10th July 2009
The Malta Independent - Friday Wisdom
Sometimes I get the impression that
nobody is minding the store of the nation. The government seems to be hard wired
on one specific project which could serve it as a platform in its bid for
re-election come 2013 and nothing else seems to matter.
It does not seem to matter that the SmartCity project has gone quasi dormant; that after the morass of 2008 the reform of the public transport system seems to have gone in deep freeze; that our roads are in a pitiful state of neglect which turn me red in the face when I am driving foreign guests around, that the economy is sinking, the government budget has gone haywire and not enough is being done to give us a fair account of the state of nation.
This week the government finally admitted that the economy will register no growth during this year and that indeed we could experience a contraction. Finally, after negating the obvious and living by hope rather than fair expectations, government had to bite the bullet and admit that it had drawn the 2009 Budget using wrong assumptions and consequently the 2009 deficit will be far greater than anticipated.
In this column on 14 November 2008, following presentation of the Budget for 2009 I had commented:
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.
What was obvious has happened. The government has lost control of the budget and the deficit will be between twice and three times that projected. We can only keep to the lower end of this estimate if we postpone expending the capital budget.
This would be a very ineffective way of addressing the ballooning deficit as at time of recession like this, government has an obligation to replace contracting private demand by creating demand through productive public investments which upgrades our infrastructure to render us competitive for the longer term. It is Keynes at its very basic.
At times like these government should take steps to assist the private sector, especially that part which is suffering through reduced external demand, to get through this crisis to ensure we have vibrant operators when eventually we swim to the other side of the river with a return to normal economic growth.
As manufacturing is diverse, assistance can be tailor-made to each individual outfit. But in tourism the whole sector depends on the same source and industry-wide measures are called for. Those parts of the tourism industry which are still subject to 18 per cent VAT should immediately be aided to enjoy a reduced rate of five per cent. Taxing tourists at an 18 per cent consumption rate is like advertising that they should go to other destinations. No one in these recessionary conditions is taxing foreign demand at such high rates and France has reduced VAT on restaurant services to five per cent even though such services are consumed by nationals and tourists alike. The argument for a lower VAT rate for services predominantly consumed by tourists, like car hire and tour guide services, is even stronger.
Government has also finally conceded to set up a price watch agency, although so far it seems like a half hearted effort. A good place for such price watch agency to start from is to compare prices of products sold by local franchisees of foreign brands to the prices of same products in the franchisors’ home country. The difference is often atrocious and unjustified by any possible additional costs of transport, storage or wastage.
The best way to address this issue is not through price controls which are almost impossible to enforce. It is by demanding fairness and openness through opening up on-line shopping services across national barriers. The consumer should not be forced to buy from local franchisees simply because the on-line shopping services of the franchisor, does not offer delivery outside the home base country. Such artificial barriers should be eliminated as otherwise we will be divided by the single market.
It does not seem to matter that the SmartCity project has gone quasi dormant; that after the morass of 2008 the reform of the public transport system seems to have gone in deep freeze; that our roads are in a pitiful state of neglect which turn me red in the face when I am driving foreign guests around, that the economy is sinking, the government budget has gone haywire and not enough is being done to give us a fair account of the state of nation.
This week the government finally admitted that the economy will register no growth during this year and that indeed we could experience a contraction. Finally, after negating the obvious and living by hope rather than fair expectations, government had to bite the bullet and admit that it had drawn the 2009 Budget using wrong assumptions and consequently the 2009 deficit will be far greater than anticipated.
In this column on 14 November 2008, following presentation of the Budget for 2009 I had commented:
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.
What was obvious has happened. The government has lost control of the budget and the deficit will be between twice and three times that projected. We can only keep to the lower end of this estimate if we postpone expending the capital budget.
This would be a very ineffective way of addressing the ballooning deficit as at time of recession like this, government has an obligation to replace contracting private demand by creating demand through productive public investments which upgrades our infrastructure to render us competitive for the longer term. It is Keynes at its very basic.
At times like these government should take steps to assist the private sector, especially that part which is suffering through reduced external demand, to get through this crisis to ensure we have vibrant operators when eventually we swim to the other side of the river with a return to normal economic growth.
As manufacturing is diverse, assistance can be tailor-made to each individual outfit. But in tourism the whole sector depends on the same source and industry-wide measures are called for. Those parts of the tourism industry which are still subject to 18 per cent VAT should immediately be aided to enjoy a reduced rate of five per cent. Taxing tourists at an 18 per cent consumption rate is like advertising that they should go to other destinations. No one in these recessionary conditions is taxing foreign demand at such high rates and France has reduced VAT on restaurant services to five per cent even though such services are consumed by nationals and tourists alike. The argument for a lower VAT rate for services predominantly consumed by tourists, like car hire and tour guide services, is even stronger.
Government has also finally conceded to set up a price watch agency, although so far it seems like a half hearted effort. A good place for such price watch agency to start from is to compare prices of products sold by local franchisees of foreign brands to the prices of same products in the franchisors’ home country. The difference is often atrocious and unjustified by any possible additional costs of transport, storage or wastage.
The best way to address this issue is not through price controls which are almost impossible to enforce. It is by demanding fairness and openness through opening up on-line shopping services across national barriers. The consumer should not be forced to buy from local franchisees simply because the on-line shopping services of the franchisor, does not offer delivery outside the home base country. Such artificial barriers should be eliminated as otherwise we will be divided by the single market.
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