Friday, 14 November 2008

A Matter of Definition


14th November 2008

The Malta Independent - Friday Wisdom

I am always sceptical when politicians brand any initiatives with catchy words. The 2009 Budget has been labelled as the embodiment of responsibility, sustainability and solidarity. I think it is a matter of definition because from where I stand and according to my economic and social dictionary, the budget does not come anywhere near deserving being labelled responsible, sustainable and generating solidarity.

Let’s start with solidarity first. Where is the solidarity in bloating the 2008 budget with a deficit of thrice that projected to fund e56 million grants for shipyards’ able-bodied employees to take early retirement and now to fund such madness by taxing all the rest? What sort of solidarity is it to present exploded utility bills to unprotected private sector employees who are being hit by international recession and have to absorb a 25 per cent cut in their wage packet as their employer is forced to a 30-hour week? Public sector employees get bundles of cash to retire early while private sector employees get higher bills to pay from reduced salaries. Some solidarity!

What solidarity is being shown to families who cannot fit within the limited quota for green initiatives? Those most in need are the least capable firstly to finance their share of the proposed investment and secondly to seek and obtain the necessary technical advice leading to a proper and informed decision on how to save on energy consumption. A maximum of 5,700 households are expected to benefit from such schemes. The other 140,000 odd households will have to make do with the energy saving lamps that are being distributed more uniformly. Rather than trying to be all over the place spreading itself extremely thin, would it not have been more effective and proper if the budget voted a 75 per cent subsidy for installation of a solar water heater for every household and provided for condominium rule provisions for installation on inaccessible roof tops.

Sustainability is not evident either. We have inverted macro-economic use of fiscal policy right on its head. All governments, with few exceptions like Iceland who partied so heavily when the going was good that they have now to be rescued by the IMF’s austerity prescriptions, are putting together special fiscal stimulus packages to sustain domestic demand at a time when the recession will reduce external demand.

Our economy will also be affected by reduced external demand. Our exports are already showing it and sudden imposition of short work weeks at some of our factories indicates there is more in store for those outfits with long order to execution lead times. Our tourism will similarly be negatively impacted and as from November we will see statistics heading down compared to last year, leading to a very unwelcome trend reversal.

Thankfully, unlike many other European countries, our government did not need to fund any recapitalisation of the banking system so it should have had more fiscal room to manoeuvre a fiscal stimulus to the economy. Yet because in the election year we overspent as if there is no tomorrow, next year’s budget deficit will be half of the actual deficit of this year. Even if the “special items” related to shipyard early retirement schemes and the claimed Enemalta subsidy is detracted from this year’s budget, then next year’s deficit will only be marginally above the “adjusted” deficit of this year when the economy in reality needs a boost to fill the gap of falling external demand.

No, the budget is not sustainable. Projecting an income tax take increase of eight per cent when the economy will grow at a fraction of that, if at all, is not sustainable. The government claims credit for providing a capital budget of e348 million. From past experience, the government lacks the capacity to process such expenditures in a timely manner. In 2007, it under spent voted capital expenditure by 22 per cent. In 2008 it plans to under spend it by 16 per cent. There is an inbuilt inclination to over spend on recurrent budgets and under spend investment budgets. Possibly it is related to our restricted capacity to process co-funding from EU grants. So if we again under spend the capital budget in 2009 to the order of 20 per cent, which is quite the norm, the actual investment will be on the same scale as this year without getting any real additional impetus from the meant fiscal push.

The economy needs a shot in the arm and it needs it now. It cannot wait for the bureaucracy to process capital projects applications. If we do that we could be applying the medicine too late when it might not be needed because the patient would have recovered on his own steam after suffering unduly without the support of a fiscal stimulus. We need investments that make a difference and generate efficiency. The compulsory installation of a solar water heater in every household has already been mentioned. Building proper elevated road networks at main traffic intersections cannot be done soon enough. We waste too much time and money negotiating intersections like Kappara, Msida, l-Iklin and Marsa.

The budget is anything but responsible. Someone has to explain the logic of exploding utility rates at a time when the underlying cost of energy is dramatically falling. Even if we hedged at high prices we could average down the price by hedging further into the future at reduced rates rather than shock the economy by the sudden shift to full recovery of all recurring and investment costs, past as well as future. What responsibility is it that we are changing the surcharge structure now that the underlying prices are falling? If we kept the surcharge system the consumer would have had transparency in seeing prices charged adjusted to international fluctuations in energy costs. But with the confused system now being proposed, easy comparison is impossible. This looks like a purposeful fudge to eliminate transparency.

If the government says that the opposition’s claim that the new price structure is equivalent to a surcharge of 194 per cent is an exaggeration, can the government kindly explain what surcharge is it equivalent to?

Let’s establish some facts. In August 2007, when the price of crude oil was USD 70 per barrel, the government fixed the surcharge at 50 per cent, where it stayed till June 2008 to ride peacefully through the elections. In July 2008, when the price of oil peaked at USD147 per barrel, DOI press release 0939 stated that at this level without any gains from hedging agreements, the surcharge should have been 160 per cent but could reduce to 115 per cent after taking the benefit of hedging covers.

The government then considered that at 115 per cent the surcharge would put too much pressure on consumers and subsidised in part reducing the surcharge to 95 per cent. Now the price of crude is less than USD60 per barrel and falling. Consequently the surcharge, permitting full recovery should be, by the government’s own calculations, around 60 per cent after taking into account the strengthening of the dollar rate of exchange to the euro.

How could the government call this budget responsible if it does not give proper explanation of why the world all over is being treated with lower fuel and utility prices and we are being oppressed by inexplicable higher prices resulting from monopoly power and political calculations to put all the pain in the front years of the legislature.

Responsibility, sustainability and solidarity are in scarce supply in the 2009 budget.

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