13 July 2005

The Web

Government admits new taxes partly to blame for inflation

James Debono

Contrary to the silence adopted at the beginning of the year, Government is now acknowledging that fiscal measures taken in the last budget have contributed to price increases.
Talking to The Malta Financial and Business Times, Parliamentary Secretary Tonio Fenech admitted that the introduction of a 17 per cent surcharge on utilities and eco-taxes have “partially contributed to price increases.”
But back in January, when Parliamentary Secretary Tonio Fenech was asked by sister newspaper MaltaToday to quantify the impact of the newly introduced range of eco-taxes on inflation, no reply was forthcoming.
While the government is now recognising the impact of these fiscal measures on inflation, it is also pointing its finger at other factors. “Structural rigidities in our product/services markets may also be contributing to inflationary pressures,” Fenech told this newspaper.
The government is not excluding corrective action to redress these trends.
“When looking at this area, we need to take a much wider perspective in order to understand properly what is going on and take corrective action,” Fenech said even though Government has yet to identify which price rigidities are fuelling inflation.
Speaking to this newspaper last week, GRTU Director General Vince Farrugia pointed out at the price rigidities in a number of sectors ranging from the fish market to the pharmaceutical sector.
But Government is still finding comfort in the fact that inflation “is still well below historical levels” and that “it is not out of line with the trends at European level.”
The Parliamentary Secretary said that the May HICP (Harmonised Indices of Consumer Prices) inflation stood at 2.5 per cent as compared to 2.2 per cent for the EU25 and Euro-zone respectively. “Other EU member states are registering higher inflation rates than us,” Fenech added.
Analysing Eurostat statistics, The Malta Financial and Business Times can reveal that most of the countries registering a higher inflation than Malta have simultaneously experienced steady growth in their economy contrary to what is happening on the domestic front.

While Malta has experienced sluggish economic growth throughout 2004 and a 0.1 per cent contraction in the first quarter of 2005, the economies of those countries with higher inflation rates than ours have been exploding.
Countries like the Baltic states and Slovakia have registered growth rates of more than five per cent throughout 2004. Inflation in Slovakia has increased by five per cent in the past year but its economy has been growing at a rate higher than 5 per cent throughout 2004.
In Latvia an inflation rate of seven per cent was accompanied by a growth rate of over seven per cent throughout 2004.
Lithuania with an inflation rate slightly higher than ours, experienced a consistent growth of over six per cent throughout 2004.
The Central Bank Governor has acknowledged that rising inflation in Malta, unlike that in other EU states is “inconsistent with the weak levels of economic activity that were evidenced by the failure of the economy to expand during the first quarter of the year.”
Like Tonio Fenech, the Governor of the Central Bank has attributed rising inflation to “rigidities in the setting of prices of goods and services in the domestic market.”
But there could be other reasons for rising inflation and which neither Government nor the Central Bank have yet identified.
Talking to this newspaper last week, Prof. Edward Scicluna blamed rising inflation on a greater money supply in the economy.
According to Prof. Scicluna banks have increased their credit into the economy (loans) by Lm30 million, mostly to individual consumers rather than to the productive sectors for investment purposes.
This has resulted in an increase in the supply of money in the country which has not been channelled into productive investment.
The repatriation of funds has also contributed to the increase in the money supply.
Since this money is serving to prop up consumption instead of economic growth, inflation is bound to grow.
Scicluna had also expressed his concern that with a fixed peg to the Euro the only competitive advantage Malta can gain is if inflation were to be lower than that of our competitors.
The fact that Maltese inflation is slightly higher than that of most EU countries should be of little consolation.
The only positive side to the story is that our inflation rate is lower than that of most of the new member states.
Yet, while inflation in these countries is a consequence of an over heating economy, this clearly is not the case in Malta.

Fuel prices
Another concern for the commercial community is the ever-rising price of fuel, which they fear will eat into competitiveness.
But Parliamentary Secretary Tonio Fenech does not share the apprehension expressed by the Chamber of Small and Medium Size Enterprices-GRTU and the Federation of Industry on the inflationary impact of the rise in fuel prices.
“Experience indicates that the impact of fuel price fluctuations on the Retail Price Index was minimal,” Fenech told The Malta Financial and Business Times.
Quoting data published by the National Statistics Office for the second quarter of 2004, when the price of fuel increased by an average of Lm0.02, Fenech said the price increase “exerted a minimal upward movement in the RPI”, increasing by only 0.04 per cent.
Fenech insisted that this is evidence of a greater “ability of domestic operators to respond to adverse price fluctuations.”
Last week Wilfred Kenely, the FOI’s Director General, warned that small enterprises might be pushed to review their prices.
“The private sector is being cornered to pass on the increases in its operating costs to its customers through higher prices,” Kenely had told this newspaper.
But Tonio Fenech insisted Government is not being complacent.
“We remain committed to closely monitor the situation in a bid to ensure that our competitiveness is not unduly eroded,” he said.
Speaking to this newspaper last week, GRTU Director General Vince Farrugia proposed the lowering of duties on fuel to mitigate the impact of this increase.
VAT and duty make up 50.7 per cent of the pump price of unleaded petrol. The tax component of LRP petrol amounts to 48.5 per cent. As regards diesel 45 per cent of the price paid by consumers goes into government coffers.
Asked by this newspaper whether government is considering a reduction of duty on fuel to compensate for higher costs, Parliamentary Secretary Tonio Fenech did not exclude such a measure.
While stating that “it would be unwise to rule out options”, Fenech reiterated government’s commitment not to lose sight of the objective to reduce the deficit.
“It is important that the fiscal consolidation process proceeds without undue disruptions and that the burden which such a process generates is equitably spread amongst the different segments of the Maltese economy,” Fenech said.
The same Minister expressed confidence that local operators will rise up to the challenge of increasing price pressures generated by the international economy.
“There are good reasons to believe that markets will react properly and we remain confident of the willingness of Malta’s economic operators to remain competitive. After all, such adverse fuel price fluctuations are hitting hard operators everywhere.”
These comments are out of synch with the FOI’s contention that Maltese industrialists are being affected more than their foreign competitors due to Malta’s reliance on oil. According to the FOI, foreign competitors have the advantage of switching to natural gas and other cheaper fuels.



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