10 August 2005

The Web

88 pages to economic Nirvana

Dr Gonzi triumphantly blazons a clarion call to all and sundry to help in the submission of ideas and comments in the forthcoming 2006 budget. The pre-budget document was issued on 30 July and the consultation period will extend to 30 September 2005. Ironically this pre-budget consultation process is ill-timed with most of the island embarking on its annual national holiday.
The document is a hall mark of an active Prime Minister who speaks to us in the form of an 88-page document about economic, social and environmental issues having an impact on the Maltese way of life. Pompously it clamours for the attainment of excellence for a better life for us and our children. The publication talks of establishing priorities for the next five years spanning to 2010. It humbly admits that while improvements have been earned in the past the administration needs to prescribe surgery to achieve its targets.
Without mincing words it reveals that the Maltese economy, with the exception of 2002, recorded unprecedented current account deficits .These reached a high of Lm209.2 million during 2000. Proudly and courageously it proclaims that despite successful measures taken over the past years, to curb the costs needed to sustain the public sector, it continues to be over-manned in certain areas. Specifically it mentions that “with Government responsible for over 33% of productive employment, over-manning and under-productivity in some areas are two of the reasons why our economy is under performing.”
Candidly it remarks that “the plain truth is that Malta’s efforts to attain a vibrant economy will not realise optimal success unless this matter is dealt with decisively.” This is a frank view of the situation that has been waxed lyrical over the past years by many economists, commentators and non-party writers albeit with little acclamation from the authorities. There were times when such free-thinking writers were called “moaners” yet now the penny has finally dropped. One of the many recommendations given in the document is the implementation of an “accruals based” accounting system. But practitioners would stand up and protest that efforts by government to involve audit firms in designing and training state employees in this accounting regime started ten years ago. So why has this delay been so protracted when the system has been running so efficiently for local councils for over five years?
No prize for guessing why in the light of a stronger accounting regime which is technically compulsory in the private sector there has been such delays. Surely the staff at the treasury are all adequately trained to muster the system so prevalent in other EU countries. Perhaps as a result of Dr Gonzi’s initiative we shall see the fruits of such improved accounting reports in the coming months.
This exercise will also seek to introduce consolidated financial management that will span government departments and public sector entities. Hopefully after so many attempts and the issue of previous tenders for the procurement and training of treasury employees by consultants we shall be awarded by the issue of more timely information and benchmarking of the assets and liabilities of the state controlled sectors.
Amid the rhetoric reminiscing of previous budget speeches one reads the usual exclamation exalting “the deployment of public sector employees more efficiently to consolidate and co-ordinate better the mechanisms and procedures aimed at the best deployment possible of all public officers and all public sector employees.”
The document further proposes that surplus staff are to be attached to a “Surplus Employment Pool.” To achieve this in the most transparent fashion it is proposed that a skills profile will be drawn up for the persons placed in this pool who will undertake re-training in order to fill skills gaps within both Government and private sectors. Critics may point out that this seems to be a utopian solution that must have been doing the rounds since the reign of MSU advisers in the mid nineties. But can we not laud Dr Gonzi’s resolve to make it happen?
Naturally the document talks about the social aspect of taking concrete steps to address the disincentives for surplus persons to move into productive employment even when made available. Within the public sector there will be a concerted drive to develop and improve IT systems which we have invested millions in. In turn, efficiencies may lead to accelerated redeployment of staff.
All this has to be accompanied by a non wavering resolve to close redundant front offices, reform back room operations and re-skill and re-deploy employees. It goes without saying that such a massive restructuring will need the soldiering of all permanent secretaries. It is they as the top echelons of the service that have to shoulder the responsibility to manage the changes required. The buck stops with them.
Likewise, nobody expects government to keep leaning on the policy of “tax, borrow and spend”.
The opposition frequently blame this policy as being the cause of current structural imbalances. It is a common held view that gone are the days when government resorts to mask internal inefficiencies by approving heavy annual subventions and subsidies to corporations and public authorities for perennial losses incurred in their operations. The reckoning has to start, otherwise we can never achieve the ERM2 criteria by the year 2007/8.
On a positive note we read that government has not been sleeping when it comes to new capital formation. A lot has been achieved albeit through limited resources by way of teaming up with the private sector. The document lists a number of prestigious projects such as the rehabilitation of the Pinto Warehouses as part of an integrated cruise terminal and granting of a long term lease to MIDI Group to restore Fort Manoel and Fort Tigne in return for the permit to exploit the erection of commercial and residential properties on Tigne point. Not to be forgotten is the long awaited rehabilitation of the now defunct Dock no1 and the use of commercial property such as Pender Place/Mercury House. Other salubrious projects include the issue by tender of development briefs for the golf course, the Birzebbugia Tank Farm and the Tigne’ site occupied by Holiday Inn Crowne Plaza .There is also a revival of the venture fund idea which was mentioned a number of years ago by previous finance ministers but for some reason never took off the ground. The idea is being revisited and a Venture Capital Fund should be kick-started in the coming weeks. In the last budget this was earmarked to start at Lm5m.
But can we have a balanced pre-budget document without mentioning the subject of taxes being the proverbial hot potato of all budget forecast?
There is a subtle attempt to patch over the fact that revenue from taxes has progressively increased but the corresponding productivity from state employees and the reduction in national debt was not so visible. This, not considering a number of submissions made by constituted bodies to revise downwards corporate taxes. Here we note that as part of the budget submissions The Federation of industry has consistently advocated that government must pursue tougher ways to reduce expenditure on inefficiencies rather than resort to increases in taxation or resort to stop-go measures. Incidentally one-off measures do not necessarily contribute to eliminate structural deficits. In relation to this, the Federation noted that the tax burden in Malta has increased from 29.2% of GDP in 2000 to 34.9% of GDP in 2004. This argument does not advocate leniency on tax evasion and social security abuses but rather that upward tax adjustments should become a second priority to cuts in government spending. By sheer contrast one cannot help mentioning the silent revolution in so called flat tax systems implemented by accession countries. This has been widely marketed as an incentive to help them attract foreign direct investment, an area where Malta has fared badly since 2000. But not everything is doom and gloom and it is a welcome surprise that government finally announced the formation of a task force which will review the relationship of tax revenues to Government finances. Certainly in view of a marked slowdown in the tourism and manufacturing sectors any reduction in government induced costs would render our local industry more competitive and would help generate sustainable jobs.
The pre-budget document is a well balanced critique encompassing the social, monetary, fiscal and environmental aspects of the Maltese economy. It is a well researched document and so far has been well received by the press particularly financial commentators. Let us all augur that its 88 pages lead us to our much desired economic nirvana.

The author is a partner in PKFMALTA an audit and business advisory firm

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