09 November 2005

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Business Today

A breakthrough budget

Out of the wilderness we encounter a latter–day Moses who has led the people to the promised lands and defied the raging waters by miraculously providing a means of access right through the turbulent valley of deficits

Reading through successive budgets one cannot but feel that a common theme runs down the contours of deepening valleys simulating the undulating deficits. Starting in the early nineties, the motto for each budget was to modernise the economy and replace aged second hand equipment that was the norm under the Socialist era.
A lot has been invested in strengthening the aging infrastructure while no effort was spared to liberalise the domestic markets and regale consumers with a variety of quality products on the shelves.
The dismantling of state subsidies and rolling back the frontiers of state control was started in earnest. The massive investment in building from scratch the financial services industry also saw its birth pangs during the late eighties. Nothing was spared to build a new power station, a new airport terminal and various strategic projects such as laying of fibre optic cable and the modernisation of the telecommunication system.
Efforts were made to bale out the Lm300 million debt accumulated out of drydocks losses while resisting any temptation to downsize the workforce as was the norm in other European countries. With hindsight it was during this period that shipbuilding witnessed a severe drop worldwide. The educational reform opened the doors to the working classes to participate in tertiary education.
This was facilitated by pouring millions annually in stipends which paved the way for more graduates qualifying in their thousands rather then in dozens as was the case when the numerus clausus was in operation. Certainly some mistakes were done but the general idea was to expand the funding for University in order to accommodate an ever growing demand for tertiary education. The crucial dynamic that underpinned government’s policy was that it is the educational sector on which this country's future wellbeing depended. Millions were siphoned out of the state coffers into an inclusive education structure to accelerate the process of creating a knowledge society. Still more effort is needed to entice a larger number of students taking on subjects such as science and cyber technology. What we need now is to see that such a gargantuan allocation is spent wisely, that is, productively. Hopefully it would motivate a better educated class competing for higher paid jobs. Another reform which has hanged like an Albatross around our necks was the redeployment of workers in the civil service.
These were recruited as a political gesture in their thousands on the eve of the 1987 elections. This reform was carried out in a seamless fashion without anyone being sacked.
Generous wage and salary increases were negotiated for civil servants and a specialised internal task force called Management Systems Unit was commissioned.
Manned by foreign experts the unit sought to improve work practices in state enterprises. All this modernisation took a lion share of the GDP and there is no prize for guessing why each year the budget ran into a never-ending deficit.
It is pertinent to point out that the national debt in 1987 was a mere Lm87m which over the years has grown and now exceeds 76% of our GDP. This signalled the birth of our structural deficit phenomena. The underlying theme justifying successive budget deficits was that so long as the government succeeded in collecting more taxes and levies then the resulting annual deficit could reasonably be borrowed from local banks. These were ever more thankful to lend from their exceedingly largely untapped surplus funds. To bridge the gap the exchequer relied heavily on indirect taxes and according to reliable EU sources the current share of 42.6% of total tax collected exceeds the EU average of 37.8%.
Better enforcement of taxes has resulted in a tangible improvement in public finances. This is mostly evidenced by the higher yield from VAT revenue and paradoxically it often exceeds the underlying growth in the GDP. GRTU complain that the extraction of taxes has culminated in less money in circulation and consequently resulted in a drop in consumption. They retort that all this chicanery has created a disgruntled middle class who as is expected tend to bear the larger share of the tax burden. Opposition spokesmen come to their rescue when they criticise government that such measures squeeze the middle classes to the point that the pips are about to squeak. Yet in spite of all the lamentations, a breakthrough in changing our profligate mindset has dawned on us with the 2006 budget.
Pundits ask what has changed that we are now tightening our belts as if there will be no tomorrow?
Certainly with the signing of the accession treaty and the submission of our convergence plan the island is now faced with a challenge to meet the Maastricht benchmark by 2008. In brief this means that our annual deficit must not exceed 3% while our maximum accumulated debt cannot go beyond the level of 60% of our GDP. The ominous news is that due to burgeoning debts we spend more on debt servicing than on other essentials such as health. So now the penny has dropped and the years of hollow feel good factors is over. This year the deficit is down to Lm76 million and the projection is that next year it will go down further to Lm55 million.
A defiant finance minister projects that the deficit will be reduced to Lm50 million in 2007 and Lm30 million in 2008. This is a fairy tale ending when considering that fiscal and monetary discipline were treated so lightly in the past.
Out of the wilderness we encounter a latter-day Moses who has led the people to the promised lands and defied the raging waters by miraculously providing a means of access right through the turbulent valley of deficits. Naturally cynics state that it is true that the Budget gap is closing, but they sow doubt in the wind by exclaiming that part of the augmented tax revenue is not sustainable. For example they cite that the revenue estimate for 2006, for instance, includes close to Lm20 from the sale of land. Furthermore the 2006 estimates includes Lm80 million receivable in grants which will not reoccur each year. Rather then sowing doubts on the sustainability of the 2006 forecasts, one ought to acclaim Dr Gonzi for announcing a number of budding measures notably in relation to the energy sector.
Since many years we were discussing the potential advantages of laying a cable between Malta and neighbouring countries together with the installation of a gas pipeline. All this has been given the green light. A bold attempt will be made next year to liberalise energy products, including petrol, diesel and gas. Such services were previously jealously guarded by the state energy monopoly. The sad news is that a larger slice of our GDP is now needed to finance the purchase of fossil fuels for energy generation. Unfortunately due to a number of reasons the price of crude oil is not expected to drop in the short term and the trend for the coming winter is that there will be a sustained high price hovering in the upper sixty dollars per barrel.
Fossil fuels will eventually become too expensive for everyday use, but there will be good money to be made from producing whatever power source one can muster from alternative sources. More positive news is the budget proposal of embracing alternative energy.
All this must be viewed in the context that it was inevitable for Dr Gonzi to augment the utilities surcharge which partially compensated for the impact of higher oil prices. As expected hiking water and electricity charges has caused adverse reactions among consumers. Already there is a spirit of embracing the higher cost of energy by taking a more conservative approach over its use. Conservation of energy will become a higher priority and in the future there will be better insulation in new homes, increased insulation in many older homes, more energy effectiveness in industrial processes, and a preference for efficient motor engines giving higher mileage/ lower emissions. Heralding the 2006 budget which has been hallmarked “for everybody to live better” we now witness a sea of change in attitude towards turning off the taps of profligacy and tightening on better accountability. Prudence has suddenly taken over and every effort is being made to count the pennies and eradicate waste. The journey may be arduous and tough but the virtue of trimming off our excess fat will lead us to live better lives.

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