News | Wednesday, 11 November 2009

Budget 2010: The economists’ verdict

Charlot Zahra spoke to four economic analysts and economists – John Cassar White, Edward Scicluna, Karm Farrugia and John A Conslglio for their verdict on the 2010 Budget presented by Finance Minister Tonio Fenech in Parliament last Monday

John Cassar White, economic analyst: “I believe that the projections for 2010 are ambitious and perhaps even a little unrealistic”

Which is the measure you like most in Budget 2010?
No doubt, the fact that the COLA increase was given in full despite opposition to it form some quarters is a positive thing. Workers’ quality of life would have been badly eroded had this not been done.

What is it that you would have liked to have seen in the Budget and has not been introduced and why?
The ceiling on the aid to small businesses is too low. A ceiling of €25,000 is hardly enough to buy a commercial vehicle. I think this measure could have been much better calibrated to really help small businesses.

Has the Government managed to keep with its fiscal deficit targets for 2009 or not, that is, 1.7 per cent deficit of GDP for this year or not? Why?
The economic developments during 2009 meant that the Government could not keep to its fiscal deficit targets. The situation can still be managed successfully in the coming years, but great vigilance is needed to ensure that the deficit does not run out of control.

This time around, is the Government being realistic in his budgetary and fiscal forecasts for 2010 and 2011?
I believe that the projections for 2010 are ambitious and perhaps even a little unrealistic.
We still need to know what sectors will be growing most to give us an overall growth of 1.1 per cent.
I hope that the significant increase in revenue being projected will in fact materialise.

If the Government is being too optimistic in budgetary forecasts for GDP and budget deficit what in your view would be a more feasible forecast?
It is difficult to come up with a precise figure. I think that eurozone economies will take some time to recover from the present slump and the effect on us, especially in tourism, may lag behind by perhaps a full year.
I hope that at least Eurostat with a projection of 0.9 per cent growth for Malta is right.

With the figures presented, is a balanced budget still possible in 2011 or not? If not, when do you think that it would be a possibility ?
More than focusing on a balanced budget in 2011, I believe we should be focusing more on measuring our success in education by the quality of our educational system rather than by the money we spend on education, by the quality of medical services we are offering to our citizens, and by the continued reforms in social services to make them sustainable.
If we do not do this, we will still have structural problems in our public finances.
More could have been done in this budget to address these issues, even if the budget as such is a short term planning tool while these issues are more long term.
In tourism I still think that we are not doing enough to revamp our product and more marketing on its own will not be enough to make us competitive again in this sector.

How will this budget be viewed by the European Commission and the IMF?
As far as fiscal rectitude is concerned, I think this budget meets the EU criteria at least in the short-term. The reform of our social services and the way we manage our public service and what it costs us to do so will still need to be addressed more vigorously.

What impact on the economy will be the proposed utility tariffs increase’ of €68 million have on the budget measures if they are indeed introduced from 1 January 2010?
This is the most critical factor that was not addressed in the budget. These increases in tariffs will no doubt have a great effect on inflation and our competitiveness. One hopes that businesses will continue to undertake restructuring reforms to compensate for this added cost with greater efficiency.

By how much will the COLA increase of €5.82 be wiped out if the full increase of €68 million in the utility tariffs is introduced? Why?
Difficult to say because the increases in tariffs have still not been announced.

Edward Scicluna, economist and Labour MEP: “With respect to the GDP and deficit/debt balance I have a feeling that a lot of cosmetic accounting has been used”

As an economist, what is your first reaction to the Budget?
Better feeling than after past budgets which suffered from a total lack of imagination and economic rigour.
This time either the Minister had better assistance or because the government is pushed to the edge of a precipice, he seemed to have put a thinking cap on.
He was also humble enough to take on several ideas suggested by the Opposition.

Which are the measures you agree with?
The schemes affecting industry, the small enterprises and those relating to education.

Which are those measures you do not agree with?
The flimsy and unprofessional way they are suggested. Many of them are all half-baked ideas. They sound good but not supported and convincing enough to show that there is a serious plan behind them.
The National Investment Fund does not sound convincing either. In fact I am quite suspicious in its regard.

Which measure have you liked most?
The income compensated energy price change. I have been suggesting this all along that a price change should try to compensate the negative tax element within it.
It should have been in force with respect to the recent gas price hikes as well. Whether it is adequate one has to find out.

Which measure would you have liked to have seen introduced?
The VAT reduction on tourism services and local services including maintenance and repairs.
If the take is large enough that the Government cannot afford, suggests the more how heavily burdened are these local services. They should not.
I suspect that the mentioned economic study has not gone into all the economic linkages with the other sectors.
A small price change in the tourism sector has enormous elasticity effect on revenue from that sector. We have the figures to back this up. The government is very timid when it comes to bold measures.
Has the Government managed to keep with its fiscal deficit targets?
With respect to the GDP and deficit/debt balance I have a feeling that a lot of cosmetic accounting has been used. This is the very heart of the budget, how to balance one and achieve the other.
The government has failed to explain how he expects to square the circle he has driven the government into.
The economic growth projected by the Minister is as usual overly optimistic with no convincing arguments as to how this figure can be reached at a time when competitive-wise we are the laggards in Europe. Our EU share of exports is falling. What are we doing about it? The same for the deficit. Where is the exit strategy plan suggested by Almunia? Nowhere to be seen.
As usual we have to await another year to find out the targets are once again not reached because they were not seriously set up in the first place. The surplus budget is now thrown out into the never-ever abyss of history.

How will this budget be viewed by the European Commission and the IMF?
Like everybody else the EU and the IMF are no longer impressed with our Government’s budget wish-list. They have to see results. Like us they await with patience as to whether this Government ever will deliver on its impressive and ambitious promises.

What impact on the economy will the proposed utility tariffs have on the budget measures if indeed introduced from 1 January 2010?
In the short to medium term the utility tariffs will swamp all the positive things the budget could have introduced.

Gordon Cordina, senior economist: “In the current recessionary environment, a relatively large fiscal deficit is a must in order to keep activity going and avert massive job losses”

The resolution of such heightened conflicts was surely a main issue in the formulation of the Budget for 2010. For example, the Maltese economy is very much going at two different speeds.
There are sectors which have long been ailing and are being especially negatively affected by the ongoing recession. These include manufacturing, tourism and the wholesale and retail trade.
Although activity in these sectors is dwindling, they are large employers, accounting for tens of thousands of jobs. It is thus important for these sectors to be sustained in order to support a gradual and smooth restructuring in the Maltese economy.
There are of course other sectors which, in spite of the recession, are faring very well. Among these, there are activities related to IT, as well as personal and financial services.
It is equally important for economic policy to sustain these and similar activities because they will be the genuine source of long run growth of our economy.
However, the resources available to fiscal authorities are by no means unlimited. Priorities and key actions must be established to derive the maximum results in this regard.
Which leads us directly to the issue of the size of the fiscal deficit, and the extent to which this can be used to finance the economy’s current expenditure needs.
In the current recessionary environment, a relatively large fiscal deficit is a must in order to keep activity going and avert massive job losses.
On the other hand, there exist significant dangers in running an excessive deficit, as this would constitute an increase in public debt which must be later repaid, and it could also lead to an economic setup which would be increasingly dependent on fiscal expenditure rather than being self-sufficient.
There are then the social concerns to be addressed by the Budget. In these times, unemployment in Malta is on a moderate increase, while the growth in household disposable income is slowing down.
At the same time, our country is facing a renewed challenge in the form of higher oil prices. In this regard, it is important to continue seeking efficiency in the production of energy.
Do what we may, however, an increase in energy costs in the coming years is probably unavoidable. The only way out for our country is to create more and better jobs so as to enable everybody to afford the higher costs of energy.
In my opinion, the Budget has provided a balanced response to these difficult issues, through a number of measures which, properly implemented, have a significant potential towards engendering the economic success of our country.
It is however also important to appreciate that these challenges are not faced by Government alone, but are very much on the agenda of all social partners.
It appears that a number of measures proposed in the Budget have been in good part inspired by the work undertaken in this context at the MCESD during this year.

John A Consiglio, veteran banker and economist: “We seem to be playing an eternal game of Timing Catch-22 where the victims are constantly appearing to be the citizens”

As an economist, what is your first reaction to the Budget 2010?
A down-to-earth Budget, completely in tune with the current economic scenario. More than usual emphasis on investment especially on infrastructure and education.

Which are those measures which you agree with?
I am slowly, but surely, earning ever more disciples to my theory that our main economic sectors need ever more to be allowed to sink or float on their own.
So I favour ever less Government help or subsidisation to the building and construction industry, to tourism and to retailing – in fact to the stronger and more loud-voiced of our organised-lobbying bodies.
So, yes, MEPA, for instance, like the MFSA, must become self-financing. I also fully agree with those measures which seem to be aimed at hopefully eventually sorting out the big issue of amounts owed to, or owed by, Government.
I mean it is ridiculous hearing that the National Debt has grown by so much, and then nobody ever stops to see what government is really owed.

Which are those measures you do not agree with?
Obviously the expected hike in fuel costs. I remain to be convinced that at times when the international price of oil really goes down it is not – it never ever seems to be – possible for the country to – immediately or with even a short lag – get itself cheap substantial stocks of the stuff.
We seem to be playing an eternal game of Timing Catch-22 where the victims are constantly appearing to be the citizens.
In simple terms, Enemalta’s fuel purchasing skills still come over as being well below par.
Has anyone taken an oath that, before he ends his political life, he would have brought Enemalta back to a surplus, profit-making, situation?

Which measure have you liked most?
I too am a strong believer in ever more spending on education. So if this budget means more spending on education all through the system – primary, secondary, tertiary, then well done for it.
I also look forward with great interest towards really seeing the hospital waiting lists go down, and I’m sure that Minister Dalli will be doing his utmost to sort the matter out.
So that intention – we still have to see the “flesh” of the intention – is indeed something which I’m sure every citizen should be happy about.
I am also all expectant to see how high medicine prices “will be forced down”.
Why cannot Malta ensure that, for instance, its overseas diplomatic and consular sources, and possibly others – regular data comes into the government’s database of how much such and such and such a medicine is selling elsewhere?
Thereafter allow the importers a set percentage for transport and handling costs, plus say a 20 per cent profit margin, and announce to all the four winds in Malta that, according to government’s calculations that is what a medicine should be selling for.

Which measure would you have liked to have seen introduced?
Firstly, Government becoming much more proactive on ensuring that the figure of some 55,000 empty dwellings is brought down to, say, 40,000 after one year, 30,000 the next, and so on.If necessary, even by Government itself becoming a much better-equipped social property owner and dispenser.
Secondly, I would have really loved it to hear the Prime Minister say: “I am humbly accepting the people’s verdict that Malta is to have a new opera house with a roof on it.
“I also announce that the new Parliament House will not be one on stilts and will be located in lieu of the present long hall in the Mediterranean Conference Centre.”





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11 November 2009


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