitude was particularly effective at a time when most economies were closed and inward looking and where capital had little mobility. That was yesterday.

Economy is now open and except for public sector employment most employers have freedom of movement with their capital. Maltese workers are competing with other workers all over the world from next door
Tunisia to distant China and Vietnam. Globalisation has rendered capital and investment extremely mobile and forced unions to be very careful in making demands that could prejudice the competitiveness of employers.

News from international sources confirming this trend abound. Only this week Daimler Chrysler (Mercedes) and General Motors (Opel) announced various job cuts schemes in Europe as their production facilities migrate to lower cost locations in order to remain competitive. In the
US, General Motors is in do or die negotiations with the unions to dismantle their legacy pension scheme and health care costs related to present or past employees to avoid having to resort to Chapter 11 bankruptcy procedures in order to achieve the same result, as many US airlines have had to do.

The dilution of union powers through globalisation has been further compounded by individualism at work resulting from new technologies. To remain competitive, employers in high cost developed economies have had to upgrade the technological skills of their employees making them more individually accountable for performance. The sense of collectivism and solidarity has lost its crowd power as employees’ tools have become the mouse and the keyboard rather than the production line.

For unions to remain relevant in the current days of unstoppable globalisation and technological innovation they must accept that the old version of union militancy is counterproductive and works against the interest of their members in the development of a strong economy where employees have the facility to move from one job to another with minimum friction and pain. The emphasis of the union has to shift to employability rather than preserving life-long employment through an unsustainable status quo.

So whoever leads the GWU, whose members are mostly in the private sector, must remain militant to ensure that private sector employees do not continue to be discriminated against. No union that prides itself on defending and promoting social justice can continue to protect the economic apartheid which exists in our employment sector where the least productive (public sector employees) have the most protection and the most productive (private sector employees) have to make do with little or no protection.

Whoever leads the union has to be militant in shaking the government to bring some rebalancing of rights and obligations across the whole employment sector – where public sector employees give up their excessive protection and unaccountability for performance and get to work in an environment comparable with private sector employees. This applies to hours of work, redundancy protection and remuneration policies, as well as general conditions of employment.

In compensation for some dilution of excessive rights and protection in public sector employment, the unions should get a deal to give added protection to private sector employment, where employees gain rights of re-training both during employment as well as in case of redundancy, and where employees are given additional right of information on the financial health and operating performance of big employers.

The union has to be militant in fighting unemployment and in forcing the government’s hand to institute compulsory training schemes for the long term unemployed, anything above six months, firstly to cut down entitlements abuse and secondly, to give a real chance to the long-term unemployed to become employable again, and to be assisted in pricing themselves for such re-employment.

If the union stays militant in the traditional way it will lose its relevance. So far it has seen its relevance fade away in the private sector but still managed to preserve it in the public sector. However this is unsustainable as defending the existing discrimination will further weaken its private sector members as government will have to allocate its scarce resources to continue funding waste rather than re-training.

Ultimately the public, who is seeing its tax money being wasted as the economy jams while our competitors race ahead, will elect a government with a democratic mandate to dismantle the residual union power in the public sector, reducing or destructing the union’s relevance even where it has survived up to now.

It is the duty of whoever is elected to lead the GWU forward to ensure that the union remains militant in preserving and creating employment and employability, as well as remaining relevant in the outreaching society of the 21st century.