This week, we will know what is in store for us in the budget for 2010. Much of the same or are we to expect something new, perhaps some belt tightening which in the aftermath of the recent increases in gas, water and electricity prices do not trickle pleasing tunes to our ears? Certainly the trimming of the deficit to below 3 per cent for next year is on the agenda as mandated by the EU Commission. With no space for new taxes the axe has to fall on the government services which so far have not been trimmed since the recession took over in the first quarter of this year. Not surprisingly party apologists were nonchalant … they were not surprised but, in a condescending way, placated us by reminding us that we hit worse deficits in the past. This may be true but past profligacy is no consolation given our ever-increasing debt obligations. The government’s outstanding debt at the end of June amounted to €3,820.4 million, an increase of €351.6 million compared to June last year. Many consider pensions and their sustainability during the current meltdown of global economies as an important item to tackle in the forthcoming budget. True our pensions reforms which commenced a decade ago had generated a universal awareness that the sustainability of the pension fund is closely linked to the pay as you go system. Simply put, one knows that the fund does not exist and today’s workers contribute for today’s pensioners. In a recent report, it was revealed that if the government’s contribution remained unchanged, there would be no surplus of funds beyond 2011/2012 and by 2015 there would be a shortfall of €192 million. Another topic is jobs. Reading last week‘s “Economist“ one is reminded of the relentless job losses in the EU countries. Some economists believe the real jobless rate, including discouraged workers and those working part-time, in EU countries such as Spain is closer to 20 per cent. True, better performances are expected from Germany and to a lesser extent France in tackling manufacturing growth.
Yet not withstanding our resilience, Malta is not spared the agony of the slowdown as is indicated with the drop in tourist arrivals and a slump in exports. Our official unemployment rate of 7.4 per cent is lower than the EU average but this may creep up in the coming winter when the tourist season is over and some hotels and restaurants will close down. Tough times are ahead and not even banks have been spared. Yet it is no time to panic as we can act in a nimble way to attract more investment in those niches where we can show that we can compete. Last month the finance minister likened the economy to a car with two punctured tyres. Cheerfully he remarked that it was “still able to move forward” albeit at a very slow pace. The Times of Malta quoted him as saying that his forecast that 2009 could see the economy shrinking by 0.9 per cent, which was not good but much better than most EU countries. Thanking heavens for such mercies he remarked providence. The bitter pill is that in the first quarter, exports dropped by 26 per cent, imports of consumer goods were down by 12 per cent and tourism registered a drop of 41,000 visitors (13 per cent). The cost of living adjustment (COLA) this year needs to mirror the steep jump in the retail price index and is expected to be no less than €7 per week. This higher amount has created a stir among industrialists who are complaining that on top of higher energy costs and normal collective agreement wage increases, the blanket imposition of COLA is not sustainable. Joe Farrugia, director general of the Malta Employers’ Association, called for a reform of the COLA mechanism, insisting that, in such difficult times, labour costs could not increase in a blanket way with no regard to productivity. But unions are pitching their tents for a long battle to protect their members’ interests.
This time round, the political mood has changed. It is more downbeat. The Prime Minister Dr Gonzi has avoided the temptation to indulge in the political spinning and has preferred to trod the tough path in seemingly wanting to bite the bullet.
In practical terms, this implies the administration is prepared to take a pragmatic view about things. This volte face that it is not business as usual is a tangible evidence of a real effort to use whatever legitimate means we have at our disposal to control expenditure.
Departments are reminded to trim costs .They can start by systematically pooling idle staff and share strategic information about future programmes and current projects, with a view to better utilisation of the totality of the public sector’s demands on the public purse. Needless to say, the reduction of the deficit is tied with the abolition of hidden subsidies to debt-ridden state companies and reducing waste in capital projects that are deemed white elephants. The restructuring of the docks already cost us close to a billion euro and this excludes the cost of shifting hundreds of redundant workers from such entities back to the public sector. But then can we restructure without pain? Certainly not. With hindsight, critics lament that politicians delayed drinking the poisoned chalice and the fiscal scar has been left to fester .All this has exacerbated the pain of reforming the system.
Bad timing is costly. It goes without saying that effective reforms cost votes just recall the trussing the party suffered at the MEP elections. On a positive note, a new industrial policy is in the offing according to a dialogue meeting held by the Office of the Prime Minister to discuss use of EU structural funds. Naturally one expects that in 2010 such funds will percolate into areas such as education, job training and creation of sustainable employment. The matching of educational skills to the demands made by the jobs market has never been more acute. Further good news is that with the extra EU funds one can pave the way for more research and better development efforts. One hopes that such initiatives will be further strengthened in the pre-budget document. Certainly the buzz word on most lips is the craze for nurturing innovation and efficiency particularly the assistance by Malta Enterprise in various sectors but the cherry on the cake is in the ICT sector. Last year the Ministry for Investment, Industry and Information Technology concluded an agreement with Oracle to extend the e-Government framework to include the Oracle technology stack.
This is another encouraging move to expand the capabilities of the e-Government infrastructure. The writing is on the wall in the pre-budget mantra that we must roll up our sleeves to produce more while reducing our costs to buttress the mounting deficit. The main objective of government is to trim its human resources costs by sharing them with the private sector. This will not lower the deficit but will effectively act as a stimulus to industry.
The impression one might get from hearing political speeches is that of a biblical allegory when a latter–day Moses (alias the finance minister) has led the Maltese people to the promised lands and defied the ranging waters by miraculously providing a means of access right through the turbulent valley of deficits. Surreptitiously the puzzle remains unsolved of how we can reverse the structural deficit that has been a regular feature of the past decades. Certainly the IMF annual report suggested the imminent privatisation of Bank of Valletta but on its own this is only a partial remedy and one that is of a finite amount so what else can the finance minister conjure in the 2010 budget that can see us out of the woods? Certainly more will be revealed next week as we live through the experience of the 2010 budget pledges.
George Mangion
Partner at PKF – an audit and business advisory firm
