The Malta
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.
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