Interview | Wednesday, 28 October 2009

If I had to walk in Tonio’s shoes…

Thirteen days before Finance Minister Tonio Fenech presents the 2010 Budget Speech in Parliament, CHARLOT ZAHRA discussed the themes for the forthcoming budget with veteran economist Karm Farrugia

What will be the general thrust of this budget, in view of the current economic situation and its budgetary position?
I believe it should be “investment, investment, investment”, be it in infrastructure or in other projects, that’s where the general thrust of the budget should be.
At the same time, one should reduce unnecessary current expenditure, especially waste, so that we would limit our deficit to around 4 for cent.
Up to 4 per cent of GDP, I think the Government would be justified. The question is when a Government budgets something, we have a habit of not meeting targets. I don’t know why.
Every time we go astray, we go astray too far.

Prime Minister Lawrence has called for a renewed social pact. After the experience of five years, do you still agree with the proposal or not?
Of course we need the social pact! We need a social pact very badly! If we had a social pact during these last five years, we would not have found ourselves in this situation.
The question now is if we are we prepared to negotiate it…
If we had had a social pact five years ago, we would have weathered the recession much more. We would have been conscious of the recession.
A year ago, the Government was not aware that we had a recession – but we were in recession, and the Government was not even aware of that.
Government came out with a Budget which was so optimistic, so upbeat – I could not believe it!
If we had a social pact, we would have been a bit better off! So what was not done five years ago should be done now.

What should be done in order to prevent the snags that the social pact discussions had last time around?
I don’t know. They kept it so secret – they kept on saying it was the GWU that couldn’t agree. Nobody knows exactly what went wrong!
If it was the COLA, the GWU was right, the Unions were right. They should insist that the COLA stays.
The COLA is very important for our stability. Anybody who wants to do away with the COLA is wrong.

Do you agree that the social pact discussions should also include the Government and the Opposition, to ensure political consensus?
The Opposition could be your future Government. If there’s a social pact, say, for five years, in the next three to five years there could be a change in Government!
Of course, if it’s possible, but at least it should include the Government of the day. Another Government would be bound by the agreement of the present Government.
If they can rope in the Opposition, it’s even better, but not without the Government! The Government has to agree to certain things, so it is a very important third party.
Don’t forget that around 35 per cent of all people employed here are employed with the Government, so how can you exclude that?

In your view, is the time ripe now for a revision of the COLA mechanism twenty years after it was first introduced or not? Why?
It all depends what you mean by revision – if revision means changing its character, I would say the timing is wrong!
If we say refining it, maybe calculating it slightly differently, yes! It all depends on what you mean by revision of COLA.
The COLA has worked very well for the past 20 years – I had a lot to do in its construction 20 years ago; I was at the time representing the GWU. We tacked it very hard, we negotiated a lot, and we brought the employers working with us.
Let’s not drop it! If we drop, we will make a very big mistake.
One reason why we attract investment here is because we have industrial stability. Without COLA, there can never be industrial stability.

Do you agree with the employers’ views that COLA should be linked to productivity and give only to minimum-wage earners?
No. COLA has nothing to do with productivity; that is wrong. First of all, they do not even know what productivity means.
Nobody has ever translated productivity in figures. They talk about productivity as if it’s the productivity of a company.
When it comes to the whole economy, productivity mixes the private sector with the public sector.
Productivity is always there in the private sector – without an urge to improve productivity, there can never be a private sector! So you don’t need to tell the private sector to improve productivity – management is there continuously to ensure that. The main function of management is to improve productivity except in Government.
In Government it is difficult to improve it, they don’t care, they don’t even know how to improve it! But in the private sector there’s no need to brag at COLA!
COLA is a compensation for an increase in prices caused by employers themselves, whether they are retailers or importers – it’s a disgrace that in Malta we had to suffer so much from inflation!
We’ve had so many price increases that we don’t even try to control it! Other countries were almost deflating, while we still have inflation. How can you possibly blame COLA?
COLA is a compensation for increase in prices – increase in prices has nothing to do with productivity; productivity is increased in efficiency, it does not take prices into consideration.
Any firm will tell you that if they increase their prices to make their profits it’s not productivity.
Productivity is prices remaining the same, you improve your profits, but prices remain the same. So anybody who wants to like productivity to COLA is wrong.

Will the Government have to postpone its target of a balanced budget by 2012 yet again, as the IMF has indicated?
Yes. Within a year after the recession is over, we should start thinking very seriously about a balanced budget, even a surplus budget, but not now.
First of all, you have to rid yourself of recession: that will take some time, then we will start growing.
In my opinion, it will be another year to another year and a half from the end of this year, in mid 2011, before we should even start thinking about a balanced budget.
Then the Government has to think very seriously – at all costs it will have to balance its budget, not hide behind the 3 per cent allowance. That is ridiculous! The 3 per cent allowance is a maximum, it’s a ceiling, it’s not normal.
So when things are going right, when you do not have a recession, you must not aim at the 3 per cent deficit; you must aim towards a balanced budget, except when you are at the very bottom of a growth curve.
If you are going through a hard time, you are allowed to run a deficit, but not taking the 3 per cent as normal! We were even below 2 per cent, but then we had excuses about subsidising the electricity, then about the Drydocks’ business, and we went haywire!

How will the latest deficit figures for July 2009, which soared by €85.7 million in the first seven months of 2009, totalling €368.5 million at the end of July, affect the Finance Ministry’s projection of a budget deficit of 1.7 per cent of GDP for this year as stated in the 2009 Budget Speech.
It cannot possibly be 1.7 per cent. It is obvious that the Budget deficit projection for this year was a dream!
It was made by people who didn’t believe; by a Minister or a Government who didn’t believe that the recession was not going to affect us!
We were so happy about the resilience of the economy – everybody kept talking about the resilience of the economy.
Ha ha! Everybody kept insisting that we were not going to suffer at all from the recession!
We were not even having a recession, but it came. So there’s no chance that the budget deficit this year, which still has two and a half months to go, is going to be anything like it was forecast last year.
It’s more likely to be around 4.5 to 5 per cent, maybe even 4 plus, but certainly it’s not going to be less than 4 per cent.

Another problem that has afflicted the country is the high inflation rate, with Malta having the highest inflation rate in the euro zone.
It’s a disgrace that we are allowed certain items in our budgetary survey or the basis of our Retail Price Index to go up, especially medicine, food and other essentials.
The Opposition leader was quite right on Sunday to pinpoint the increases in food and vegetables as being due to what happens there at the pitkalija.
Medicines are the same: everybody knows that it’s a disgrace!
Even I have gone abroad, and silly little things like medicines for cold, headache and diahoerrea, you can get for cheaper in London than in Malta!
I was in America last year, and things were more expensive than here, but not medicines!

What effective measures will the Government take in this Budget to address inflation?
The budget is not there to address inflation!
Inflation is something which is outside the Budget; it’s about controlling what’s happening in the economy.
Half of our inflation, if not even more, has been caused by imports. While other countries are reducing their prices, the same things we import here have gone up in price.
The other half is divided equally between inflation caused by the utilities’ tariffs and other things.

Besides the Budget what measures should the Government take to combat inflation?
The Government should study more seriously what is happening in the economy. It must dig deeper to find the root, the worms that are eating into our economy and make it rot and behave so badly.
Government needs to find out what is spoiling the soil and is not allowing the economic fruit to grow and mature nicely.
There’s something wrong it the economy, that’s what Government should do. It has got all the means to do it if wants to.

In an interview with Business Today, UHM Secretary-General Gejtu Vella has called on Government to convert the Consumer and Competition Division (CCD) into a strong authority that really defends consumers’ interests. What is your assessment on this request?
I think that’s a great idea. I believe that this Division should be given more power. An authority, by its very name, means power to do things, not simply suggesting or being subservient to the Government of the day or the Ministry.
In many other countries, the Consumer and Competition Division is indeed an authority.

GRTU Director-General Vince Farrugia has called on Goverment to present a “bold” budget, bolder than last year’s. So how bold do you anticipate this budget be?
It has to be bold, anyway, because the situation is very grave.
I would not want to be in the Finance Minister’s shoes now! He’s got the hardest budget to produce!
If a Minister ever has to face tough times, this is the Minister now.
I have great sympathy for him, however he has to be bold anyway!
Bold means taking decisions fearlessly that will not please people.

What kind of decisions?
Control current expenditure – there’s a lot of waste in the ecomony, especially in the Public Sector.
There’s a lot of waste of money, people doing nothing, waste of resources, red tape, and red tape costs money, because it employs people too. That’s what he has to do.... that’s what boldness means.
I’m not saying that the goverment should retract social services, but where there are abuses, yes. Of course, all this reduces public expenditure.
When do you anticipate Malta coming out of the economic recesssion?
We always follow with a lag of three to six months after the others.
Now others are coming out, except for Britain – unfortunately the UK is still in a recession.
Unfortunately, to come out of recession, you only need one quarter of positive growth. To go into a recession, you need two quarters of successive negative growth. I think this is really unkind.
I think the world should realise that to come out of a recession, one needs two consecutive quarters of positive growth.
We should be coming out of the recession by the mid next year.
I think that we should make it during the last quarter of 2009, and the first quarter of 2010.

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28 October 2009


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