11th August 2006
TheMalta
The smiling faces of a
young family looking at the future with confidence adorns the front cover of the
pre-budget document 2007, which has been distributed as part of a wide
consultation exercise.
Objective and thorough reading of its contents however provide pretty little to smile about. Following the introduction, there is one chapter that gives an analysis of the Maltese economy and seven chapters that tackle different aspects for future strategy, including fiscal measures being considered for inclusion in the 2007 budget.
It is important for our confidence to be built on the reality of the present situation and therefore, there has to be a relationship between the current state of the economy and our expectations for the immediate future. In many cases, this relationship gets lost and the vision conveyed by the document seems more like a wish list rather than a determined action plan to achieve the set targets within a reasonable timeframe.
The credibility for the future vision is therefore largely dependent on the economic performance being currently achieved and publication of the document should have been delayed by a couple of weeks in order to beef up the economic analysis by half- year data for 2006.
Deficient as it is due to the absence of more current information regarding 2006 performance, an unmistakable conclusion is that government has in fact very little room to manoeuvre the economy out of its dull performance.
Cumulative real growth over the five years 2001-2005 is a measly 0.6 per cent, while private consumption over the period has increased by 4.4 per cent. In simple language, we have been consuming more than we have been producing and to do so, we have had to erode our past savings and/or incur consumption debt.
And this happened simultaneously with a trend where the impact of taxation has grown from 28.3 per cent of the GDP in 2000 to 35.1 per cent in 2004 – meaning that while we have been producing less and consuming more, we have also been paying more taxes. So while government was repairing its fiscal deficit, the private sector was dislocating its own balance sheet while trying to maintain its consumption patterns.
This is clearly reflected in our Balance of Payments performance, where we only registered a small surplus in 2002 due to exceptional factors related to sale of aircraft by AirMalta
Further worrying is the fact that the miserly growth we have achieved has been underpinned by unsustainable consumption and government investment, which will run its course when the Mater Dei project and the Italian protocol and EU pre-accession funds come to their natural end in the near future.
The productive sector has been under stress. Tourism is bad and getting worse. Manufacturing performance is highly dependent on the performance of ST Micro-electronics which in turn is highly dependent on the state of the micro-chip market for the level of value added to the GDP. Even this could be misleading to understand the real state of the sector as given the entire foreign ownership of the productive units the value added measured in the GDP generally leaks out on profit distribution in the GNI (Gross National Income).
The same is the increasing experience of the financial sector as it shifts from local to foreign ownership, which adds value to the GDP and takes it back through external profit distribution in the GNI. The healthy performance in tourism would have a much wider positive ripple effect as residents own most of the productive units in the sector and there would be little external leakages through profit distribution. Putting it simply, a positive performance in tourism is doubly more important than a positive performance in manufacturing, even if the value added content is the same.
Given this shaky performance that leaves us anchored in the prescriptive phase of the projected economic turnaround, one would in normal circumstances would not even dare to think of taking measures to increase private consumption through tax reduction. Furthermore, it is economically risky to start building structural subsidies into the economy as in the case of the subsidy approved to keep the price of bread stable in spite of the increasing cost of its production inputs.
However these are not normal times. The election is starting to loom on the horizon and the best working assumption is that it will be held in the fall of 2007 in order to replay the euro issue just as the EU issue was made to dominate the 2003 elections and give backstage importance to other bread and butter issues where government has little credit to reap. All governments want to create a “feel good factor” in an election run up and human nature being what it is, or has unfortunately become, feeling good seems to depend almost entirely on increased consumption.
To complicate matters this has to be achieved in the context of discipline for euro accession and in the context of a harsh environment for energy prices that are likely to exert a cooling effect on international economic performance going forward.
Maybe this explains why the government has put up for consideration a shopping list of measures which would cost many tens of millions to finance but in the end had to warn us of the need to prioritise to keep the bill within Lm8 million. This is a relatively insignificant amount, which could be compensated by better enforcement without introducing additional tax measures.
The
The smiling faces of a
young family looking at the future with confidence adorns the front cover of the
pre-budget document 2007, which has been distributed as part of a wide
consultation exercise.Objective and thorough reading of its contents however provide pretty little to smile about. Following the introduction, there is one chapter that gives an analysis of the Maltese economy and seven chapters that tackle different aspects for future strategy, including fiscal measures being considered for inclusion in the 2007 budget.
It is important for our confidence to be built on the reality of the present situation and therefore, there has to be a relationship between the current state of the economy and our expectations for the immediate future. In many cases, this relationship gets lost and the vision conveyed by the document seems more like a wish list rather than a determined action plan to achieve the set targets within a reasonable timeframe.
The credibility for the future vision is therefore largely dependent on the economic performance being currently achieved and publication of the document should have been delayed by a couple of weeks in order to beef up the economic analysis by half- year data for 2006.
Deficient as it is due to the absence of more current information regarding 2006 performance, an unmistakable conclusion is that government has in fact very little room to manoeuvre the economy out of its dull performance.
Cumulative real growth over the five years 2001-2005 is a measly 0.6 per cent, while private consumption over the period has increased by 4.4 per cent. In simple language, we have been consuming more than we have been producing and to do so, we have had to erode our past savings and/or incur consumption debt.
And this happened simultaneously with a trend where the impact of taxation has grown from 28.3 per cent of the GDP in 2000 to 35.1 per cent in 2004 – meaning that while we have been producing less and consuming more, we have also been paying more taxes. So while government was repairing its fiscal deficit, the private sector was dislocating its own balance sheet while trying to maintain its consumption patterns.
This is clearly reflected in our Balance of Payments performance, where we only registered a small surplus in 2002 due to exceptional factors related to sale of aircraft by Air
Further worrying is the fact that the miserly growth we have achieved has been underpinned by unsustainable consumption and government investment, which will run its course when the Mater Dei project and the Italian protocol and EU pre-accession funds come to their natural end in the near future.
The productive sector has been under stress. Tourism is bad and getting worse. Manufacturing performance is highly dependent on the performance of ST Micro-electronics which in turn is highly dependent on the state of the micro-chip market for the level of value added to the GDP. Even this could be misleading to understand the real state of the sector as given the entire foreign ownership of the productive units the value added measured in the GDP generally leaks out on profit distribution in the GNI (Gross National Income).
The same is the increasing experience of the financial sector as it shifts from local to foreign ownership, which adds value to the GDP and takes it back through external profit distribution in the GNI. The healthy performance in tourism would have a much wider positive ripple effect as residents own most of the productive units in the sector and there would be little external leakages through profit distribution. Putting it simply, a positive performance in tourism is doubly more important than a positive performance in manufacturing, even if the value added content is the same.
Given this shaky performance that leaves us anchored in the prescriptive phase of the projected economic turnaround, one would in normal circumstances would not even dare to think of taking measures to increase private consumption through tax reduction. Furthermore, it is economically risky to start building structural subsidies into the economy as in the case of the subsidy approved to keep the price of bread stable in spite of the increasing cost of its production inputs.
However these are not normal times. The election is starting to loom on the horizon and the best working assumption is that it will be held in the fall of 2007 in order to replay the euro issue just as the EU issue was made to dominate the 2003 elections and give backstage importance to other bread and butter issues where government has little credit to reap. All governments want to create a “feel good factor” in an election run up and human nature being what it is, or has unfortunately become, feeling good seems to depend almost entirely on increased consumption.
To complicate matters this has to be achieved in the context of discipline for euro accession and in the context of a harsh environment for energy prices that are likely to exert a cooling effect on international economic performance going forward.
Maybe this explains why the government has put up for consideration a shopping list of measures which would cost many tens of millions to finance but in the end had to warn us of the need to prioritise to keep the bill within Lm8 million. This is a relatively insignificant amount, which could be compensated by better enforcement without introducing additional tax measures.
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