26 November 2003

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Toon this week: The difficulties of forecasting

A compromise budget

In its first of five budgets presented by any administration one always expects the most unpopular of measures to be introduced. Given the economic situation most commentators and constituted bodies were hoping for drastic measures to on the one hand reduce Malta’s financial deficit and give a boost to what is perceived a sluggish economy.
The general impression following the budget is that in some sectors the budget was far too kind. An attempt is being made to raise revenue, but perhaps not enough is proposed to drastically cut public expenditure.
Understandably this is easier said than done.
Higher consumption tax might raise revenue and cause us to save more.
While the budget has been aimed at cutting the deficit, the tax measures could well serve to slow down the economy if things do not transform dramatically with European Union integration.
The first few months of every year are usually slower for both retail business and tourism, and only come May-June will we get a clearer picture.
At that time the government should be tackling welfare and pension reform and one hopes it will take the right decisions will we see business confidence regained.
Beating the deficit simply by raising taxes can only go so far in solving the problem. The real deficit attack has to come in the form of cutting government expenditure.
This course of action is likely to hurt more than any increase in taxation and is possibly more politically sensitive to implement. But unless we want to continue in free fall, with disastrous consequences for everyone, government has to rationalise its costs.
Welfare benefits have to be given to those who really need them and in some instances these can be trimmed to reflect modern-day exigencies. In this regard the reforms in the pink and yellow forms are welcome.
Furthermore, government needs to implement a medium to long term programme to reduce the number of employees on its books.
In certain areas employees lost through natural wastage need not be replaced by new recruits and where staffing levels require new engagements, the first priority should be to shift workers from already existing departments. This requires a more flexible civil service.
The general impression is that the budget is likely to fall short of its objectives as the measures are not drastic enough. Only time will tell.
It can be expected that the new 18 percent VAT rate will discourage some spending in the short run. But this will dissipate with time.
Expenditure on cigarettes and fuel will probably dip in the short run, but as usually happens will pick up after a few months when people get used to the price.
The constituted bodies have not welcomed the budget measures, and expressed their dissatisfaction with the long coming increase in VAT which they said will decrease disposable income and possibly put tourists off.
What should definitely be welcomed are the attempts to ensure more tax is collected on property deals, and the introduction of an eco-tax on non-returnable packaging. While these may not boost business they serve to regulate and push consumers towards more environmentally friendly alternatives. It will serve to cool down the overheating and the hike in prices that is taking place here.
Finally, the minister stopped short of announcing dramatic measures intended to curb wastage at all levels of government administration even if these would do little to address the deficit problem. Nonetheless, it appears that a general mood change in ‘fiscal discipline’ may bring an improved respect for ministerial budgets.
In short the 2004 Budget is a compromise budget. In some sectors, it appears half-baked, in other forthcoming and forward looking. More needs to be done before we any final judgement is made.

Copyright © Newsworks Ltd. Malta.
Editor: Saviour Balzan
The Malta Financial & Business Times, Newsworks Ltd, Vjal ir-Rihan, San Gwann
Tel: (356) 21382741-3, 21382745-6 | Fax: (356) 21385075 | E-mail