Sunday, 2 November 2008

A trip from Treats to Tricks

2nd November 2008

The Malta Independent - Friday Wisdom

The first budget in a new legislature always carries a higher degree of sobriety. There seems to be a clear inverse proportionality between the proximity of a budget to the next general election and the dosage of sobriety in its contents.

The budget for 1999 was the first budget coming soon after the “special” election of September 1998 after a mere two years of Labour’s interlude in government since 1987. The Minister of Finance made a quotable declaration in his opening remarks to that budget speech:

“The state of public finances is in very bad shape. The tragedy is that such a serious problem is packaged in cheap propaganda. To arrive at a solution it needs to be acknowledged that the present financial position is the result of huge structural faults which were layered on each other over a long number of years.”

Coming from an administration that had refused to accept paternity for the public deficit exposed by Labour on assuming government in 1996, this admission was a rare moment of sobriety in a political game, which continually plays let’s pretend.

The budget for 2004 was the first following the April 2003 general election. After having proclaimed that government finances were on a sound footing before the election, the tune changed when presenting the budget a mere seven months later:

“A weak economy has a strong negative impact on government revenues worldwide. The result is increased deficits as receipts are not matching the costs of an ever growing expenditure on administration, security, education, pensions, social benefits, health, environment, culture, sustained development in quality of life and investment in social, environmental and productive sectors.

“Many countries are looking analytically at their structures and are taking necessary decisions, even if difficult, in order to bring about effective reforms in each sector. Even Malta is sailing in this troubled ocean, battling against the same waves ... Storms that build up without warning batter us as much as anybody else.

“The slow economy in 2002 and 2003 brought about huge constraints on public finances as tax revenues that had been forecast on income on consumption, as well as profits from investments were far below expectations.”

Well you can clearly see the pattern. Undue pre-election optimism changes into an overdose of pessimism in the first post-election budget. Pre-election optimism to generate a false feel good factor to win political support in the conventional “it’s the economy, stupid” syndrome; and post-election pessimism to set the scene for applying the painful medicine which was politically inconvenient to apply before the election, even though it would have been economically more effective as a stitch in time.

Tomorrow’s budget will undoubtedly follow the same pattern. I say undoubtedly because under the Gonzi administration we are getting well-signalled indications of what we can expect from the budget. So we have been getting perceived wisdom that subsidies that were comfortably sustainable before the March 2008 election have suddenly become unsustainable even though in truth the cost of the underlying has been dropping and is expected to drop further.

You can’t blame people for being totally confused and irritated when they are burdened with further charges on their utility bills, which had already exploded upwards by 30 per cent last July (when the surcharge went up from 50 per cent to 95 per cent) even though the current price of oil is well below what it was this time last year. The truth is that the government has fooled us. It heavily subsidised the utility bills when the price of oil was going up to foster a feel good factor to see it through the election. Now that the price of oil is coming crushingly down, the government is clawing back its subsidies and including in its new tariff computations not only full recovery of operational costs, but a meaningful return on investments, past and future.

Who cares that 10 years ago the same government then in Opposition had strongly opposed the then Labour government, accusing it of losing its social conscience when it raised utility bills for the first time in 17 years, during which period rates had effectively been reduced by 10 per cent? Who cares that suddenly social calculations do not matter this far from the next election? There can be no social aspect if the government wants to pocket in full the profits made from the sale of petroleum, which in the “bad” old days used to subsidise water and electricity generation and distribution. By removing this cross-subsidy it passes on the full cost of utilities to the consumers. Who cares that in an island totally dependent on important fossil fuels without any economies of scale and without any natural water resources, commercial rates would put us at a great disadvantage compared to our European peers?

This attitude is not restricted to utility bills. It is evident throughout. Refusing capping phase out arrangements to hotels, as offered to industrial users, exposes a dangerous cocktail of arrogance and over-confidence in the strength of our tourism product at a time when it will clearly be suffering from reduced global demand. Refusing to repeat last year’s trick of including an element of future inflation in cost of living calculations is an insult to our intelligence, telling us quite clearly that last year’s measure was deception not conviction.

I suppose the answer to all this is simply: “that’s politics!” Well, it should not be. In spite of Alfred Sant’s in-built non-electability and in spite of all this trickery, the GonziPN team just managed to scrape through with the narrowest of margins. It is pushing its luck and insulting our intelligence if it continues to work on the assumption that voters will only base their judgement on the government’s performance in the final lap of the legislature.

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