George M. Mangion | Wednesday, 16 September 2009

A bumpy road ahead

A well attended business debate at the Intercontinental hotel yesterday saw the finance minister confronted by tough questions about the current state of the economy and the implications for next year’s budget .
“Do you sleep at night?” was the brusque question put to Tonio Fenech by host Vanessa McDonald. “Sure,” was his prompt reply with a smile, adding that “if otherwise I would not have enough strength to face the day.”
The young minister kept the audience attentive. There is no money for a €12 million bailout to employers who argue they need to be partially relieved of the cost of living increase for 2010.
His short answer came out quite tetchy when he compared the economy to a shop keeper who worries about his costs when he or she should better be advised to invest more to upgrade, improve competitiveness and attract better custom.
The minister’s pragmatism insisted that subsidizing the private sector, will not necessarily create new jobs to make up for the ones lost.
There was no mention of spending cuts in the answers given by the minister as to where will the extra cash will be garnered given that no new taxes are levied.
A thorny question referred to the implications of a lax fiscal morality, associated with the timing of the latest tax amnesty.
With a drop of €80 million from what was projected for this year in revenue, together with a continuation of a sluggish performance of the economy next year, it comes as no surprise that remedial action needs to be taken to make up for the shortfall, hence the amnesty waiving off interest and penalties on capricious taxpayers.
But can anybody blame a finance minister with so many demands from various sectors when the economy is in recession? (although the “r” word was never mentioned in the debate).
Can he turn the tide and guide the Maltese out of the storm? Most of the press attending the event yesterday were expecting the minister to announce a cure, but instead were sprinkled with a few palliatives on the state of the economy.
The minister seems to think that the patient does’nt need any surgery or ant massive interventions – The country just need to wait until the recovery comes and green shoots appear.
By definition, “green shoots” represent the beginnings of economic growth after a recession. Observers say that in Germany and France, Europe’s foremost economic and our two main export markets, are showing a perceived revival this year.
“Green shoots”, as it applies to these two economies, may be a reduction in unemployment, an upshot in sales, coupled with a revival in consumer confidence. This augurs well.
Regrettably, the feeling of doom and gloom cannot evaporate unless we can see some tangible signs that exports are picking up and tourists return to their numbers and make good for a bleak winter outlook.
Tonio Fenech is resolute not to bail out industry in distress by subsidizing COLA. He insists to only bail out companies who promise to invest and find a long term solution for their perceptible lack of orders.
As for STMicroelectronics he does not want to rush into any deal, given that the multinational can potentially turn into another “drydocks“.
STMicroelectronics operates tax free in Malta, and its contribution to the economy is acknowledged, talks about “assistance” will have to be balanced.
So where do we stand in our assessment of the economic status when compared to others particularly in view of the competitiveness report just issued by the World Economic Forum?
Malta ranks 52nd in a survey among 133 countries, which is roughly half way through the list.
We need to roll up our sleeves and address our lack of competitiveness seriously.
However, Malta’s overall competitiveness continues to be held back by some critical structural weaknesses in the economy.
A recent report revealed how non-performing loans both in the corporate and household sectors are featuring on banks balance sheets.
At the business breakfast somebody asked whether we could have an emergency plan to sort our day to day cash shortages and lack of orders. Others lamented that the cost of the public sector will shoot up by another €23 million following the granting of increments and that this may be the straw that breaks the camel ’s back in a recession.
The employers union was asking why a bailout of €12 million for COLA looks so unaffordable when the unproductive sector is merrily been blessed with a generous increase. Surely if the public sector is not collecting enough revenue there must be some idle workers somewhere.
A similar situation in the private sector will result in a four day week and not a three month summer half-day routine.
One asked why the “recession-proof“ public sector is not being asked to carry some of the weight on account of their reduced workload. This becomes more relevant when one reads of massive arrears in income tax, a €10 million vat scam, not to mention over 31,000 unpaid road licences and many others. It begs the question of how the cost of governing the island is ridiculously high.
In recession deep Britain, the labour government looks set to balance its books. Unemployment may soon reach the three million mark so tax revenue is markedly lower. Spending cuts will be ‘de rigueur’ and more than 700,000 public sector workers could find themselves out of work due to public spending cuts.
Failing any cuts in the public sector in Malta, this country definitely needs to implement many tough reforms that are well overdue and serious decisions made to curb unjustified expenditures.
The whole administration must be audited, and services that could be better handled by the private sector must be privatised.
Administrative and bureaucratic barriers that hinder start-ups must be immediately removed awhile overlapping authorities re-grouped and made to deliver.
A positive result has been registered by Malta Enterprise which three years ago took over the disparate operations of three different agencies.
Malta Enterprises is now busy organising trade missions to various countries and partly subsidizing the cost to ‘bona fide’ participants.
Company directors and executives are offered the opportunity to meet their potential market counterparts in an effort to generate more orders.
In my opinion this agency is performing well and within its limitations, is creating favourable conditions for foreign direct investments.
It is a pity that Finance Malta who is also trying to promote financial services, was granted a mere €100,000 per annum to operate.
Just compare promoting Isle of MTV festival on its own cost almost three times this amount and generated no business.
Again the Tourism Authority has a €23 million budget but financial services which account for a larger contribution to GDP only merits €100,000.
The minister has remarked that income tax will not be touched this year, forgetting a much hyped pre-electoral promise to introduce a 25 % rate for managers and business owners.
In general, there is a consensus that lowering income tax for the workers will not necessarily revive the economy since a larger proportion pay little or no tax.
On the other hand, as can be expected, larger enterprises claim tax credits and thus reduce their taxes to nil via the judicious use of investment schemes.
To conclude on the business event, the President of the employers association reiterated that the cost of living adjustment is too onerous, commenting that this is a direct consequence of the government hiking energy prices to balance the books of its utility monopoly.
Industrialists have warned that if their proposals are not taken into consideration, lengthy and unpredictable deflation will follow, which will further dampen their export potential and open the door wide open for layoffs.

George Mangion
Partner at PKF – an audit and business advisory firm



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16 September 2009


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