Sunday, 27 November 2005

Democratic drag

The Malta Independent on Sunday

The breakfast meeting to discuss the Budget for 2006, organised by The Malta Business Weekly and Hotel Phoenicia Meridien, delivered a clear message to the government.

It is time to look problems in the eye and acknowledge that our economy is growing sub-optimally, far too slowly and in a dangerously unbalanced way. Economist Gordon Cordina concluded that we need consistent real growth of four per cent p.a. to catch up with the EU average within a generation. Our recent growth rate of one per cent will get us nowhere and at this rate, former communist countries now EU members will soon overtake us, as they continue to register economic growth and attract investment in ratios beyond our wildest dreams.

Entrepreneur Joe Grioli put his finger on the problem in a more direct manner when he gave real life examples of lack of political leadership and determination to do what really needs to be done to move forward. He made a clear case that mere recital of good intentions and attacking problems superficially will simply not deliver. Repeated claims that we are on the right track sound quite hollow. The question is whether we are moving fast enough along such track.

In his address Grioli made a comparison with the performance of
Singapore. He observed that the Singapore brand is a symbol of efficient government for foreign investors, a landmark international port, a prominent financial centre and an efficient spot on the ITC network. Malta on the other hand has no recognisable brand among international investors. In trying to be everything to everyone we finish being indistinguishable among the ever-increasing crowd of countries pitching for investment to win in the globalisation game.

As soon as Grioli finished his presentation the floor was given to the Parliamentary Secretary for Finance in the Office of the Prime Minister, Tonio Fenech, who in trying to parry Grioli’s criticism said one of the most shocking things ever to slip through the lips of a local politician.

He opined that comparisons and benchmarking with
Singapore were unrealistic and erroneous as Singapore was not an effective democracy. Consequently, its government could manage the economy in an effective way, which is not realistic to expect in a real democracy given the government’s sensitivity to the need of not distancing itself too much from the electorate in order to retain its seat of power.

So, according to the main economic spokesman for the government, democracy is a drag on economic performance. This is not so different from saying that communist regimes are better economic managers than the market economy of the free world, or that
Cuba should have a more efficient economy than the United States.

Late last September I had the opportunity to attend an international conference where one of the speakers was Mart Laar the first Prime Minister of a free
Estonia following its 1992 detachment from the former Soviet Union. Mr Laar, was for some time also President of Estonia and in spite of his young age, at 45, he retired from politics and now earns a living on the conference speakers circuit relating his experience of successful conversion from a command to a market economy.

Mr Laar explained that in 1992 Estonia, the supermarket shelves were basically bare except for Russian vodka, inflation was running at 1000 per cent unemployment was heading towards 30 per cent, food was rationed and international trade was 92 per cent with Russia.
Estonia in 2005, thanks to the switch from communism to a real democracy with market driven economic policies, is now registering stable real growth of six per cent pa, inflation is at two per cent, unemployment is low, the budget is balanced and the over-dependence for foreign trade on Russia is no longer.

Certainly our Parliamentary Secretary’s assertion that democracy has to be a drag on economic growth is not borne out by the experience of
Estonia and, for that matter, by the experience of all countries that have come out of communism. Even the hybrid experiment being run by China, where central political communist structures are co-existing with a market economy in certain parts of the territory, is showing that what actually makes the difference between a shoddy and a brilliant economic performance is the extent to which the market is allowed to allocate resources while keeping a minimum social net to give a decent standard of living to those who cannot participate in the market because of their health, age or other particular circumstances.

What is causing a drag on our economic performance is certainly not democracy. It is our acceptance of long-standing rigidities we should have shed more than a decade ago.

Why should we in 2005 continue to pedal a COLA system of automatic wage increase across the board when all those we are competing with have abandoned this system? How can we continue to detach wage costs from productivity gains and still pretend to be shocked when factories close down and workers lose their jobs that are not being replaced by new factory openings. Maybe one could argue that the COLA is an intrinsic part of our social services structure. I quite disagree with this, as if anything COLA increases to the minimum wage should form such function with wage setting beyond the minimum wage allowed to the market function through negotiation at micro level between employers and employees, in most cases through their respective unions. But even if one were to hypothetically accept the argument for COLA retention, it is fair to ask which is the more important social service: COLA increases for those in employment or jobs for those who have none? Nothing changes the fact that the biggest social service is a productive job. Nothing is more traumatic and socially tragic than losing one’s job with little or no prospect of finding another within a reasonable time.

Let’s take another example mentioned by Grioli in his address. Rather than dismantling monopolies and letting the market deliver efficiency and productivity, we have kept the institutional system of quotas for taxi licences. Such quota licences change hands for astronomical sums, which means that taxi drivers will have to overcharge, and cheat, to get an economic return on their investment. I don’t know whether it was a joke or not, but Grioli even related a case where cruise liner passengers who on disembarking found no bus or coach transport, decided to walk to Valletta rather than take a expensive taxi ride. However, when asking for directions they were pointed towards Marsa by irate taxi drivers who had been refused the opportunity to sell their services. Some welcome!

Democracy is no drag on the economy. A fatigued leadership without determination to make space for the markets to deliver their efficiencies certainly is.


Friday, 25 November 2005

Sprint or Marathon

The Malta Independent 


CHOGM stands officially for Commonwealth Heads Of Government Meeting which has brought to our midst a diverse array of leading political figures from all corners of the world for this prestigious event. It will be over before most of us can blink so it is imperative that it is given a more enduring meaning.

For me CHOGM stands for Can Handle One-off Games Magnificently.` Can (we) Handle Ongoing Games, Mates` This is the crux of the matter!` That is our real challenge.

Of course it is refreshing to walk into City Gate and see the ceiling of the main gate properly repaired and shining white with fresh paint.` That job had been going on at a snail`s pace for endless months I can no longer count on both hands.` I can assure you however that the production in the last couple of weeks was greater than the production in all previous months not just because the workers were equipped with the proper tools and scaffolding but principally because someone was measuring the actual output and a very clear target was set which had to be met come hell or high water.

It is most definitely a huge sigh of relief to see the up-lift given to the area round the war memorial and Glormu Cassar Avenue, the main drive-way into the centre of our capital city.` It is also a major walkway for cruise liner tourists who make their own way from the Waterfront terminal to Valletta and vice-versa.` We have had millions of such visitors and never really cared much to ensure that we give them a polished first impression to help persuade them to consider returning for a longer stay amongst us.` Now what was neglected for years gets done in a few weeks.

This is a typical Maltese trait. Give us a challenge with sufficient motivation and the more difficult it is, the more we put in our substantial abilities and creativeness to deliver even in the most unlikely circumstances and tight time frames. I have seen it happening over and over again.

I remember when some twenty years back I had a business relation with a foreign owned company involved in quite complicated manufacturing, the German manager in charge of production had confided this with me. He told me that when things are moving as pre-planned, the run of the mill sort of thing, he had to make a great effort of keep everyone on track with acceptable productivity levels of output.` However when a job with a tough challenge arrives which one would normally refuse as unrealistic, on discussion with his local workers they would come up with more creative solutions than he, with all his experience, could ever think of.

The same used to happen with larger building projects I was involved in, mostly hotels.` Unless there is a fixed time commitment for switching on to live operations, the work just drags on and on.` With a fixed time commitment, in the last month before the deadline work miracles get performed before your very eyes.` A month before opening you would never believe how a building site` can be turned into a polished luxury hotel which will accept guests in a few weeks time.

It should not be like that.` We are good sprinters but poor marathon runners.` We excel in crisis management but perform poorly in ordinary run of the mill operations.

The trouble is that economic winners in the globalisation game are, unfortunately for us, economic marathon runners and excellent planners. The winners avoid crisis rather than excel at handling it. We need to change.

If somehow we can have the national effort made in the last month in the run up to CHOGM a benchmark of our ongoing efficiency standard then we will succeed to compete whatever our cost base. Because competitiveness does not depend solely on costs.` It has also much to do with efficiency of performance on a consistent basis.

Rather than waste energy and resources in protecting unproductive jobs we need to apply such resources and efforts into the creation of new jobs.` There is no bigger social service than a reliable productive job and the maintenance and enhancement of our social services depends on our creating many more such new jobs than the jobs that unavoidably have to be lost as improvement in our standard of living makes old jobs no longer competitive in the new environment.

Unions can organise as many street protests as they want. It is their democratic right to do so. But that would neither create one single new job nor offer any additional real protection for existing jobs` and social services .` These depend on new investment by the private sector and an efficient bureaucracy and regulation by the State.` Private investment will however only be attracted when it could perceive profit potential on a consistent basis with as little unknown surprises as possible.

Security for investors and consequential job creation depend on the social partners and government reaching consensus on the way to undertake efficient ongoing restructuring, spreading the pain fairly by re-balancing the rights and obligations of workers across the whole employment spectrum, and dedicating saving in operational expenses into training and retraining of employees to keep them employable even if they have to change employment more regularly than hitherto.

Investment is attracted be reliable marathon runners rather than moody excellent sprinters who tend to relax unduly between one sprint and another.    

Friday, 18 November 2005

Rags and Riches

The Malta Independent - Friday Wisdom

November 2005 is proving to be a month of rags and riches. In France, rags and riches sparked to produce the night-time riots which have shocked the French reputable joie-de-vivre. In Malta, rags are for the 800 odd employees who are losing their jobs in a long-established clothing factory which is closing down within the next three months, while riches are the investors in local bank equities quoted on the Malta Stock Exchange.

I think it is worth musing on and analysing the background, motives and what led to such rags and riches simultaneously co-existing on this small rock, where millionaires and the have-nothings rub shoulders, even if they want to avoid each other.

Let me start with the rags. There is nothing unusual with factories closing down when they reach the end of their economic life. The cycle of life works like that. Globalisation, which we cannot escape even if we had economies of scale let alone given that our size constraints to export most of what we produce and import most of what we consume in order to retain an acceptable level of efficiency, accelerates the rollout of the cycle of economic life.

The Denim Group has been one of our industrial success stories. Unlike most other exporters, it was wholly owned by local investors who managed to find a competitive niche in the global denim-wear market. A combination of international downturn in the denim-wear fashion trend and an increasing local cost base brought about the inevitable closure of the local outfit, with unpleasant consequences both for investors but especially for their employees.

If we had a bit more realism in our economic management then we could have been in a position to accept such events as normal run of the mill occurrences, where factory closures are compensated for by factory openings of new competitive projects.

Unfortunately, because our economic managers have allowed our economy to lose its international competitiveness, the rate of creation of new manufacturing jobs is far inferior to manufacturing job losses, and this trend may be expected to persist, possibly accelerate.

If we had had the foresight to make the wage setting mechanism more flexible, rather than persist with COLA-mandated increases irrespective of micro efficiency gains, a system devised in the 1970s when we had a closed economy and which is therefore totally unsuited to the current realities of globalisation, then companies like Denim could have survived here for a few more years.

If we had had the discipline to operate strict monetary and exchange rate policies to control the inflation adverse differentials with our trading partners, then we could have emerged with a rate of exchange regime which helps rather than hinders our international competitiveness.

What will actually happen, now that the consequences of our past indulgence and excesses are translating themselves into private sector job losses? The investors will quite understandably explore if they can remain in the global game by transferring their activities to a lower cost location.

The employees, many of them without technical or tertiary education and quite a few with decades of experience in a trade which has been rendered irrelevant, will have to face the humiliation of begging for a new job for which they are ill-prepared.

The unions are powerless to protect their jobs and can only promise to do their best to try to find new openings. Unlike what happens when public sector jobs are rendered redundant, the unions cannot demand that Denim employees be offered a public sector job or that they get paid terminal benefits for voluntary resignations.

The apartheid in our work market condemns these employees, quite a few of them in their 40s, to eat humble pie, to suffer in silence until at least the next minister calls at their residence nearer election time to pitch for their vote. Then they can, for once, have a lever with which to attempt to trade their family’s vote for a public sector job.

If we still have any social conscience left, and if we really mean to restore competitiveness to our economy, balancing the rights and obligations of employees across both the public and private sector is a priority. Unfortunately, it has been put back to 2010, following the recent signing of the collective agreement for government employees.

The riches being made by investors in equities of the three quoted banks are ridiculously unbelievable. Up to close of business last week HSBC Malta shares are up YTD 76 per cent, Bank of Valletta shares are up YTD 53 per cent and Lombard Bank shares are up YTD 65 per cent.

These gains are in addition to the sizeable dividends which they have distributed. While all the banks reported a strong increase in operating profits, only possible, at least in part, due to their dominant position, nothing can really provide a strong argument for the size of the capital gains experienced.

In a very narrow and illiquid capital market like ours, the risk is greater for the market to over or under shoot beyond what is reasonable and sustainable. My personal feeling is that the market has now entered a distinctly overshooting range which discounts irrationally huge future profit growth of the three banks.

Investors had better beware and ask themselves by what logic is the HSBC Malta share price trading at 23 times earnings per share, when HSBC’s parent’s share price trades internationally at 12.7 times earnings, as do most shares of other strong and highly profitable international banks.

Which serious bank is going to invest in the Bank of Valletta privatisation at these high multiples?

One could irresponsibly argue that the market knows best and that the market is always right. But even if one does that, the point arises whether such speculative riches should continue to go untaxed when others are suffering factory closure rags.

Taxation is a delicate matter and should not be tampered with to suit particular circumstances, because it could destroy the confidence that is so necessary to safeguard the integrity of our financial markets. But the argument for higher taxation of banks that are registering profit growth through the strength of their dominant position is growing stronger. If not a windfall tax – which I dislike – then a special profit surtax for operators who enjoy a dominant position should certainly be within the realms of the possible.

Sunday, 13 November 2005

How to make simple things complicated

The Malta Independent on Sunday

I am always extremely suspicious when budget measures get immediately revised, refined or, more exactly, re-fudged. It shows insufficient foresight and inability to think through such measures before they are announced. Typical is Labour’s 1998 hikes in utility tariffs which shortly after being announced were opened for revision through endless negotiations with the unions.

When such measures are tax related than the fudge is bigger. Because taxation is a delicate matter. Effective, fair and understandable taxation depends on consistency of principles and equity in treating taxpayers equally and fairly. If taxation policies start discriminating amongst tax payers in an irrational manner then taxation loses its moral authority and evaders will even find moral justification for their wrong-doing. Such fudges unfailingly give a boost to tax evasion.

Good housekeeping typical of effective leadership is to think all measures through well before announcing them and then stick to what is decided come hell or high water. Whilst prior consultation is commendable, taxation measures cannot be kept open for negotiation after their being announced. Not even a majority referendum can overturn a legislated fiscal measure.

The changes to taxation on capital gains from sale of real estate were clearly ill-thought with government accommodating a particular section of property owners at the risk of compromising the whole structure of our taxation system. It took me no more than two minutes after reading the budget text to conclude that the measure will need substantial revision and re-styling. How is it possible that the Prime Minister in his capacity as Minister of Finance does not smell the risk of such hotchpotch measure which brings to nought years of patient building of our tax system to close the gaps so much sought by tax evaders.

In one fell swoop the whole VAT audit trail was thrown out of the window by giving the facility to property vendors to pay tax as a percentage of sales value rather than as a percentage of taxable profit. The motivation to keep proper account of the cost build up in property development, with VAT payment and all, to ensure that one could justify their deduction from the sales value to arrive at the taxable profit, was suddenly brushed aside.

What fiscal motivation remains for such property vendors to keep proper documentation and pay VAT on their cost build up when the tax they pay has nothing to do with the costs anymore, but is a straight percentage of the sales value? So apart from reducing the tax impact on property hoarders government is proposing to give them the incentive to acquire goods and services without paying VAT thus fattening further their profit margins.

The instant revision announced by the Prime Minister in his replica speech last Wednesday makes hopeless a situation already confusing. The right thing to do would have been to withdraw the measure altogether and announce that the matter is being carefully reconsidered. Instead the Prime Minister, now under pressure from those who were negatively affected by the measure as first announced, issued fresh measures which discriminate amongst those in latter categories as well. So if one sells property owned for five years or less one has a choice between the previous and the new tax system. But five years and one day will force you to pay 12% withholding tax on the sales price irrespective of whether you made a profit or not.

Apart from such discriminatory treatment, the tax even as amended remains illogic. The basis of taxes on profits presupposes the existence on profits in the first place. If not the tax is no longer income tax but excise duty which is subject to strict EU rules.

Further discrimination is between developers in designated areas and general developers. The former enjoy their right to choose without any time limit but the rest have to choose within five years. The argument is that the development in designated areas is larger and could take longer to execute and sell, whereas the latter is smaller and capable of quicker execution. Little sensitivity is shown to the fact that the tempo of sales rollout depends on market conditions which may not be always buoyant. Laws are meant to last and not to assume that current market conditions will continue in perpetuity.

The proper way to do what government is trying to do was simply to give a conditional tax amnesty. The model was already there and government used it effectively in the last budget when it gave heirs of inherited property the possibility to pay a percentage for increasing the value of inherited property to current market conditions. The up-dated valuation will then be taken as the cost base for any future sale.

If government wanted to give fiscal incentives to those who have hoarded property and who would, under current tax systems, be liable to 35% on huge profits made if the property is sold at current market rates, then the simple way to do it is to give such owners the same ‘amnesty’ as that given to heirs of inherited property.

It would have had the benefit of:

  • Creating a tax amnesty with a fixed expiry date
  • Generating for itself instant positive cash-flow from a one off source
  • Preserving the integrity of the audit trail of the VAT system.
Instead it has decided to make simple and tried things so complicated. May be it could argue that government is against tax amnesties. I am against tax amnesties too and this as a matter of principle.

But effectively the shift to final withholding tax on sale of property is a disguised amnesty for property hoarders exposed to substantial taxation upon sale of their property. Only it is an amnesty that benefits one sector and punishes another sector of the property market – those who bought at recent market prices and now have to sell under oppressed tax conditions.

How can the government be against tax amnesties when it gave tax evaders holding foreign assets three schemes in the last three years to regularise their position upon payment of a small percentage penalty. My wonder is how such amnesty was given to evaders who had breached two laws, i.e. Income Tax and Exchange Control and was denied to those that breached only the Income Tax act and kept their funds locally paying the withholding tax on savings income. A true case of favouring the grave offenders and punishing the small ones.

I am against all tax amnesties as a matter of principle but then I am in favour of equity and non-discrimination. Government seems inconsistent regarding amnesties but against tax equity and in favour of tax discrimination.

Friday, 11 November 2005

Out of Focus

The Malta Independent - Friday Wisdom

The best label for Budget 2006 is ‘out of focus’. Whilst it should aim for achieving fiscal sanity through economic growth it is instead trying to achieve it at the expense of economic growth.

There are huge and important differences between the two approaches. The proper and common sense approach is to achieve fiscal sanity through economic growth. This acknowledges that the ultimate aim of economic policy is to achieve long term sustainable balanced growth, superior to that of our competitors. By doing so and by restraining government expenditure to grow at a slower pace than the economy, the government could achieve higher revenue flows without raising taxes and thus narrow the budgetary gap in a relatively painless manner.

To achieve such growth there must be clear economic restructuring policies that render the economy more flexible and competitive in order to attract investments and grow exports of goods and services at a rate exceeding general world trade growth.

The budget simply fails in this respect and unashamedly admits its failure. Expecting a growth rate of just 1.1% for 2006 when we have capacity to grow at 5% or more, is a certificate of having economic policies in general and the budget in particular out of focus.

The end result of such misdirected policies is that measures to prop up government revenue flows and to restrain its recurrent expenditure in order to achieve fiscal deficit targets, when applied in the context of a stagnant economy, cause dangerously explosive social pain which generally becomes intolerable at the political level when it comes to stitch on the remaining two annual budgets between now and the next election.

Claims that the budget is free from additional tax burdens are almost laughable. Following the price hikes in energy prices announced a few days before the budget, both those that take on immediate effect but especially those that are planned to creep in by monthly increments over the next two years, there is de facto no spare capacity for additional tax measures. But the budget contains additional taxation by stealth.

When tax bands are frozen for several years at a particular level, rather then adjusted at least to reflect the real rather than the nominal value of money, that is taxation by stealth. When VAT is applied on increased energy prices, that is taxation by stealth.

The 2006 budget does little to stimulate growth by rendering the economy more flexible and competitive. If anything it does just the opposite. The most glaring faults are those of omission.

Not only we have kept on the COLA – semi wage indexing system irrespective of productivity grains – but we have given it a further dose by indexing ahead of time expected inflation increases in the last quarter of 2005. Growth based policies would require liberation from a system that is clearly out of date and out of touch with the current competitive environment, leaving wage fixing policies to free collective bargaining while keeping legislative increases only to the minimum wage to protect non-unionised labour.

Compare this to efficiency gains of more than 4% being registered by a mature economy like the US which in effect means that while wages there increase in absolute terms the unit cost of labour per productive unit is decreasing making the US economy more competitive. Our economy, with much bigger scope for efficiency gains, is showing competitiveness in reverse gear.

The much promised reform to link expenditure on health services by capping them to specific revenue items has again been regularly promised in the pre-budget document but not delivered in the real thing.

The pension reform has again been put to wait for yet another year and government seems to be suggesting introducing a compulsory second pillar which raises our labour costs and compromises further our competitiveness.

And a few days before the budget a collective agreement was signed for public sector employees guaranteeing their privileges, indeed adding to them, until 2010 thereby sanctioning the apartheid in our labour market. This inevitably creates political pressure in the run-up to any election for people to exchange productive private sector jobs for cosy public sector employment rather than create the necessary economic dynamics for shifts in the opposite direction. Indeed I consider the need to re-balance the rights and obligations in the labour market between public and private sector employees as a pre-condition to achieving real effective restructure. This may have to wait for 2010.

As to the sins of commission the only significant measure announced in the budget, the switch to 12% final withholding tax on sales value of real estate, is clearly ill-thought and needs urgent reconsideration.

How can we create a fiscal system that taxes profits where no profits exist and eases taxes where huge profits are made? How can we create a system which effectively nullifies the audit trail which was being built layer by layer by the VAT system by rendering tax payable on property sales independently of relative costs? How can we do exactly opposite to what Jesus thought us in the Gospels by rewarding the lazy who hoarded their talents and punishing the enterprising who put them to productive use? How can we introduce such sharp changes in the tax system so offhandedly rather give our tax systems the consistency needed to render them fair, understandable and effective?

The 2006 Budget is out of focus. It compromises our competitiveness and could kill the growth in real estate and construction which was helping the economy to keep its head above the water. It is evidently the product of amateur economists who see fiscal discipline as an end in itself rather than a means to the end of economic growth which is the only real source to sustain and improve our standards.

Friday, 4 November 2005

Not Acceptable

The Malta Independent - Friday Wisdom

“This is not acceptable” categorically declared the Prime Minister in his budget speech (page 13 para 1) in a menacing message to critics of the country’s economic performance. “Our economy is showing strong signals of growth and it is sad that there are some who continue to project a negative message irrespective of what official results show…(they) seek to discourage the people. This is not acceptable”

I could hardly believe that in 2005 a government of an EU country expects economic analysts to be blinded by political rhetoric, and sends veiled threats to those who rather than accepting things at face value use their brains to show how, in spite of misplaced flattery, the economy is continuing to under-perform. I do not criticise to discourage anybody but to appeal to whoever is responsible to look realistically at our performance and to take measures that truly addresses our problems rather than their symptoms.

It seems the government does not like to be judged by results but by other irrelevant criteria, like how much effort is being put in to achieve what is being achieved. I have enough white hair to have learnt to judge by results rather than by effort and certainly not by words. Assertions are easy but do not constitute facts.

Take the assertion that our economy is showing strong signals of growth. In the 12 months to September, in spite of reported real growth of 2.75 per cent per annum in the September quarter of this year – a figure which by all measures is preliminary (this year it is more subjective than usual as the figure had to be produced on educated assumptions given that the budget was moved forward by one month) and subject to substantial revision when a better estimate is produced in the second week of December of this year – the economy grew at an annual real rate of 1.7 per cent.

Furthermore, it grew in a worryingly unbalanced way with financial intermediation and property and construction being the drivers of growth, which was totally missing in manufacturing and tourism. The EU real average growth for this year is two per cent and the average growth of the other nine countries that joined the EU with us is about four per cent.

Should we be happy that our economy grew less than half that of our peers and even less than the whole EU average? To catch up at some distant point in time with the EU average we have to grow faster than the average and we certainly have the capacity to do so. It is government policies, past and present, that form a barrier to the proper exploitation of our potential.

When one sits for an examination one is judged by the result. The hours of study, the money spent on books, the length in answering the question, these are of no relevance unless they contribute to a good examination result. For macro economic managers the result that measures their performance is real growth, sustainable balanced real growth.

How can economic success and signals of strong growth be proclaimed if the government’s own expectation for real growth for 2006 is 1.1 per cent with an inflation rate of 3.9 per cent when the EU is projecting a real growth of 2.3 per cent and an inflation rate of 1.7 per cent for 2006?

We are expecting to register less than half their growth rate and more than twice their inflation level and we call that success! This “success” offers the clear prospect of further erosion of our international competitiveness that makes a fixed exchange rate regime particularly burdensome to carry.

Even in the two areas where economic statistics seem to offer positive developments there is more to it than meets the eye if one cares to scratch the thin surface layer. True, the budget deficit seems to be heading in the right direction. But is it right in substance, technicalities apart, not to measure the borrowing being undertaken by Enemalta to fund some Lm30 million to cover unrecovered hikes in the acquisition price of energy products?

Is this not our deficit too that we have to make good for in future years? Whether such consumption deficit resides in central government books or in Enemalta’s financial statements is immaterial for taxpayers who will have to make good for it just the same.

And should we not acknowledge that the growth in recurrent revenue was not the result of revenue buoyancy resulting from economic growth but the result of one-off fiscal amnesty measures that cashed in one year what efficient fiscal enforcement could have extracted in multiples in subsequent years.

The government prides itself that our registered unemployed showed a dramatic reduction over the last 12 months. Unemployment is more accurately measured by the Labour Force Survey, which avoids the risks of administrative manipulations inherent in registered unemployed statistics. Comparing our low unemployment with the high unemployment in competitor countries risks awarding credit that in fact is hardly due.

To make a more concrete comparison we should measure also the under-employment in public service and we will surely find out that our real unemployment is worse than that of our competitors, at least in economic terms. High employment levels in the face of stagnant growth is a clear signal of falling efficiency and loss of competitiveness – hardly a sound foundation for future economic growth.

And the one substantial measure announced in the budget – the change of the Capital Gains on property sales to a mandatory Final Withholding Tax model – promises economic turbulence and further impetus to the already dangerous asset price inflation we are experiencing.

The mandatory nature of this measure, unlike the optional models in other areas where the final withholding tax model was applied as in the case of investment income and bank interest, punishes those who risk capital in recent or new development projects where acquisition costs at market prices normally allow thin margins, and rewards those who have been idly hoarding property.

Yet another case of rewarding the lazy and punishing the enterprising. For sake of restoring some order to our property market and avoid the risk of compounding asset price inflation to the point of exploding the bubble, this measure needs to be re-thought at least in making it optional rather than mandatory.

Or are we thinking that asset price inflation, as indeed is happening also on the financial capital markets, is not our problem and should not be addressed through monetary policy? If that is so than most certainly it is not acceptable.