10 August 2005

The Web

Tell-tale signs

Not all in the economy is gloom and doom but in his zeal to harness the deficit Lawrence Gonzi had better take note of the tell-tale warning signs that come in the form of monthly statistical indicators which show an economy that is not functioning well.
It is not the opinion makers, economists and journalists, who analyse the numbers, interpret them and comment on the results that are stoking the flames of gloom. The Prime Minister prefers quoting the positive indicators to show how the economy is turning around but his enthusiasm does not seem to be shared by outsiders, and that excludes the Opposition.
For all his good intentions the Prime Minister still has not grasped an important element; talking in flowery terms about the economy will not make it grow.
It is true that unemployment is contained and jobs have been created. It is also true that government’s drive to cut down on the deficit and reform parastatal entities is reaping dividends.
But it is also true that in the first quarter of this year the economy shrunk. In today’s interview the parliamentary secretary for finance attributes this to government’s own drive to contain its expenditure by limiting the engagement of public service employees. While controls on government’s wage bill do have an impact on growth, the Q1 reduction has to be viewed within a wider context of sluggish growth over the previous two years.
Economist Edward Scicluna had described this state of affairs as one of the longest recessions since World War II, even if not a very deep one.
Economic sluggishness is accompanied by a drop in the value of exports to the tune of around 15 per cent for the first six months of the year and a drop in industrial new orders in May.
These are warnings that had better be heeded. They will not go away by simply talking about them in poetic terms or dismissing critics as harbingers of gloom and doom.
The key to growth is foreign direct investment yet Malta has somewhat failed to harness the enthusiasm among investors for the 10 new EU member states. Foreign companies seeking to set up shop here still find a mountain of red tape that turns them away. There is no fast track approach within the limits of accountability and many employees in government departments have no sense of urgency, an important ingredient for enterprise to flourish.
The aims spelt out in the pre-budget document of gearing up the country and its educational system for particular niche areas in manufacturing and services is a laudable approach but this will only deliver results in the longer term. It takes time to train people and requires a holistic approach to the whole education system.
Within this context it is necessary to institute the educational reforms that have already been agreed upon in the national curriculum enacted years ago before embarking on yet another costly exercise of change within the primary and secondary schooling system.
But what is missing in the short term is a concerted effort to boost the waning tourism sector. This is the single most important economic area that can give the economy an immediate shot in the vein if handled efficiently and effectively.
Unfortunately, the restructuring at the Malta Tourism Authority is still ongoing. What should have been a swift, surgical exercise is slowly turning out to be a lengthy and cumbersome job. It is a very different style of restructuring than that adopted in State-owned entities where government has adopted a far more heavy-handed approach.
The MTA’s budget is predominantly spent on wages rather than marketing and instead of acting as a watchdog to ensure the delivery of high quality services by tourism operators, the authority indulges in managing beaches, which is not and should have never been part of its core functions.
Another area requiring immediate action is the retail sector. Shop owners are inundated with government-induced administrative work, constant inspections ordered by different authorities and charges imposed by the various entities.
The pre-budget document talks of a scenario where tariffs and charges are streamlined and if possible reduced for the business sector. The next budget has to include a thorough rethink of the various charges retailers and businesses have to pay on a regular basis and a system has to be put in place whereby inspections are carried out by a central co-ordinating unit.
Much has to be done to try and crank up the economy and it has little to do with collecting more taxes. Tonio Fenech’s commitment not to increase the overall tax burden in the next budget is welcome even if cynics point out that it would be suicidal if government raised taxes or introduced new ones at this stage.
The next step, however, has to be a pro-active effort to reduce government expenditure by identifying the extra personnel on its payroll and retrain them for eventual employment with the private sector.
Reducing expenditure could give government the required leeway to offer a targeted tax cut for the productive sectors in the very near future.

The Malta Financial & Business Times is published weekly on Wednesdays.
Website is updated weekly on Thursdays at 15.00CET
Copyright © Newsworks Ltd., Malta
Editor: Kurt Sansone
The Malta Financial & Business Times, Newsworks Ltd, Vjal ir-Rihan, San Gwann
Tel: (356) 2138 2741 | Fax: (356) 2138 5075 | E-mail