Friday, 13 November 2009

Undecided Between Hope and Despair

Undecided Between Hope and Despair

13th November 2009

The Malta Independent - Friday Wisdom

Alfred Mifsud

Beyond its first impact, the Budget for 2010 presented in parliament this week is increasing within me the ambivalent feeling between hope and despair.

The hope comes from a string of relatively small but highly positive programmes which government launched in order to promote growth, employment, investment and innovation particularly in the SME sector with special emphasis on the industries of the future, IT, digital communications, and environmental services.

The Budget makes a much welcome increased contribution for marketing our tourism products and investments to upgrade our public places, historical heritage, and public transport. It promises to continue assisting manufacturing enterprises facing transient recession induced difficulties to nurse them back to health by promoting increased job creating investments. It devotes more resources to child care facilities, a crucial ingredient in the mix to motivate higher female participation in the work force.

But this hope comes with a high dose of despair from three different sources:

• The embedded inability to spend the capital budget as planned even in a recession year where economic logic should have spurred to over-spend the investment budget not to hold it back. This coupled with an equally embedded practice to overspend on recurrent expenditure by nothing less than e101 million during 2009.

• The lack of courage to take bold remedial measures on sources of long-term damage to the economy. I am referring particular to lack of progress in the pension reform, inertia to dismantle the COLA mechanism which is now seriously compromising our international competitiveness, and continued denial about lack of sustainability of universal entitlement to free health services.

• The total irrelevance of the 2009 Budget presented this time last year at the peak of the financial turmoil when in spite of clear evidence of the grave economic woes confronting us government presented a Budget which was totally inappropriate for the challenges awaiting.

Let me start with the last point. Minister Fenech will probably forever hold notoriety for presenting the most irrelevant budget in history. This time last year he had forecast he would finish the year 2008 with a deficit of e200 million. He finished it with e33 million more missing the target by 16.5% even though he was merely forecasting eight weeks forward.

This time last year he had planned to finish 2009 with a deficit of e99 million. We know now it will be two and half times as much at e258 million. He had planned a balanced budget by 2011 whereas now we are merely hoping for a deficit under 3% by 2012. He forecast real economic growth at 2.4% for 2009 whereas now we know we are registering an economic contraction of 2%.

Now I can sympathise with an argument that the financial crisis and the ensuing recession have nullified most financial plans. But that applies for plans made before September 2008 when the Lehman Brothers’ earthquake hit the financial world. The Budget was presented on 3 November 2008 when we were already in the eye of the storm.

There is no doubt that last year’s budget was a totally irrelevant and waste of time exercise. On 21 November 2008 in an article in this series titled ‘Stop doodling’, I had written:

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.

As it happened government had no plan B but still incurred a higher deficit without giving the economy any stimulus. The worst of both worlds! Many of these measures in the Budget 2010 should have been adopted last year for the medicine to work in time to avoid the economic disaster we had in 2009 which could well extend into 2010.

Again on 15 May 2009 in an article titled ‘Redoing the budget’ I had stated:

My opinion is that rather than a mini-budget, government should present to parliament a fresh budget for 2009 based on current realities even if it does not consider it necessary to take any new measures. The Budget for 2009 presented last November is dead in the water and the projected deficit of e98 million for 2009 is totally unrealistic. Given current realities the final deficit is likely to finish between double and treble the level projected in the Budget for 2009.

Government is again seriously making a grave under-estimation when earmarking just two-and-a-half million euro for temporary assistance to viable industries that need help to get through the recession. Awarding Cola increases of e12.23 per week for recession years 2009 and 2010 is forcing our exporting industries and tourism to compete with a steel ball tied to their legs, especially when they are already hard-pressed with a Euro rate of exchange which has hardened against most other currencies except the Japanese Yen. Government inertia in refusing to carry part of the Cola burden in a package deal which would have scrapped the Cola mechanism for organisations where employees have in place a collective agreement, is a major sin of omission.

Expecting the creep in health service cost to remain sustainable in the face of increasing longevity is defying the laws of economic gravity. Delaying taking preventive measures is a guarantee that down the line the system will inevitably implode.

Will the positive measures be enough to return the economy to growth path in 2010? We can only be optimistic if we believe that the international recession will recover in V shaped mode and if we show great determination to execute the Budget 2010 measures aggressively and urgently.

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