Sunday, 31 October 2010

Like October rain

The Malta Independent on Sunday

Like October rain - 31.10.2010
The budget for 2011 read out in Parliament last Monday was as predictable as October rain.

The middle budget in any legislature has a particular feel that, in the absence of any crisis, delivers more political convenience than economic logic. It is probably the last real opportunity for the government to raise taxes and squeeze the middle class so as to lay the groundwork to ease up on the middle class in the remaining two budgets before the next election. On the other hand, that squeezing must be more restrained than in the first two budgets, lest public perception suffers irreparable damage that cannot be repaired by any fiscal back-pedalling in the remaining two budgets.

That is exactly what we got, and in clinically precise measures too. The middle class has been squeezed explicitly through higher taxes on fuel, tobacco, beer and alcohol spirits and implicitly by keeping the tax bands rigid, thus increasing the impact of taxation through normal revenue crawl. In compensation, the middle class only got minimal tax credit increases for private school fees due next year, a tax credit that has already been absorbed by the atrocious 12.5 per cent increase in private school fees that middle class parents have already faced in the first quarter of this scholastic year.

I suppose we should be thankful that, in the middle of international economic turmoil, our budget was a non-event, and indeed our economy seems to have recovered its growth path. Maybe it is indicative of elusive normalcy that while the Irish, the Greeks, the Spaniards and the Portuguese, among others, are having to absorb bitter austerity medicine, and while the French protest in the streets and paralyse the country with widespread strikes against the restructuring of the pension system – something we have been through already without a whimper – our national agenda is more concerned about whether we should continue to wear our Catholicism on our sleeves through the no-divorce-we’re-Maltese syndrome.

As an aside, I wonder whether the Minister would consider a religion tax to replace the controversial increase in the tourism tax. It would be ideal if we could persuade tourists to contribute to our national budget through higher taxation. But tourists have a choice of destinations and, coming at an uncertain time when Air Malta is removing seat capacity as part of its restructuring (I would have thought that Air Malta should cut expenses and non-core operations rather than revenue-generating seating capacity if it is to restructure effectively), a tourist tax increase could risk stalling tourism growth (a major contributor to our economic engine) in its tracks. Through a religion tax, we would be able to judge how many of the fundamentalists who insist on imposing their religious values on the rest of society would be willing to dip into their pocket to pay a tax for hearing Sunday Mass.

Lest I be misunderstood, I am not proposing a religion tax, just questioning the religious persuasion of the anti-divorce fundamentalists.

What is questionable is whether the budget is a cause or a consequence of the economic normalcy we are enjoying while all around us is in turmoil. My impression is that it is neither a cause nor a consequence. It is irrelevant! A lot of trumpets are being blown on how the deficit is being controlled and getting it back under three per cent of the GDP and then keep it cruising towards a balanced budget. But frankly there is so much massaging of figures going on in the computation of the budget that it can be made to hit any target one wants.

Let me give a couple of examples. We have no real idea how much the Citigate projects will cost. €80 million has been mentioned but, take my word for it, this is a very indicative estimate and as things go now that the project has been extended, and rightly so, to include the exterior approach to the main gate, the ultimate bottom line will be much bigger than first estimates. There is nothing in the budget that evidently votes money for this expenditure. If this were a revenue-generating project, like for example building a highway on which toll fees would be charged, then I could understand that the investment can be carried out on a commercial basis outside the Consolidated Fund. But Citigate is a non-revenue generating asset and should be financed fairly and squarely from the Consolidated Fund.

Take another example of how the budget deficit can be massaged to whatever one wants it to be, at least in the short term. Since 2005, under the capital expenditure vote of the Ministry of Finance, vote 7189, an increasing amount – estimated at €17 million for next year – is voted under the heading ‘TCF Advances’. TCF stand for Treasury Clearance Fund, which is a sort of a dirty fund where expenditure is funded without it being captured in the Consolidated Fund. So each year we vote capital expenditure, which in reality was incurred long ago in the past, probably without any economic benefit if the supposed capital expenditure was some sort of subvention for the shipyards or similar loss-making organisations, and which only now is being brought gradually in the mainstream books. With two-way transactions going through the TCF, what is the point of judging fiscal performance by the massaged fiscal deficit that the Minister sees fit to declare for any particular year?

If one is to judge the budget exercise on its own, immaterial of the impact it has on the overall economy, that judgement should be based on the actual out-turn on the budgetary position for 2010, which has now been revised from the original estimates. The bottom line is that in 2010 the government will have €64 million less revenue than projected. Recurrent expenditure is expected to exceed original projections by €41 million. The deficit will not show a combined deterioration of €105 million, being the sum total of these two adverse variance. The adverse variance will be ‘only’ €58 million because capital expenditure voted is being under-spent by €47 million.

What the economy needs is for the government to strengthen its revenue structures through efficiency and enforcement, control its recurrent expenditure through control of entitlements and social fraud, and strong capital expenditure to upgrade the infrastructure (maybe one day we can have decent roads and free flowing traffic, clean valleys and natural water reservoirs, protection of water resources in the geology underground table, and green energy). The 2010 fiscal performance merits a fail on all three tests. The government collected less revenue, spent more than planned in recurrent expenditure – which leaves no long-term beneficial impact on the economy, and spent less on capital expenditure, where we need to spend more, much more.

If our economy is rumbling along gracefully and can afford to have people discuss divorce rather than austerity, then credit should go to the people, to their resilience and ability to adjust even in the face of the most adverse circumstances. This was achieved in spite of, not because of, the government.

Sunday, 17 October 2010

What taxpayers want

The Malta Independent on Sunday

What taxpayers want - 17.10.2010

While putting the last touches to the public budget for 2011, which will be read out in Parliament later this month, the Minister of Finance should keep in mind what taxpayers want and what they deserve.

It is not just a simple matter of taxpayers wanting lower taxes. Taxpayers in general understand that, in a civil and social society, taxes are and will always remain an indispensable source of revenue to fund essential but not commercially viable services (law and order, defence, education, health, social services and non-productive infrastructure, among others), as well as to finance the general functions of government. But, more than ever, taxpayers want value for their money.

They want to see their money being spent with transparency and high standards of governance. The government has no money of its own. It manages the country’s debt and assets, which are owned by all society. Governments come and go, but society remains. The government is simply an agent of society and it is the duty of the agent to act in the interests of its principal and to protect the interests of the principal like a good paterfamilias.

Taxpayers are fed up of seeing our country humiliated by the falling standards of governance typical in the operations of a third term government. The strong rebuke given by the EU for lack of governance in the evaluation and award of the Delimara power station extension contract is typical of a government getting too comfortable with managing its affairs and our money. If such low standards of governance prevail in a contract that was under the close scrutiny of the media and the Opposition purely due to its sheer size, then imagine what governance standards prevail in smaller expenditure out of the spotlight in more shadowy corners.

Take the answer given by the Minister of Finance regarding claims of conflict of interest of a member on the Enemalta Board of Directors who also represents the organisation’s insurance broker. The minister sees no conflict of interest because the broker was not the ultimate beneficiary of the contract and, as a broker, his job was simply to identify the best deal for Enemalta. What does it matter to the minister that brokers live by the commission earned on such insurance contracts?

The minister’s argument is like saying that Enemalta’s chairman can also be the local representative of the turbine supplier because the ultimate beneficiary is the manufacturer not the agent. Unbelievable!

It is true that some conflict of interest may be unavoidable and in such case the conflict could be managed through full disclosure and withdrawal from particular matters where such conflict of interest is evident. But it is clear that this government – that expected a high standard of ethics from Labour when in government – lowers these standards when the boot is on the other foot.

Taxpayers do not want the awful experience, which is frighteningly becoming all too frequent, of interminable traffic jams in key arterial bottlenecks. It is high time to accelerate not only the project for better public transport (including an underground metro system in the long term) to encourage the reduced use of private transport, but also to invest in Singapore-type multi-level traffic intersections.

Efficiency gains need these investments if we are to move forward. Taxpayers are also fed up with hearing both sides of the electoral divide proclaiming that our universal entitlements to free health and education will be protected, come hell or high water. Many taxpayers are paying twice, first through general taxation and then again for private health insurance or private health and education services. To many people, the public service for which they pay taxes is just not up to scratch. And it can never be up to scratch if it has to provide for universal entitlement. The result will inevitably be falling standards, long queues and other forms of subtle rationing. Quantity and quality rarely go well together and often it is either one or the other. So taxpayers look forward to the day when, as has happened in the case of pension reform, they are finally told the truth: that the present universal entitlements system is utterly wasteful and clearly unsustainable and that their taxes can be lowered through restructuring by shifting from universal entitlements to limited entitlement by appropriate means testing.

Lower direct taxes will eliminate the discrimination where earned income is taxed at a higher marginal rate than unearned income (a regressive system, if ever there was one!) and will stimulate efficiency and investment as taxpayers are empowered to retain a higher portion of their earnings. It will also stimulate higher participation, especially by married women, in the labour force. It could also lead to better tax compliance, if the cost of compliance falls below the risks and costs of non-compliance.

Lax tax compliance is unfair to honest taxpayers and higher compliance could deliver lower tax rates without reducing the tax take. A simpler tax system would provide for lower marginal taxes and the removal of all the complicated system of exemptions and special provisions accumulated over the years to mitigate the high margin tax rate on certain types of earned income. And, if all this will only be feasible by raising indirect taxation through higher rates or a widening of the taxable base, then this should form part of the package to ensure that we keep our public finances on the straight and narrow and keep cruising gracefully towards a balanced budget in the medium term. Some may argue that such a project would be unsocial and regressive. I strongly disagree.

The social dimension should mean that the State, through taxation, provides to each according to their needs not providing everything to everyone. The latter involves the present wasteful transfer payments, whereby taxpayers pay taxes with the right hand and receive universal entitlements with the left hand. By avoiding such transfer payments, the bottom line should be that more resources are left for government to devote to those who really need them, while more money is left in the hands of taxpayers who can be trusted to take care of their own needs better than the government can on their behalf.

Taxpayers are asking that the taxation system be reformed to stop the practice of paying twice for the same service. The minister has before him all the claims made by unions, business organisations, civil society, the Church and other individuals. It is time, however, that the minister listened to what taxpayers want because, in the end, it is their money.

Sunday, 3 October 2010

The Road to Singapore

The Malta Independent on Sunday - 03.10.2010

The road to Singapore

The Global Completive Index for 2010 – 2011 (GCI) released by the World Economic Forum received superficial coverage in the local media with main emphasis on the fact that Malta has gained two places up the ranks from 52nd place n the last two reports to the 50th spot in the latest report.

The Index is by its own nature merely indicative and sources information which is not necessarily perfectly comparable across all countries.

So whilst superficially moving two places up the ladder is positive, in substance it is neither here nor there.

Deeper analysis provides valuable information of where we stand in comparison to reliable benchmark countries, what our strengths and our weaknesses are, and consequently draw some conclusions of what we have to do to get better.

Take for example the table of where we stand in the GCI index among the 27 EU nation states. We rank in the 21st spot.

 Some countries that joined the EU with us in 2004 stand ahead us. Estonia, Czech Republic, Poland and Cyprus stand in range between the 12th and the 15th spot, Slovenia and Lithuania somewhat behind them but ahead of us.   Hungary, Slovak Republic, Romania, Latvia and Bulgaria rank behind us.
Of the 15 countries that joined the EU before us only Greece ranks behind us and in fact it ranks right at the bottom in the 27th spot, for reasons which have been making negative financial headlines all throughout this year.

What factors are conditioning our ranking?   I propose to analyse by benchmarking with small countries that are in a similar stage of development, particularly Slovenia, Cyprus and Singapore. 111 evaluation criteria used have been clustered into 3 groupings, namely, Basic Requirements (applicable to all economies) Efficiency Enhancers (applicable also to developing economies) and Innovation and Sophistication factors applicable to advanced economies.

Here is how we rank against benchmarks

Country Overall Basic Requirements Efficiency Enhancers Innovation and Sophistication factors Singapore        3   2   1 10
Cyprus           40 29 36 36
Slovenia         45 34 46 35
Malta              50 40 47 46.      
Figures reflect ranking in Competitive Index out of 139 countries

To see where our strengths and weakness are I took the 10 criteria where we perform best and the 10 where we perform worst and compared them to the same benchmark countries.

10 criteria where Malta performs best         :

                                                         Malta Slovenia Cyprus Singapore

Incidence of Organized Crime              8         42         40           4
Auditing Standards                                8        48         18            4
Protections of minority shareholders   10      119         21            7  
Fixed telephone lines                              2       15         17          28
Interest rate spread                                10       52         49          63
Intensity of local competition                 9       43         18          28
Trade tariffs                                            4         4           4            2
Business impactof rules on FDI             7      116         33           1
Financing through local equity market   9        84         65          5
Soundness of banks                               10      110         31          9
Figures reflect ranking in Competitive Index out of 139 countries

One should note that our financial infrastructure provides 5 of the 10 winning criteria.
Our high ranking in fixed line telephony is of doubtful value as many countries skipped legacy communication technology and rank behind in fixed line telephony but ahead in more important mobile and digital communication.

Of particular interest are the criteria where we perform worst.

10 criteria where Malta performs worst

                                                            Malta      Slovenia     Cyprus    Singapore
Burden of government regulation         96             52              23               1
Quality of roads                                   113             42              23               1
Available airline seat kms                     92            121              61             17
Quality of electricity supply                  89              32              31               9
National savings rate                           133              54            127               6
Government debt                                 111              61            100           130
Flexibility of wage determination          86           117               97              3
Female participation in labour force     119             31              58            86
Domestic market size                            128             80            104            49
Tertiary education enrolment rate           72              4                55           30

Figures reflect ranking in Competitive Index out of 139 countries

Some of these we would readily agree to, in particular the quality of our roads and of the electricity supply.

Hopefully we are doing something about it.

Others things are inherent weaknesses we can do pretty little about like the size of the domestic market and availability of airline seat kilometres.

Our poor rating in the national saving rate must be inaccurate as de facto this is one of our strengths, and it seems that some erroneous data was picked up which is condemning us without fault.

Even the low ranking in government debt is surprising given that our financing did not suffer an explosive growth as a result of the financial crisis and ensuing recession.

Same applies for the reported lack of flexibility in wage determination.

I think this is more applicable to the public sector than the overall economy. In these three criteria I think we probably rank better than reported and in fact the World Economic Forum admits using indirect sources of information for these criteria.

However there are other criteria we should be doing something about or we are simply not doing enough.

Government bureaucracy (note were Singapore ranks here – right at the top), female participation in the labour market, and tertiary education enrolment are real weaknesses which are prejudicing our competitiveness.

Add these to our mid table ranking in criteria related to public sector governance (favouritism in decisions of government officials, transparency of government policy making , corruption)and little effort is needed to conclude where we have to improve to seriously improve our ranking and become serious contenders for FDI’s based on credentials of efficiency and innovation.

The good thing is that improvement in these areas requires strong will rather than strong Euros and improvement does not involve negative influence on government funding and fiscal position.

On the contrary, any money invested to improve where it matters will produce multiples in economic growth and resultant government revenues.

If we really want to we can set out on the road to Singapore.