Editorial | Wednesday, 27 August 2008

Inflation scourge

Inflation, the scourge of the seventies is rearing its head again to the detriment of living standards and long-term public finances. It has become, as confirmed by an EU survey, a burning economic issue in Malta as well as abroad. Of particular concern to us in Malta is that our rate of inflation is higher than the European average, and the highest it has ever been. Tackling inflation must be placed as governments top priority. According to the National Statistics Office, the annual rate of inflation stood at 5.6 per cent. This represents an all time high, which could have devastating consequences.
The easiest and most simplistic analysis is to lay blame exclusively on imported inflation and take comfort in the oil and food price hike, which, needless to say, have been the main component in the increase. That said, these have certainly not been the only reasons attributable to the increase.
The immediate effect of the inflationary spiral is that consumers will be buying less for the same price. With disposable income contracting, there will be dire effects on the economic activity in the country and its growth prospects.
Government’s room for manoeuvre is not without confines now that the European Central Bank decides on interest rates, taking away from governments one of their strongest powers. As a result of the recent increase in interest rates sanctioned by the European Bank, home and commercial loans have become more expensive to service. This, coupled with the fact that banks have become less disposable to loan moneys and this has had detrimental effects on commercial activity.
With all this scary background looking at us in the face, government must be seen to be reacting.
On the domestic front, government must ensure that regulatory bodies act as real custodians of the interests of consumers. A sense of fair-trading must be ensured and no companies in a dominant position must take advantage of their position in the market. This presupposes a well-oiled and functioning fair trading office, which has sufficient bite to probe banks and insurance companies, whose charges are often considered highly exaggerated. There is sufficient legislation, much of which imported from Europe, to ensure that prices are kept at reasonable levels. The recent investigation into the price of medicines is a case in point, although little has been done since and certainly no abusers were brought to book.
This inflationary scourge is best combated by making the country more competitive, more productive and more efficient. This target is best achieved if government itself, as the biggest single employer in the country gets its own labour force to produce more and direct its employees into more productive tasks which yield a higher value to the country. The processes of privatisation are welcome as a means of reducing further the labour force in the public sector but these must most especially be carried out to give better value to the consumer. This newspaper has always favoured privatisation in the belief that this will encourage competition. On the other hand, we disagree with a public monopoly simply being converted into a private one without the service granted to the consumer being improved. The process was always seen as salutary because it should lead to a better service to the consumer.
With disposable income now being reduced, government should also consider rethinking many of the unnecessary government-induced costs which simply serve to inflate running costs both of businesses and of domestic consumers. The annual charges of many services offered by government are excessive and certainly should be revised in today’s economic climate. Processing fees at government departments all seem to serve the same purpose: that of financing a bloated public sector - which is seldom at the service of the citizen.
Government must focus fully on controlling this inflationary spiral before it gets further out of hand. It is surprising how few economists are participating in this public debate in offering their suggestions and input on how best to control this monster. A debate in parliament on the reconvening of the house or at least in the public accounts committee would not be out of place either. It would serve to set a direction on how to be best placed to overcome this problem.