George Mangion | Wednesday, 13 January 2010

Bridging the gap

The impression one might get from hearing the New Year resolutions by the ruling party is that of a biblical allegory when a latter-day Moses alias the Prime Minister, has led the Maltese people to the promised lands and defied the raging waters by miraculously providing a means of access right through the turbulent valley of global recession. True, it is tempting to be optimistic when predicting a recovery but anybody who tries is more likely to get it wrong.
But seriously, one can call to mind that by reading through recent reports the economy has reported a minimal 0.4 per cent increase in GDP during the third quarter. This calls for positive news as it compares favourably with the increase registered in Eurozone countries. Eurostat said that during the third quarter of 2009, the average GDP of the 16-member eurozone registered a growth of 0.4 per cent. Almost all the eurozone members posted growth except for Spain, Greece and Cyprus, still considered to be in recession and registering negative growth.
All along we read that the EU ‘s biggest economies, Germany and France, posted 0.7 and 0.3 per cent respectively while the UK, registered a negative rate of -0.2 per cent. UK government debt is expected to nearly double by 2010 compared with its pre-crisis level of below 40 per cent. Sadly, it is expected to reach 100 per cent of GDP by 2014.
Back to Malta. it goes without saying that keeping public finances in check is a pivotal challenge for the government. Finance Minister Tonio Fenech has projected a deficit of 3.9 per cent of GDP for 2010 and a figure of 3.8 per cent for 2009. To make matters worse, the under-performance between recurrent revenue and expenditure in the nine months to November 2009 increased by €139.5 million to €410.5 million. Can one be complacent when such results hit you in the face? No wonder, SME’s are suffering from a general run by government agencies to press for payment of fines and sundry charges.
It is particularly painful for Tonio Fenech who has inherited a mountain of debt to abseil, while affording a mild stimulus to the ailing economy. Many ideas are floated on how he can possibly balance the books. It has been rumoured for some time that the privatisation unit might be tempted to sell remaining shares in Bank of Valletta now that it registered a bumper profit last year.
Keeping on the subject of restructuring the economic fabric one notices how successive budget speeches one can immediately notice a common theme running through them. Starting in the early 1990s, the motto for each legislation has been to modernising the economy and improving our chances to enter the EU club. This has been achieved and it was no mean feat.
As part of this process, heavy investment was made in modernising the infrastructure, including projecting to replace the obsolete Marsa power station, upgrading and privatisation of many assets including the Gudja airport terminal, installing a new digital telephone system and various strategic projects such as laying of fibre optic cable to the Italian mainland .
Since the drive to moderise the economy, the PN can be credited for liberalising internal market, removing most state subsidies and dismantling the archaic importation licences.
The outgoing social services minister John Dalli was the architect responsible for piloting the financial services industry practically from scratch. This now accounts for a sizeable share of GDP and is practically recession proof.
Public corporations too started a period of restructuring, the best known of which is Malta Shipyards which are now awaiting the adjudication of the privatisation process. As a general note (with some notable exceptions ) the sustained effort to privatise state corporations yielded good returns.
Massive investment was, and is still, being made in education, as witnessed by the steep increase in the University population, the building of San Benedetto institute and the opening of other institutions such as Mcast.
Both parties concur that education is properly sustained and no effort spared to invest in the latest technologies. The crucial dynamic that underpinned the government’s policy was that it is the educational sector on which this country’s future wealth depends. What we need now is to ensure that such a gargantuan allocation on education, some 256 million euro next year alone, is spent wisely to continue meeting the specific needs of the economy particularly ICT and biotechnology.
Over the past years, generous salary increases were awarded to civil servants as part of a reform process there. A lot has been written that we need to reach higher productivity within the civil service, given the hefty investment in training and computerisation.
Quite rightly the opposition laments that projects went over board and there was no adequate monitoring of expenses. Hard pressed taxpayers are licking their wounds and pray for a tighter control over such capital projects. In spite of some shortfalls credit has to be given where it is due and with all this massive transformation there is no prize for guessing why each year the budget run up a higher deficit .Others are more critical saying that we have been living beyond our means for the past two decades. Guess who is right?
It is pertinent to point out that the national debt, very small in 1987, now exceeds 70 per cent of our GDP.
The underlying theme justifying successive budget deficits was that so long as the government succeeded in collecting extra tax revenue, especially as a result of economic growth, there could be justified borrowing from local sources to bridge the deficit. But the last year has seen an explosion in the deficit with a reduced investment in profit generating capital projects. Something has to give in the coming years.
Over the years, new indirect taxes, as well as better tax collection, has yielded a steep increase in tax revenue but there have been complaints, notably from the GRTU that there is less money in circulation and consequently there has been a drop in consumption. Many agree that retail industry is in dire straits and the last Christmas shopping season was nothing to write home about.
Thus it is not easy to comment on the expected recovery. One can easily lose the wood from the trees amidst the cross-fire of criticism from opposing sources. In my opinion, the recovery this year will be a weak one underpinned by problems in the tourism and the luxury real estate market (given in glut in Tigne point). Debt servicing costs are still higher than what we spend on education.
This year is a tough one for Lawrence Gonzi who has to decide on how to reign in the burgeoning cost of living increase. It is also about time to take a courageous step to liberalise the importation and distribution of energy products, including petrol, diesel and gas. Such services are jealously guarded by Enemalta the state energy monopoly.
Can we agree with the motto that the 2010 is a rainbow year where our hopes for a recovery are better perched thus enabling everyone to enjoin the fruits of green shots in the economy. Surely the consumer has shown that prudence and thrift has suddenly taken over and every effort is being made to count the pennies and trim any luxuries. The journey may be arduous and tough but the virtue of trimming off our excess fat in 2010 will lead us to live better lives.


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13 January 2010


Malta Today


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