Friday, 21 November 2008

Stop Doodling

21st November 2008
The Malta Independent - Friday Wisdom

The Prime Minister himself seems unconvinced about the 2009 Budget presented in parliament; so much so that in his replica to the Opposition Leader;s criticism he was not defending the budget as presented but a Plan B which is still in his drawer.

I got further confirmation of this when Prime Minister started making concessions on the utility tariff which his ministers had emphatically declared as a closed matter that was not even mentioned in the budget speech. The government has now agreed to absorb through general taxation the cost of phasing out the capping mechanism, which was applicable to large industrial users, rather than having it cross-subsidised by other user segment(s). Furthermore the Prime Minister has agreed to meet the unions following their national protest of last Friday and presumably he has to offer them some concessions on the same scale as allowed to the business organisations.

This looks like doodling when in fact what we need is determined action to protect the economy from the harsh consequences of the coming recession. Most governments in the world are taking specific measures to supplement substantial easing of monetary policy by using fiscal policy to stimulate domestic demand in order to fill the slack created by falling external demand. The G20 meeting over last weekend delivered a broad agreement for governments in developed as much as in emerging markets to stimulate their economies in a concerted action by using fiscal policy to create a surge of demand to reduce the risk of the recession turning into a deflation.

If the government does not have a plan B then it better prepare one quickly. The parting shot should be voting a special one-off stimulus budget equivalent to about two per cent of the GDP as an emergency measure. This would amount to a supplementary budget of e110 million which would be spent in a mix of measures which meet the following objectives:

· Measures which stimulate the consumer to spend more on products and services with the least possible leakage to imports.

· Measures to render our products more competitive to stimulate foreign demand in sectors with high value added.

· Measures to increase investment that underpins future growth and render our economy more competitive.

Let me be more specific. In the category of measures to stimulate consumer demand, government would have to absorb the cost of concessions that the Prime Minister has made and will be making for reviewing the utilities tariff. With international price of energy still falling this should be pretty minimal if it would cost anything at all. But the government should go beyond that.

I would consider reducing the VAT rate on restaurant bills during the Christmas period i.e. between 15 December 2008 and 1 January 2009. It will generate some badly needed feel good factor and increase consumption in a sector that has high value added with low import leakages. It will also carry little risk of future expenditure being merely shifted forward due to seasonality aspect involved.

Another measure to be considered in this category is a one-year abolishment of duty on documents for first time home buyers subject to a cap up to say e120,000. This should keep the property market underpinned by demand from genuine buyers who intend to buy and keep rather than merely buy for re-sale.

In the category of measures to render our products more competitive to stimulate foreign demand this will have to be entirely focussed on the tourist industry. Extending for a period of six months to June 2009, the low VAT rate as applicable for hotel accommodation also to other tourist services like restaurants, car-hire and local tours should help to stimulate foreign demand for services with little or no import leaks.

In the category of additional investments to underpin future growth, there should be a more aggressive roll-out of the green measures announced in the budget to make it accessible to more households and industries. We should also launch an urgent project to build elevated traffic solutions at the many traffic inter-sections where we waste too much time and fuel negotiating our way during rush hours.

Another thing government should do is to desist flattering itself for the decision to join the euro monetary union at the earliest possible day. The argument runs that had we not joined the Euro we would have been financially flattened out just like Iceland was. This is ludicrous. I still think that joining the Euro was a good decision and timely one as well. But stating that if we stayed out we would have been ‘Icelanded’ is an exaggeration. Iceland was flattened out financially because they partied too heavily when the going was good and over-leveraged their economy to make expensive foreign acquisitions.

It is probable that had Iceland been in the euro there would have been rule discipline which would have impeded them from such over-leverage excesses. That’s a fair argument. But stating that the same would have happened to us if we were out of the euro is not a fair argument. Outside the euro and within it, we always had conservative banking policies and our banks never ever contemplated undertaking aggressive foreign ventures leading to leverage of their balance sheet totally disproportionate to the country’s GDP.

Let’s focus on protecting the future rather than on exaggerating past achievements through illogic analogies.

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