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Every government is burdened with the responsibility of the economic wellbeing of its country, taking the necessary measures to increase its economy and to achieve financial sustainability, and in Malta there seems to be consensus of both unions and employers that with Budget 2007 government is on the right track, having described as credible and realistic.
 In an interview with Business Today, Parliamentary Secretary for Finance Tonio Fenech says this is a balanced budget and expresses his belief that the euro will be of great benefit for the economy as it gives it more stability to Malta to be in the second largest currency in the world with less costs to industry and less risks. He also says it is the private sector that generates the economy and if people remain doing things they’ve always been used to doing, then this country will not have any innovation.
Budget 2007 appears squarely aimed at the Nationalist core-voter, the middle-income earner. It appears to be a budget to pacify disgruntlement…
It was a budget whose aim wasn’t to make everyone happy but to address fiscal measures to help economic growth. We strived to tackle those who can help economic growth, females who need encouragement to join the labour force, those already working but are feeling they pay so much tax they don’t want to work more. That’s why we broadened the 15% tax band to ensure that every pound earned by middle-income earners is only taxable at 15%. That’s why we have taken the measures regarding the self-employed and host families. There are many rumours going round; any comments should have been made before the budget since there was ample time to express one’s self. Everyone had agreed with government that any measures should be taken to increase economic growth. For those who argue that children should have been given more assistance, we have aided those who send their children to private schools. However children do not need children’s allowance but better investment in education. This is a crucial investment we cannot do without. The budget has to meet a number of objectives. Sustainability shouldn’t be made the one and only criterion by which you make a budget, and as long as we are under the 3% GDP in terms of expenditure, then we are sustainable.
The past two budgets were aimed at showing Brussels you were cutting down on the deficit – this year, you went astray of that target by giving money back to the people…
No, not at all. We have not done the previous two budgets to please the EU but we believe in the financial sustainability of the country. We started this process even before we decided to start going into the euro. Addressing the deficit issue is something that any sound government and sound economic theory will argue that you should do. Then we were criticised that we were putting the deficit before the growth of the economy. Now we have lowered the deficit and are putting more priority in economic growth. Some people haven’t agreed with us but results have proved us right. In the past we had large deficits but the economy did not grow by the same proportion. Now that we have addressed the deficit, the economy grew, last year by 2.2%; this year at a rate of 2.6%, and expected to be even slightly higher. So our economic theory has been proved in practice – now that we have the tools of fiscal policy back in our hands, we are using them.
With regards to the fuel surcharge, only 17,000 families benefited from vouchers. For the rest of the population the situation remained unchanged. Bearing in mind that oil prices have dropped, why hasn’t there been any mitigation in prices?
Now the mechanism works in the manner in which Enemalta manages to buy the fuel. If Enemalta didn’t do any measures like forward buying, people would have said ‘if we are facing the impact why didn’t Enemalta hedge?’. Now that Enemalta has bought in advance in established prices, people question why prices don’t drop immediately. We have to pay the surcharge in accordance with how Enemalta bought the oil. Our forecasts are that if the oil prices continue to lower, then also the surcharge will start going down because Enemalta will start purchasing at cheaper prices. With fuel we do not use forward buying, we just buy. So the impact is felt immediately. Secondly the move in the tax bands also compensate for energy consumption. It respects the people who conserve energy and not the people who waste energy. If I would have subsidised the surcharge as the Labour party is recommending all I would have done would have been for the people who waste energy. We have supported those in the lowest band.
You have once announced a venture capital fund. Can you guarantee it will be launched and implemented in 2007?
The problem was not that we have never launched it. The problem was take-up. Government provides venture funds but if you do not have projects which effectively come from the private sector, you cannot benefit from the funds. Normally venture projects are innovative projects involving risk. Although there were participators, they wouldn’t qualify for venture funds. We are now trying to change the mode of how it is going to operate. What we haven’t spent in the past we have saved but this budget is the first to have really invested in research and innovation – Lm3m. We have to do the same revolution we did in IT fifteen years ago when this government invested heavily in primary and secondary schools’ IT systems and computers. Today everyone is conversing with computers and that is thanks to the Nationalist government. We are going to do the same with research and innovation.
Recurrent expenditure is still increasing – isn’t this a message that government cannot still control its spending, and instead concentrates on cutting capital spending and increasing taxation?
Recurrent expenditure this year will only increase by 0.7%, Lm6.6m. Our capital expenditure increased at a higher rate than Lm6.6m so no, government is actually controlling its recurrent expenditure and basically in the past we have achieved financial sustainability through hard control on recurrent expenditure. We have maintained our salary levels, reduced our contribution to government entities. There are only three votes that kept seeing a recurrent expenditure increase, which was pensions which increased by Lm12m, health and education because these are the three pillars we have to keep supporting – but our recurrent expenditure only increased by Lm6.6m. What we have increased is the capital vote, which in fact increased from last year as a proportion of total expenditure.
The new hospital is expected to cost Lm4 million every month: isn’t this a major cost for your deficit-reduction programme?
A lot of figures are being thrown out. It was a PQ from an assessment by the health ministry and this is a very primary estimate. St Luke’s already costs us Lm1m a week so there will be elements where the new hospital will cost us more like energy, whilst maintenance will be substantially lower. We will have a proper assessment when we close off all the maintenance contracts later on in the year before the hospital opens. Until now all we have are estimates. In fact the budget did not provide for Lm4m a month because as Ministry of Finance we have assessed that this should not be the case.
You said only Lm8m would be spared in pre-budget talks – you turned up with over Lm12m in tax savings. How can you afford Lm12m without mitigating measures?
I have mitigated measures and have reduced further my recurrent expenditure. This year we have been more aggressive in the growth in the recurrent expenditure. When we did the pre-budget document it was based on the estimates of the first few months of the year. Now we have more certainty how we are going to close off the year. It was clear we were going to collect Lm30m more in income tax. We had estimated we had Lm22m, so we had Lm8m plus.
What growth rates are you expecting by these new consumption measures?
These are a basket of measures. If more women come into work part-time every woman will add to the growth rate. Last year every woman who had been outside the working environment for five years and returned to employment would have the first year tax-free: 450 took it up. This is purely growth for the economy. It all depends on the take-up. Our predictions in terms of the growth rate are quite positive. It depends on the how the people perceive the measures, if they are encouraging for them to work more. Then yes, economic growth will be there. At the moment we need to focus on making a faster growing economy. This government is not short-sighted. It could have done much more to be pleasing to everybody but we decided to do less. We focus on making the economy grow even more so that in due course we can give more benefits to people.
Competitiveness and increasing exports remain the key to revitalising the economy. How has this budget addressed this concern?
The real import for the economy is related to investment and raw material. If factories are importing raw materials, it means they have orders. The movement in the tax bands is definitely good news for our competitiveness. Unions agree with it, employers agree with it. Basically we lowered tax rates, which will in turn reduce workers’ claims for higher compensation. They will be content with the cost of living increase, with what they received in tax cuts – therefore they will not put more pressure on their employers to increase wages. Therefore the tax bands, economically, are deflationary in terms of our competitiveness internationally, because people already feel relieved financially. So I think this budget has taken a number of measures to increase our country’s competitiveness.
Do you feel our fixed peg with the euro has made things worse for our competitiveness?
Definitely not. The best thing for our economy is stability. Businessmen tell you we need a stable economy. A stable exchange rate doesn’t give us costs in mitigating risks of the movement of the currency. A floating exchange rate means people will have to start hedging against the Maltese Lira to make sure that they do not lose revenue from their exports, which is a costly exercise. Basically, the fact government has maintained a 100% pegged rate with the euro has been the best thing for competitiveness. Whoever’s fooling himself that a moving rate will make us more competitive by devaluating the Lira is being short-sighted. We have never done that for 30 years, why should we do it a year and a few months before joining the euro? Secondly our history has always shown us that stability has been the main force behind economic growth. Therefore we shouldn’t create an unstable environment when we already have enough international instability with oil prices.
How confident are you of Malta’s fitness for the euro zone?
Fairly confident. Obviously there are still issues to be addressed, primarily inflation. In terms of the criteria of deficit, debt, and interest rates we seem to be on track. In terms of inflation criteria there is still to be seen how close we can get to the reference value. Our predictions are that since this month we have felt the full impact of the increase in the surcharge over a twelve-month period, and the inflation rate is worked on a twelve-month moving average, the surcharge’s aggressive months will start being reduced. What you will have is a downward trend in terms of the graph for the inflation. In terms of the financial sustainability of this country, we have made a budget to continue along those lines.
But the IMF and other agencies believe the government’s programme to be too ambitious. Debt is still high, and Brussels will consider the sustainability, and long-term health of the economy…
Obviously I am not there to please the IMF, I am there to meet the EU Maastricht criteria. The Maastricht criteria also talk about financial sustainability and there is a way how this is measured. Our GDP forecast, our revenue and expenditure forecast, show us that we will be sustainable. In fact our revised convergence shows that by 2009 we will start going below the 1% GDP in terms of deficit, so we are on track in our plans to continue reducing our deficit. I don’t believe it is too ambitious. Ultimately these are targets. The most important thing is to go below the 3%. If you can go to a medium-term objective of having a surplus it is even better but we will do that gradually.
Brussels will also look at the government’s balances differently, statistically, such as seeing revenue as net of privatisation sales or tax amnesties. Then there’s the question of accruals. Does it worry you that the deficit rate you say is below 3% might not actually be what it really is?
The 3% is without any one-offs and is based on accruals. It’s the Labour Party who keeps saying that it includes privatisation proceeds. It doesn’t. Our deficit, the Lm57 million last year, is before we take into account the proceeds from Maltco. If we have to take the proceeds from Maltco into our revenue we would have made a Lm25m surplus not a Lm57m deficit. So Labour is completely wrong – whoever claims government is achieving its targets through the sale of assets is completely wrong. To report the budget for the EU, there is what is called the consolidated fund which needs to be adjusted to the general government. We report the general government to the EU. It takes the adjustments for accruals, therefore whatever government has to pay, whatever it has to collect, and also all the surplus or deficits of entities dependent on a government subvention.
Brussels thinks you won’t make it below the 3% rate in 2007, despite your statistics showing otherwise.
They haven’t said it yet. The EU will now soon issue an assessment based on forecasts. The real test of an assessment for us to join the euro will not be the forecast. It might be slightly higher or slight lower than 3%. We have made our forecasts and our figures show that next year our deficit will be 2.6%. We have given them our forecast. We have a track record of keeping to our budget targets.
Your convergence programme promises a 3.5% positive primary balance. In 2006 this is not the case. Will it be for 2007, and won’t this be a negative point when Brussels will consider Malta’s accession into the euro zone?
No. What the EU will consider is whether we will maintain a level below the 3% of GDP which is in the total deficit figure. That is the primary objective to join. The EU rules are that you have to be below 3% and in a sustainable manner. The primary balance would be positive if we manage to achieve it but again it really depends on how the economy is performing, whether the government would take more measures to stimulate more the economy. I will not tie myself to just economic theory – I will tie myself to the economic reality you face every time you come to do a budget.
There is hardly any mention of pension reform in the budget. Considering the increase in health costs, one would expect this issue to be addressed: is this still high on the agenda?
I don’t think we needed to mention this because effectively there is a law being passed in Parliament. Soon after the budget debate we will definitely be continuing with the pension reform debate. The pension amendments will need the whole House because it is a financial bill so it takes a bit longer to implement. But it is already in Parliament. Hopefully we’d have closed the bill by the beginning of next year. In terms of the health issue, in 2003 the decision to increase VAT from 15% to 18% was then taken to compensate the increase in the health bill. The government had opted to continue sustaining our health bill through taxation and not through other direct measures. So really we had addressed the issue of keeping health at a sustainable level in 2003.
Tonio Fenech was talking to Charlotte Camilleri |
