From the No Side - A Year Later

The Malta Independent on Sunday 

What has happened to the substantial minority that had voted against joining the EU this 1^st May? Have they changed their mind or have they simply accepted EU membership as an irreversible reality?

As someone who had argued with conviction that there was a better choice to EU membership I can well explain where I stand now and where I stood before the referendum.

I believed then and still believe now that given our particular characteristics, EU membership has substantial disadvantages through disproportionate costs of bureaucracy to comply with the rigour of the acquis communitaire. I still think that it would have been more smart for us to negotiate on a bilateral basis something which was more tailor-made to our requirements rather than enter into a structure which is certainly unsuitable for countries of our size.

So as a matter of principle my views have not changed. I am however one year older and one year wiser and certain doubts which I used to have about the feasibility of the alternative solution have intensified.

I personally never argued the case for or against EU membership in black or white terms. I have never argued or even hinted that if the majority decision would be to choose the membership route then that would be a straight ticket to hell. I always kept my distance from the unofficial but well cycled clichés of senior MLP exponents who argued against EU membership in terms of ‘allaharesqatt’ (God forbid).

My line has been consistent. There is a better alternative outside membership that suits our characteristics of size and flexibility much better, but that in the end we can survive both in and out as both policies offer opportunities and threats. The real difference is ourselves, our determination and our readiness to do what we have to do with discipline and consistency and to stop the practice of throwing all caution to the wind for cheap propaganda gains to extend, seemingly perpetuate, political hold on power at grave economic costs.

Let me explain this in cola and lemonade terms. Let’s say membership is cola and non-membership is lemonade. I used to argue that lemonade is better than cola but I never argued that cola is cyanogenic and kills instantly.

I am one year wiser because the trust I had that in the No side of the fence there was the stronger sort leadership that is necessary, in the absence of the EU membership discipline, to make a success of it, has gone. It has evaporated when I saw those who used to argue that cola kills instantly, re-positioning themselves unashamedly and argue that cola, while not being the elixir of eternal life that the Yes campaign often tried to depict, is quite ok provided you drink it from lemonade bottles.

Even the best marketing guru would have problems selling cola from lemonade bottles. The perception is just not right and in business as in politics perception is reality. So when I see much lesser mortals seeking to perpetuate their stay in power by adopting a complete reversal of their formal policies, then the doubts I had on the availability of the leadership qualities to make a success of the No policy grow to the point of conviction that for all its theoretical merits it lacked practical application.

And quite frankly I think that the narrow margin that gave a majority to the Yes side had exactly this on their mind. They were and still are not enthusiastic about membership. They know that membership is no magic solution for our economic ills. But they believed that on the No, as much as on the Yes side, there was no quality leadership to impose the sort of discipline to stop this country from destroying itself and they preferred the external discipline of EU membership and eventually the much tighter discipline of Euro membership in order to save us from ourselves.

For me the issue is closed. No matter how much I still believe that with the right sort of leadership we could have cut a much better deal with the EU outside membership, we have to operate within the boundaries of available or accessible resources. Our leadership qualities could only get us an off the shelf package warped and twisted to be made to fit us for a transitory period until we deform our characteristic to fit the off-shelf shape of the acquired structure.

Now that we know that membership does not kill we have to give it whatever it takes to ensure that we make the most of it. And the advantages of membership is the discipline it should enforce on our leaders to perform the economic re-structuring without further delay. Without such re-structuring we cannot make the most of membership.

Membership success has to be measured in terms of the flow of foreign direct investment we are able to generate because we can be perceived as members of an organisation with clear rules and guarantees that go with the single market and eventually the single currency. Without such investment flows we will wither away as membership on its own is no guarantee of prosperity. Real and productive investment is! We therefore need to waste less energy and resources protecting unproductive jobs and we need to apply all our resources and energy in creating new productive ones. Re-structuring is not about avoiding closures and redundancies. It is about ensuring that there get created far more job opportunities than the unavoidable job losses.

And for those who still believe that membership is poison leading to instant death let me just say how much I admire their consistency. Let me assure them that there is ample space in a democracy for them to continue seeking to persuade the majority of their views that the membership deal needs total re-negotiation. But let’s all understand that the priority is now investment attraction and job creation and that this is best achieved through a common effort to re-structure and not by obstinate resistance to change. And if there a case to be made about the constitutional validity of the referendum then the place to argue this is in the Constitutional court and ideally it should have been done before the referendum, though there is no legal bar for a post-event contestation.

The real challenges are just about to start. Whether they enrich or impoverish us depends entirely on us.

The Two Sides of the Pensions Problem

The Malta Independent 

  
The so called pensions problem can be simply split into two parts. The first is how we are going to maintain the existing system when it is clear that unless the parameters are re-aligned, the changing ratio of beneficiaries to contributors, as a result of demographic changes and longevity beyond retirement, will break the financial structure of the National Insurance scheme.

The second is that even if we find ways and means of re-aligning the parameters to make the current system sustainable under the changing demographic pressure, it is insufficient even at its maximum to maintain the standard of living of a growing segment who earn much more than the maximum pensionable salary.

Several reports have been written about the former, the latest by the World Bank, which indicate how the various parameters could be re-aligned to keep the present system sustainable. Foremost among these is the extension of retirement age from the present 61 years to at least 65 years, and alignment of benefits to the actual quantum of contributions made, rather the present mechanism which makes a very loose link between the overall level of contributions and the benefits entitlement.

Sooner or later, when government finds the conviction to manage the necessary change even at the expense of some electoral unpopularity, or when the system approaches its breaking point, we will have to do what we have to do, whether we like it or not.

Regarding the latter there are proposals for the introduction of an additional funded pillar which for those still under age 50 could contribute to increasing the maximum level of pension to ensure an adequacy of retirement income.

I have my doubts how necessary this really is. If we force people to save further for their supplementary pension we could create pressure for wage increases which could further complicate our international competitiveness. Furthermore, if government has to give fiscal incentives to stimulate the adoption of this funded pillar, it could compound its fiscal position at a time when its focus should be on re-sanitisation of the fiscal system.

My doubts were confirmed this week when the NSO issued statistics about home-ownership in Malta. It is indeed heartening that 77.6 per cent of Maltese households own their residence and 11 per cent have an additional property. Upon retirement, all these will be the owners of their debt-free residence which probably is the best inflation-proof investment they can make.

So we can hardly argue that the Maltese are not saving for their pension and they need to save more. If there is anything which has so far shielded the country from financial disaster caused by recurrent strategic public fiscal deficit it is the thrift culture which has facilitated the financing of such deficits to the point that it made it possible to avoid taking timely curative measures.

So the solution to the problem of pensions insufficient to maintain the life-style of the work years should be found in devising systems of generating supplementary cash flow by residence equity release over the period of retirement.

The state system cannot guarantee sufficiency of pensions to maintain working-years living standards. This will unavoidably lead to a dilution of heart-warming notions of leaving one’s residence to one’s children to be replaced by the reality that one needs the savings made through paying a mortgage during working life to enjoy a comfortable and healthy retirement. In any event, with life expectancy at retirement exceeding 80 years, there is little scope for leaving a house to the children when they themselves will be nearly at pension age before they inherit it.

To address the second part of the pension problem, what we need is a stable monetary system with long-term low interest rates to make it easier to service a mortgage. Many people forget that local mortgages are on a variable rate basis and that the current low interest rate scenario may not last forever.

Like St Thomas

The Malta Independent on Sunday 

   

It was the 25^th November 1995. The incumbent Finance Minister was presenting his fourth consecutive budget in parliament, this time for 1996. It was the first budget following the introduction of VAT which had made a root and branch change to the system of indirect taxation.

We were told that the deficit for 1995 would finish around Lm36 million estimated at just over 3% of the GDP which was growing at a real rate of 6.7%. That was a rate that truly reflects our growth potential if we are ever to catch up to EU averages. The deficit for 1996 was planned to remain stable at around Lm39 million which in the face of a fast growing economy would reduce the deficit to 3% a level which the Minister had targeted in his first budget presentation for the year 1993.

Indeed in that first budget the Minister had pledged to be guided by sound financial housekeeping rules promising to keep deficit within acceptable boundaries of the then freshly enacted Maastricht criteria and to reduce the share of government in the national economy through privatisation and a operation of a leaner and more efficient central government.

In his speech for the 1996 Budget the Minister made bold statements like “This government is committed to have public expenditure reconciled with public income”. After singing self-praise verses of optimism that government revenue will balloon as a result of momentous economic growth and more efficient tax collection and enforcement, the Minister announced several measures of fiscal largesse. In their due course these measure were to prove a huge burden on public finance and hardly in line with the determination to reconcile expenditure with revenue.

The fiscal giveaways were so widespread and so sizeable that one could hardly resist the temptation to conclude that that budget or 1996 clearly had an eye on the approaching election even though in theory the Minister had the opportunity to present a further budget for 1997 before the legislature term would expire.

Now I want to fast forward you a bit to the month of November 1996. Labour had just won the election. The Clinton syndrome of “it’s the economy stupid” did not seem to work here. In spite of the substantial fiscal boost given to the economy, the electorate was not impressed and in perfect synchrony with the two legislature cycle of Maltese politics sent a Nationalist government to refresh on the Opposition benches. Labour was elected in spite of the feel good factor and all.

In November 1997 the new Minister of Finance was Lino Spiteri whom I well remember expressing with a sense of despair that the Nationalist Party were really lucky to have lost the elections and thus save having to face the financial mess they left behind.

I quote from Lino Spiteri’s budget speech for 1997:

Labour Government inherited a deficit of Lm112 million that is almost three times the planned deficit of Lm39 million equivalent to 9.3% of the GDP rather than 3.2% as originally estimated.

I am saying this to establish two important points:

Firstly that 1995 was the last year where we registered healthy economic growth in the context of macro-economic stability.

Secondly that the public finance structural problem was discovered in 1996, although it might have been contributed to by earlier measures whose impact was time-lagged, and that we have not yet addressed it 8 years later.

We had a deficit of Lm112 million in 1996 and we still had a deficit of Lm176 million in 2003 which even if stripped off the exceptional Lm58 million Shipyards write-off is still higher than the 1996 deficit in absolute terms. In relative terms we had a deficit of 9.3% of GDP in 1996 and a deficit of 9.7% of GDP in 2003.

The only difference between 1996 and 2003 is that we have since trebled our national debt, eaten the reserves we had in the sinking funds and sold some of our best public assets the funding from which simply disappeared in the big black public deficit hole. And of course we are eight years older and should ideally be eight years wiser, though I have my doubts about that.

Eight years is indeed a very long time; certainly a time long enough for a problem as that identified in our public financing in 1996 to be addressed in a gradual but determined manner. The fact that eight years seem to have served for nothing but to pay lip service to the problem is in itself shameful and a great waste of resources which we just cannot afford.

The new Prime Minister has pledge to make restoration of sanity to public finance as a priority agenda item. For those of us who have heard this before we can be permitted to express that, like St Thomas following the Resurrection, we will believe when we see it and not we hear about it.