News | Wednesday, 11 March 2009

One Year Later

By a Special Correspondent

PM Gonzi’s evaluation of the first twelve months of this administration has drawn the expected comments. From the perspective of partisan politics – an important driving force giving the dissent PM Gonzi has had to navigate through and also because of the imminent MEP elections – it is to be expected that government paints a rosy picture. From the national management perspective, particularly during the current global recession, government is probably right in trying hard to avoid panic. Yet, as some commentators have stated, a lack of realism could mean that government fails to be proactive and, at best, will only react after adverse effects manifest themselves.
This criticism may not be totally misplaced. Those of us who are old enough can see parallels between this administration and the 67-71 Borg Olivier Government when the policy seemed to be to do as little as possible and allow problems to hopefully resolve themselves. In fact, PN elves cite the current illegal immigration policy as one of Government’s biggest merits. Critics, including some from the PN fold, maintain that the current policy should be changed as the situation is deteriorating. Government however seems intent on not doing anything, at least for the moment.
When it comes to managing the country during the current global situation, government does have the problem that it is navigating in totally unchartered territory. Much bigger and richer countries have been throwing money at the problem and their critics say that this is either insufficient or useless. Gonzi cannot throw money at the recession - government does not have the resources to do so. Government indebtedness is massive and is getting unsustainably worse. Apart from the unpopular speed cameras, government does not have many cash cows left to generate revenue or to sell off. Government depends on tax and quasi-tax revenue at a time when most economists seem to feel that taxation should be minimised to stimulate the economy. With many people earning less, the state makes less income tax. Another consequence is that people spend less and therefore VAT revenue also decreases. If more people hit the dole queue, social service expenditure will increase. Governmental institutions, such as Mater Dei, are perceived as not delivering the quality service that is expected and rectification implies more expense. But the money is not there. John Dalli blames Tonio Fenech for being unable to pay suppliers and the stark reality is that government has become a bad payer, thus applying further brakes to the internal economy. Perhaps the current issue of € 70 – 95 million new government bonds will add some much needed liquidity, although it ultimately adds to the problem of the sustainability of government’s debts. Still, long term aims require survival in the short term. One aspect is that current overprinting of so many major currencies implies that the global recession will probably be followed by a period of global inflation, making it easier to repay accumulated debts. Still, one of the major sources of our current problems remains the extravagant over-expenditure of yesterday and today it becomes more difficult to make justifiable and necessary expenditure. It is very easy to state that the PN government in power for so long has created the problems it faces and must now solve. The only evident solution is at an eventual cost to the tax payer, that is: you and me.
To give government its due, it has reacted well in the case of Trelleborg, Methode and presumably ST. It is not very clear what government has done but it appears that the deal involved tax credits. This is justifiable. Government has waived future tax it would not have collected anyway if the entities involved closed down and would have incurred the massive costs involved if more workers lose their jobs, generate less income tax and VAT, consume unemployment benefits and put more shackles on Malta’s economic flywheel. The deals involved remain secret. Now, under this scenario, Company A, that through good management or good luck has not faced the problems of Company B, does not get the government support Company B gets. If government were to publicise the details of the support it gives, it would be practically certain that all and sundry would apply for a slice of the cake that is not there. Another problem is whether such action contravenes EU competition norms. Perhaps with the bail-outs prevalent all over Europe, there is enough precedent for Malta to be able to get away with norm infringements. However, will such assistance be available for small businesses? For a government which states that job creation is a primary target, should there be tax credits available to anybody who creates new jobs?
Is it possible for government to maintain this support? In particular, what will happen in the tourism sector if the present reductions in occupancy continue to manifest themselves? Recently letters in the media concerned the tapping of new markets that are available to Malta. Are we going to wait for the peak season downturn before we act? Government is applying the €0.50 per head per night charge in 2010. Elsewhere in Europe the idea is to reduce VAT in the hospitality and catering sectors. In fairness, Government is already helping this sector through the payment given to low cost airlines and through supporting Air Malta’s losses. However, this sector has also been seriously hit by the new power rates and by an unexpected market decline. This sector not only creates jobs but is a strong contributor to our balance of payments. If we have a couple of lean years, should the industry be sacrificed?
In normal circumstances, the banks would support a healthy business with a good track record by helping to ensure that temporary cash flow deficiencies are surmounted. But these are not normal circumstances and nobody really knows how long these problems are going to last and what the future global economy is going to be like. The banks in Malta were not strongly affected by the woes that have wrecked much bigger and more illustrious counterparts because of the Banking Act and because they wisely put the principle of prudence ahead of profit. We should not expect that our banks will take risks in a period of major uncertainty. It therefore appears likely that many of our SMEs will not survive the current problems. Cash flow is going to be a bigger problem than profitability and the majority may not be able to hold out in an economy where sales credit abuse was rampant even when times were much better. The banks are facing another problem. Much of the collateral they hold is in the shape of property that is declining in value. Should there be several foreclosures, then the banks will be putting more property on the market forcing further realisable value decline. This scenario has happened and is happening elsewhere and could happen here.
The problem with the Gonzi government is that it is giving the impression of indecisiveness. The situation is difficult and government has to be careful of how easily it makes support available or else it will invite abuse. However government’s own actions and a bellicose opposition have amply shown that government is not averse to fleecing the public and then resorting to questionable expenditure. The problem is not merely the global recession but public confidence in the Gonzi government – confidence that has declined rapidly since the elections a year ago. PM Gonzi needs to pull a rabbit or two out of the hat. But does he have the hat in the first place?



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11 March 2009

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