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George M. Mangion | Tuesday, 12 November 2008

Saving jobs or the planet

President elect Obama has something in common with our elected finance minister. Both are young on the job and inherited a substantial deficit coupled with a looming recession (this one may be getting worse before it turns positive).
Both promised change in their pre-election talk and both face calls from electorate to walk the talk.
President elect Obama faces uncertainty in an economy which just suffered a 46 per cent drop in Standard and Poor 500 index since last year.
American firms are soon to report on their Q3 results and disclose a drop in earnings. This will spread across developed and emerging economies such as ours.
Our finance minister faces four major factories going on reduced hours and will collect less taxes from slashed bank profits and dwindling exports. This not to mention the redundancies at the shipyards topping €55m.
So poor Tonio Fenech as finance minister is seen as the father figure in the textbook style of ‘great expectations’.
Instead, he just experienced his baptism of fire and the state of affairs of the country’s finances could not match his altruistic endeavour to uphold a more voter-friendly profile.
He frankly admitted that with a €200m deficit this year (three times the pre-election guess) he could not lighten the load of taxes and shower the goodies for Christmas.
Not with the maelstrom that is approaching our shores this winter.
Proof that cash is tight is the projection next year to borrow a cool €500m. The Nationalists also blew the trumpets of a lower 25 per cent top rate on managers and middle-income groups, but this is not affordable just yet.
So is there a silver lining?
Yes. Thank God Malta’s banking fraternity was not mired with sophisticated finance products such as sub-prime mortgages, collaterised debt obligations or asset backed securities that sent Lehman Brothers to bankruptcy. Yet, not surprisingly local banks have reported record low profits on account of impaired financial assets. Still so far we have been spared the queues of depositors lining the retail branches of Northern Rock claiming their savings. It goes without saying that being spared the cost of bailing out banks has helped in no small way to introduce initiatives to encourage investment in alternative energy sources.
According to a report penned by UK experts at Mott MacDonald, large onshore wind-farms are the most economically viable for us. This report (commissioned by MRA) was concluded in 2005 but was tabled in Parliament 3 years late in March 2007.
It aimed at identifying how best to reach a five per cent target in alternative energy.
In 2005, the report concluded that wind-farms were viable on onshore and shallow water locations even though crude prices were lower than today.
Procrastination and excuses by the government has cost us three years of a head start in mitigating our dependency on fossil fuel.
Now we face higher electricity tariffs as a result of delayed investment in the distribution network and the resulting inefficiencies of the Marsa power plant.
Consequently Malta has made no noticeable progress in tapping alternative energy sources even though the regulator had access to expert reports. Sadly inaction has exacerbated our environmental deficit.
Again since 2005 no data on wind conditions has been collected in an empirical manner.
Regrettably, there was no emphasis during the agitated budget debates to trim direct taxes and replace them with a new code based on their environmental impact. Yet the message by the electorate to the re-elected party was unequivocal - let us quickly reform our ways, MEPA included.
Such a reform will embrace the urgent re-designing of ecological taxes.... the polluter pays principle.
The Commission has introduced an ambitious plan to cut overall carbon emissions by at least 20 per cent from their 1990 levels by 2012.
Secondly, members are targeting to derive 20 per cent of their energy needs from renewable sources. This may not be achievable due to recession. Back to our theme of green taxes.
This has been long promised such that many refrained from buying new cars on expectation of a VAT-free and lower registration charges across the board. True, charges went down on smaller engines but heavily increased on diesels.
Many criticised the lack of provision in budget for cash rebates to owners of old bangers waiting to scrap them.
By just heaping more circulation tax on private vehicles as they get older will not help low-income drivers to buy new cars.
Could a more pragmatic approach to reward owners wishing to scrap cars help induce them to invest in a younger, less polluting hybrid engines?
According to a Xarabank survey many expected such a fund to be set up and all agree this it is a legitimate claim on the millions levied by ADT.
In truth, the government as custodian of our taxes is faced with many honourable petitions on how to utilise its revenue.
So who decides where to tax and where to subsiidise? Is the taxpayer sovereign in his or her wishes? Why is genuine consultation at MCESD level on priorities so difficult?
In theory, when a fiscal policy is approved by a majority in an electoral manifesto then funds must be allocated for the purpose originally pledged.
That is the hallmark of true accountability.
This means that those responsible for budget overruns must consult the people once again before sanctioning new burdens or try to borrow more to balance their miscalculations.
Naturally, such infringement can only occur in democracies where the party in power is not adequately checked by a vigilant opposition.
Back to the pressing need of an environmental reform.
Why do we still sport heavy trucks and buses belching obnoxious fumes burning a dubious fuel mix?
Will the proposed new circulation taxes gradually remove these offenders?
Surely, based on the millions of euro in taxes collected from car registration and licenses, a tidy sum can be spared to reduce health hazards on our (some claim third world) roads. May I suggest mandatory use of catalytic converters instead of higher circulation taxes?
Typically one questions why the commissioning of an independent agency trading in carbon footprints or exchange of carbon credits was not proposed.
Can we afford to maintain the omnipresent rate of poisoning the environment? The millions borrowed in the past decades now exceed €3500m and guess what - these were not enough to fund a replacement machinery for inefficient and polluting power generation at Marsa, with only 30 per cent throughput.
Now, a bold decision was taken by minister of finance to levy a 2c per litre fuel tax to fund much delayed improvements.
Realistically, urgently needed capital expenditure on new turbines and a submarine cable to the European electricity grid do not come cheap.
Again, another courageous move was the €130m investment in Tas-Sikka windfarm which will be phased over five years. But then you cannot please all and sundry.
GRTU complained that small transport operators were badly effected by higher diesel at a time when European counterparts are lobbying for a reduction.
In Britain, prime minister Gordon Brown is pleading with fuel importers to cut prices. These recently went down from over £1.08 to 93p per litre. More reductions are expected as crude prices approach the $50 mark.
In Malta, one notices how due to successive hikes, total tax revenue has reached 34.5 per cent of GDP. This was the price to pay for past profligacy, the pound of flesh to subsidise certain inefficient State enterprises and the burgeoning cost of running the civil service. The electorate has spoken explicitly with its vote and warned the winning incumbent not to feign change when it comes to issues like green taxation.
On a positive note, Dr Gonzi proposed inter alia turning our taxes green. Perhaps now is the time to act boldly when the political will is conducive to administer the deepest cut. Our green fairy Godfather may work wonders though he failed when he wrestled Medusa - the hated deficit monster. His dilemma is whether to save jobs in a slowdown or save the planet.

George Mangion
Partner at PKF – an audit and business advisory firm
[email protected]

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12 November 2008
ISSUE NO. 558

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