09 November 2005

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Business Today

Budget flashback

Water and electricity rates are back on the political agenda. Slapping on a surcharge of 55 per cent the current administration is trying to fend off higher oil prices. But asking people to dig deeper into their pockets is a next to impossible task unless it is backed by adequate information.
Labour MP Leo Brincat believes government has not been transparent enough about Enemalta’s fuel problems. “Government has to be transparent about the recommendations made by the hedging committee and which of those recommendations were taken up or discarded,” Brincat says.
And the former finance minister in Labour’s short-lived government, knows something about controversies linked to higher utility rates.
Looking back, Brincat recognises that the water and electricity rates as introduced in the 1998 budget were hefty and posed a veritable burden on the people. But he says that after listening to the reactions from the social partners the then Labour government had commissioned Alfred Mifsud and John Cassar White to draw up a report on the situation and suggest revised tariffs.
Brincat says the revised tariffs were never implemented because the 1998 election loomed after Dom Mintoff voted against the Cottonera project in parliament and started the ball rolling.
Brincat also denies assertions made by the Prime Minister recently that a Labour government had left a deficit of Lm150 million. He contends that the deficit had run out of control prior to 1996 because of a number of miscalculations by the outgoing PN administration.

The Labour Party claims that in 1996 when it was returned to power, the government found a financial situation that was far worse than what was being publicly stated. Was it a question of an outgoing administration that was lying about the facts or was there creative accounting in play?
It was more an issue of public finances that got out of control and this is confirmed by the memo then finance minister John Dalli had presented the cabinet in the summer of 1996.
In the memo John Dalli had warned the cabinet that with the expenditure that was to be incurred and the way the financial situation was developing they were going to be way off target. Lino Spiteri only took over as finance minister in October 1996 and any bad performance for that year is solely due to the way the previous administration had managed public finances.
The deficit target set by the PN government for 1996 had been of Lm54 million. When Lino Spiteri had presented the 1997 budget in January that same year, Lino had discovered that because of a back log of bills the deficit had shot up to Lm132.7 million for 1996. It was a substantial deviation.
Lino had resigned around Easter time and I took over at finance. What I tried to do for the rest of the year was more of a consolidation exercise rather then deficit reduction.
The revised estimates for 1997 indicated that the deficit stood at Lm135 million.

What could have led to the financial situation running out of government’s control?
There were a number of items linked to the shipyards and the transfer of church property, which went haywire. Another expenditure item which the PN government had overshot was the Crans Montana summit. The total bill, which we had to foot because of commitments made was more than what the conference had cost when held in Switzerland.
But revenue from VAT was far below what government had projected. John Dalli’s memo to cabinet in June 1996 was a red warning light and I believe it was the trigger that set in motion the election process.

If one were to analyse the NSO figures for the 1997-1998 period there was a visible dip in expenditure but government also collected less revenue. Was the tax changeover from VAT to CET the reason for lower revenue?
We were in a transitional period between both taxes and any such period is bound to create instability.
In August 1998 when we already knew that we were heading for an election we undertook a stock-take of the situation and found out that the deficit by year’s end was projected to be around Lm86 million. These were statistics given to me by the people at the ministry, who were the same people who had been working there during John Dalli’s tenure.
But what is interesting is the Central Bank quarterly report that was published after the election. It was the first indicative assessment of our financial performance. The report said that government’s deficit during the first three quarters (still a Labour administration) had deviated by some Lm73 million. However, the report did not identify any expenditure items where we overshot. Instead it said that half of this amount was attributable to adjustments in the fiscal accounting system.
It is very clear that the new administration wanted to hit back at us for exposing the PN government’s failings in 1996. Upon change in government in 1998, the new PN administration went ahead with certain capital expenditure programmes which we had slowed down. The Central Bank quarterly report had also pointed out that the capital expenditure programme in the last quarter (under a PN administration) was expected to overshoot by Lm20 million.
The deficit deviation for 1998 as outlined by the Central Bank quarterly review was part-created by the increased spending of the new PN administration and a change in the accounting system. We were also accused of using the treasury clearance fund. John Dalli before us had used it and continued to use it after 1998.
When I delivered the budget for 1998 (in November 1997) we were estimating a deficit of Lm90.4 million, which would have amounted to 6.5 per cent of the GDP. We had also targeted a budget deficit of five per cent to be achieved over a three year period to avoid sudden shocks to the economy.
I had also insisted on financial discipline in government entities and although the Nationalist opposition at the time had laughed at us, we committed ourselves to a five per cent reduction in fixed costs of government’s recurrent expenditure across the board.
Apart from the ministry of finance that was controlling public finances, over and above we had a cabinet sub-committee chaired by the prime minister that acted as an additional monitor on expenditure.

The Labour Party questions the statistics quoted by Lawrence Gonzi in the budget. This is a charge often made by both political parties. Can this country continue doubting official statistics? Why can’t we have a benchmark over which everybody agrees?
This game will continue being played by any administration as long as government does not introduce an accrual accounting system since there will always be hidden bills to account for.
I recall the Chamber of Commerce coming to me as finance minister and asking whether government could advance payments that were owed to its members by government. I had asked the officials at finance to give me a breakdown of monies owed, primarily to pharmaceutical importers and they told me that the amounts were negligible. I asked them to have a better look at the figures since the Chamber of Commerce was talking of millions. We eventually found out there were a number of bills stashed away at the health ministry that were not yet presented to finance.
What often happens, especially towards the end of the year is that a number of payments owed by government to contractors or suppliers are advanced to the next year so as not to impinge on the expenditure figure of government.
Accrual accounting would ensure that these games would not be played.

On Saturday the Prime Minister accused you as finance minister of presenting the budget with the longest list of taxes in 1997. What is your reaction to this statement?
If you look at the individual items the list was a long one but you cannot view a list of taxes in isolation from the overall burden they would create.
I have to say that we did not introduce taxes mid-way throughout the year.
But I have to put the question to the prime minister. He is saying that the increase in government’s tax take for next year will come about because of increased economic activity. The Prime Minister has to explain how this will happen when it is prospecting a drop in economic growth.
I take this to be a clear message that government is going to introduce new or higher taxes throughout the year. Lawrence Gonzi has already suggested something of the sort when during the press conference after the budget he suggested that if government were to introduce biometric passports in 2006 it would have to decide what to charge for them. Yet there was no mention of this in the budget.

The Labour Party accuses the Nationalist government of increasing the tax burden over the past few years. Similarly, the PN accuses the short-lived Labour government of having introduced a lot of taxes. Where is the difference between both administrations?
Let’s face it the VAT rate at 18 per cent needs to be revisited. We have to look at the impact of taxes on the economy. I am particularly worried with the situation in tourism where hotels across the board are facing endemic problems. Similarly in industry, exports have dropped because prices have had to be slashed. Apart from financial services and real estate, if one were to look at the key economic indicators none are performing well.
Even in real estate, we still have to see the full impact of the withholding tax introduced on the sale of property where it is clear that government has to revisit key aspects of this proposal.

When the Labour Party in 1997 increased utility rates and introduced a tax on the water meter all hell broke loose. Was the extent of the public outcry a result of mishandled communication and lack of explanation by government of the reasons that led you to take such a decision, or was it really a hefty burden the people could not afford to shoulder?
There is no doubt that the burden was hefty but we recognised this fact and committed ourselves to take corrective measures. In 1998, some months after the budget when we had received the feedback from all social partners, with cabinet approval I had commissioned Alfred Mifsud and John Cassar White to draw up a report on utility tariffs as announced in the budget and suggest corrective measures.
The report was not implemented because by the time it was ready the political crisis had kicked in and cabinet had decided it was not wise to go ahead with the valid suggestions since they would have been construed as an electoral gimmick.
I believe the decision not to implement the revised rates was correct even if the report had been commissioned almost two months before the crisis.
Those revised rates were a lighter burden than the budget measures we had suggested. Today, when utility rates are compared we have to take into consideration not only the budget measures announced in 1997 but also the corrective measures suggested by Alfred Mifsud and John Cassar White, the changes implemented by Josef Bonnici after the 1998 election – which were very similar to what Mifsud and Cassar White had proposed – what government is proposing in the budget this year and what the rates are expected to be in 2007.
In 1997 we did not introduce those high rates because of an oil crisis but because Enemalta was on the brink of bankruptcy. We had various expert reports telling us to put up the rates and restructure the company. The second chairman we appointed at Enemalta we did so in an executive role because the corporation never had a chief executive officer until then. It was a process that had kick-started a gradual reform.

Politicians are dependent on bureaucrats in the civil service for information and implementation of their political programme. A bureaucrat will only look at the radius of operation around him or her and so may not be the ideal person to see the wider picture. How can a politician guard against this situation?
I think the only way to do it is to question the information supplied by bureaucrats but more important is the verification of the information by outside sources. As minister of finance I had done so when Enemalta executives had suggested hedging the price of oil. Initially I was cautious about the proposal because I wanted to know what its implications were.
I am not a technical person and so I asked for the opinion of Alfred Mifsud as an economist and the Central Bank. Both concurred that if used judiciously and without looking at it as a magical solution, hedging was a useful instrument. There were times when we went wrong but the net result was overall positive.
The mistake the PN made in 1998, particularly Josef Bonnici, was that it adopted a dogmatic anti-hedging attitude. There were various times since then when Enemalta could have hedged. It would be a mistake to hedge now but it would have made much sense to hedge in March or April.
Unfortunately we do not have enough information on how Enemalta is purchasing its oil. In a situation of rising oil prices it is important to be transparent. The technical report turned political, which Austin Gatt then produced in all newspapers was not transparent enough.
Government has to be transparent about the recommendations made by the hedging committee and which of those recommendations were taken up or discarded. When the fuel procurement committee was set up the Labour Party refused to be present on the committee because it would have politicised something that should not be politicised.
We had suggested that from time to time the committee give a breakdown of its work in front of a parliamentary committee but government declined our request.

Government’s drive to reduce the deficit is conditioned by the Maastricht criteria, which government hopes to fulfil in time for introducing the Euro in 2008. Is Maastricht a blessing in disguise in terms of fiscal prudence or a millstone around government’s neck?
It is a bit of both. In a scenario that is not conditioned by such criteria government would be able to reduce the deficit at a slower pace. Maastricht does introduce fiscal discipline but at a cost.
We also have to consider the pace of economic growth. A strict deficit-reduction programme would have made sense had we been experiencing good growth. If we had real growth of around four per cent we would be able to go ahead with an aggressive deficit reduction programme.
Other countries have not suffered the full impact of rising oil prices because they have healthier growth rates than ours. The problem is not the three per cent deficit target required by Maastricht but the attainment of such a target at a time when we have 1.1 per cent growth.

But can Malta ever reach economic growth in the range of four to six per cent like the new EU members states in the east?
When we were planning the manifesto for 2003 the Labour Party’s experts had said it was possible to reach a growth rate of three to four per cent over the medium term. We still think it is attainable if there is the right mix of ingredients and government gives importance to sectors such as tourism and manufacturing.
In manufacturing we are seeing a number of pharmaceutical companies opening shop. This is positive but even here we are seeing a skills mismatch developing in the labour market. There are a number of problems in various sectors that have to be addressed.
The Prime Minister is now saying that the Malta Council for Science and Technology falls under his portfolio but did it have to take him a whole year to decide what to do with this council which is supposed to be at the forefront of research and innovation.

The Labour Party says it will focus its energy to stimulate economic growth if elected to government. How does it expect to do this? What will you be doing differently?
I don’t want to partisan but this is an administration that has been in office for almost 18 years bar the 22 month interlude when we were in government. When we were elected in 1996, the Nationalist Party started a process to reorganise itself. But when the 1998 election came about well before its time, the Nationalist Party found itself in government unprepared and unreformed. The post-1998 cabinet was very similar to the outgoing PN government in 1996.
Today, the only doer in the cabinet, even if I do not necessarily agree with his methods, is Austin Gatt. At least he decides. I used to criticise John Dalli a lot, I disagreed on a number of occasions with his decisions but at least he was a doer.
Bar these two individuals who is a doer in the current cabinet set up?
The Labour Party has a mix of people; veterans with experience and others with enthusiasm to join the cabinet for the first time. In the next election the Labour Party will be able to offer a mixture of vision and energy, which are missing from the Nationalist Party.

Leo Brincat was interviewed
by Kurt Sansone

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