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.