09 August 2006

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Business Today

Cracking the pre-budget code

One is justified to ask what can the 2007 budget do to help mitigate the
growing pains and smoothen the stretch marks

The Euro convergence programme plans to cut the deficit from 9.7 per cent of GDP in 2003 to below three per cent in 2006 and a further drop thereafter. It seems we shall be sliding downhill as the worst is over and Dr Gonzi proudly leads us down the rose garden.
But there is a fly in the ointment since we still need to trim inflation from the current 3.1% to below 2.6%. It is a pity if we fail the Euro convergence test after so many sacrifices and we deserve better than Lithuania who had to postpone its entry.
As in the past, the pre-budget document is intended to pave the way for public discussions on the 2007 budget. The Prime Minister has been upbeat on the chances of an economic upswing. He thinks that during the short period that he has been in the saddle, the economy will soon start reaping rich dividends of government’s fiscal policies.
Party apparatchiks applaud the fervour of the Prime minister’s intentions which they believe are intended to consolidate public finances and stimulate the economy. As revealed in the pre-budget document, which this year is issued a month earlier than usual and extends to 178 pages, the Prime Minster aims to loosen the financial burdens on citizens.
The Parliamentary Secretary within the ministry for finance has announced a proud array of incentives to kick start the ailing economy. The cherry on the cake is an assurance that the deficit target set at below three per cent will be reached. The document also includes proposals for a review of the income tax bands, for the introduction of an energy benefit and a reduction in the airport tax. Government intends shaving off Lm8 million of tax and social security income in 2007, which in the view of critics is too little too late. But the coffers are not brimming full considering that gross foreign exchange earnings also saw a general drop from Lm272.2 million in 2003 to Lm 263.3 million in 2005 while tourism income is lower this year.
An innovative idea is the reduction of part-time minimum NI contribution by introducing a pro rata contribution for part-timers while new incentives for funded pension scheme contributions and at long last the streamlining of the company taxation system. Disappointed were the insurance industry which were taken aback by the recommendation that no tax exemption or government subsidy be applied to any mandatory contributions that would have carved out from the present social security benefits.
So what happens now that the electorate has been enticed by glittering tidings post membership – do we enter a phase of belt loosening for the remainder of this legislative term? Certainly we cannot afford to return to the balmy days when the problem was not lack of money and profligacy was king.
Perhaps not every thing is doom and gloom, more so when one contemplates that with the election round the corner and with the EUR822 million on tap next year should be a thanksgiving year. It goes without saying if the patient needs to take the prescribed medicine then citizens are fed up downing the surly cod liver oil. It is surreal to question why since the mid eighties we have not succeeded in winning the battle of the bulging deficits yet now that the euro convergence criteria is on the horizon we seem to have woken up wiser.
On a more practical level economists are raucous about the need for more productivity to redeem the burgeoning national debt, now exceeding 68% of GDP. Naturally Dr Gonzi is honest when he exhorts us to tighten our belts and improve productivity levels. In the past his ministers hit out at some civil servants who unmistakably put spokes in the wheels of reform programmes and imposed bureaucratic practices which stifled growth. For example, one hopes that the measures announced in the pre-budget document succeed in assisting SMEs.
One expects the next budget to take cognisance of the need to rally the economy and boost consumer confidence. It goes without saying that unless the economy expands at a faster rate than 2.5% tightening of public sector expenditure will have to be accelerated while more rationalisation on the revenue side becomes imperative.
While improving tax revenue is inevitable to plug the deficit one hears uproarious comments against further taxation from constituted bodies and unions. Although comparisons can be odious, in this case we cannot but help compare our tax code with that of others.
Two years ago a report compiled by The Business, a UK newspaper, compared and contrasted the combined tax effect on the economy of 50 countries. This included Malta as well and the implications of our rigid tax structure were quite evident. Naturally by way of comparing the tax intake of various countries the study included corporate, personal, wealth taxes together with employer/employee social security and VAT. Of the 10 accession countries Malta stands half way in the 31st position down the list of misery score and certainly we need to brighten up our tax code. Inevitably our pivotal challenge as clearly underlined by the pre-budget document would still remain that we must try to attract investment through better and more effective fiscal transparency.
Any ingenious and out of the box solution can further cement our advantages as an investment location. Unless we can streamline our heavy overload of fines and charges imposed by government agencies we cannot fully enjoy the fruits to join the Eurozone.
While a swallow does not make a summer it is interesting to see a 3.1% increase in GDP was registered in the first quarter. Let us hope that this momentum is maintained in the subsequent quarters.
One is justified to ask what can the 2007 budget do to help mitigate the growing pains and smoothen the stretch marks. There is no quick fix solution. The opposition say Dr Gonzi must do a number of tasks but mostly reshuffle the cabinet of ministers and possibly regroup the portfolios to ensure a smaller but more effective team. Political observers argue that unless the reshuffle is done this month when Parliament is adjourned then the once in a lifetime chance of making headway with a new stable of ministers will disappear.
The medicine is sour but a new broom sweeps clean and if successful Dr Gonzi can woo back the lost sheep that have yielded three successive losses at local council elections. It goes without saying that a refreshed cabinet will take unequivocal decisions on hot issues such as the deficit, environment, health reform, immigration, broken roads, pensions, competitiveness, the dearth of FDI and sustainable job creation.
In the coming months prior to announcing the 2007 budget we have no soft options but to bite the bullet. Otherwise there is ample optimism in the pre-budget document. It augurs that 2006 is our golden year when our fortunes have never been better to turn a new leaf. It sounds like Dr Gonzi has deciphered the code to the secret of unleashing the curative powers of an economic turnaround.


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