26 October 2005

The Web
Business Today


A bleak outlook

The Prime Minister has five days to go before producing the final recipe for next year’s budget.
It will be a recipe that seeks to continue driving the country along the road to Maastricht, which means the finance minister will have to redraw the boundaries for public expenditure and seek to maximise every avenue that will yield him more cash.
Lawrence Gonzi will seek to reduce the deficit by more than Lm25 million to live up to the commitment he gave the EU. According to government projections the deficit for next year is supposed to go down to 2.3 per cent, below the three per cent threshold demanded by Maastricht.
It will not be easy. Despite the Prime Minister’s high flying discourse over the weekend on how well the economy is performing there are still some serious problems that need to be addressed.
Statistics have shown that the economy grew by 2.4 per cent in the second quarter and Gonzi has been quoting unofficial statistics which point towards more economic growth in the third quarter.
These are positive signs but the Prime Minister had better not rest on his laurels. A deeper analysis of Q2 statistics shows an increase in inventories, which although directly translates into economic growth, could be a sign of the country’s inability to sell its produce abroad.
This thesis is further confirmed by figures that show a constant decline in exports and Eurostat statistics which show a massive decline in industrial new orders over a one year period in August.
Boasting about bank profits and higher intakes from VAT will not hide economic realities, which would have any policy maker worried.
Malta has become an expensive base for industrial production and it is this reality that needs to be addressed in a concrete manner.
Any idea to raise new taxes or increase existing ones has to be discarded if government does not want its deficit-reduction drive to deliver a serious blow to the economy at large.
A concerted effort has to be made to tackle the expenditure side and in the forthcoming budget, industry leaders and tax payers will be waiting for a set of concrete measures aimed at making government leaner and more focussed.
With households and businesses being burdened with a hefty 55 per cent surcharge and further increases in petrol prices government has to seriously back up these measures with efforts to reduce public inefficiencies, wastage and ancient work practices. Government also has to be more transparent in the way Enemalta is purchasing its oil requirements.
But it is unrealistic to talk of the fuel crisis as a distinct issue from the budget. The surcharge will cast a long shadow on Gonzi’s delivery next Monday.
Every budget measure taken will be evaluated by businesses and households in terms of the additional costs they will have to carry because of the surcharge and petrol increases. Costs that for business will also include pressures for wage increases throughout 2006 to make up for the erosion of disposable income.
Government’s mistaken road to consider the fuel problem as a distinct issue from the budget means Gonzi has no intention of relaxing on its deficit targets for the next two years, something which could have cushioned the massive impact of the oil crisis until the economy picks up and delivers the goods.
With government’s own projections it would have been possible to still remain on track to reach the Maastricht deficit criteria without stretching the economy beyond its elastic limit.
It would be a mistake if the budget turns out to be solely an exercise in deficit-reduction. While focussing on public finances is commendable and should remain a priority it need not become an obsession that kills the proverbial goose that lays the golden egg.
The surcharge announced yesterday is a hefty burden indeed.
Industry expects the budget to have a comprehensive package of incentives to stimulate economic growth. It is through growth rather than tax increases and surcharges that the country can hope to prosper.

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