Interview • November 30 2003

Numbers, targets and cash

Finance Minister John Dalli is confident that Malta will get out of the economic doldrums it is in and augurs that the social pact will be signed by June. Here he speaks to Kurt Sansone about the budget and its after-effects.

Minister John Dalli is a busy man this week with budget and all, and when I meet him at the ministry in Valletta the last thing on his mind is the weather.
Jokingly, I tell him that the interview is about the atmospheric conditions outside and he smiles. After all it was he who analogised about a captain steering his ship when introducing the budget on Monday. In his speech Dalli gave a picture of the current financial and economic situation and also projected what the situation should be like in three years’ time.
I ask him whether the country can afford going haywire once again with its projections:
"We had made projections for a five-year period in 1998 and for the last four years we were not only on target but ahead of what we projected. We went haywire in the last year but we still managed to drastically reduce the deficit from where we found it in 1998. The reduction is equivalent to almost five percentage points."
Dalli explains that during the last two years the scenarios within which the country was operating changed completely. He says that a number of countries entered into restructuring mode, which led to rising unemployment in Europe. "This left its impact on our economy because after all these are our clients," Dalli remarks.
He then mentions the world turmoil because of the terrorist threat. "In last year’s budget I said the negative effect of the Twin Towers attack was being recuperated and I was correct because gradually things were beginning to settle. Unfortunately we were then hit by the war in Iraq and the Sars virus, which worsened the domestic situation that was already tense because of the election," Dalli says.
I smile when he mentions the election campaign. Surely last year Dalli knew that 2003 was going to be the year during which Malta had to go to the polls and this would have left an impact on the economy.
Dalli responds: "Because of the election and referendum campaigns the domestic economy stopped growing completely as GDP statistics show. There was a lot of misinformation, the closer we got to the referendum and election.
"We started to feel there were problems towards December of last year. The revenue we were expecting in December did not materialise and in January I issued a circular to all government departments to control their expenditure and not to commit 10 per cent of their allocation. We took the necessary measures to control the situation. Then came the election and we got lost in the campaign. In May when I was reviewing things it clearly showed that the situation merited serious attention and I painted a clear picture to the social partners in the MCESD. I also spoke about it in public. At the time I was seeing a deficit of Lm126 million and we put in all our energy to rein in expenditure and collect the revenue due. In fact we will end up with a deficit of Lm107 million taking into account the Drydocks early retirement schemes."
And how does the finance minister solve a gaping deficit? I argue that the main thrust has been to increase government revenue by introducing new taxes rather than reining in expenditure. But he winces at this argument that is often made by the constituted bodies, as well as the Opposition.
"Who argues that way is simply using cheap criticism and is only treating the situation in a superficial manner. Government did increase its revenue but almost 80 per cent of that increase came mostly from greater enforcement and a more efficient tax collection system. New taxes accounted for only a small portion of the higher revenue.
"As regards expenses we have taken measures to control them but there again when we speak of government finances we do not visualise the possibility of spending less. The reality is that today we spend Lm10 and if we are not careful tomorrow we will spend Lm12. But if we are diligent we will spend Lm10.5. That is the reality unless government starts divesting itself from the social responsibilities it has assumed over the years so that expenditure will go down drastically.
"Everybody says that government should reduce expenditure but when we come to speak about the welfare gap everybody vanishes. In reality when we talk about government expenditure it is all a question of what services government is going to assume for itself. This is a government that will not divest itself from its social responsibilities and this is a declared policy. This government will remain committed to ensure that all services not provided for by the private sector because there is no profit motive will continue to be provided. Furthermore, we have to ensure that every citizen will have access to all that is required, be it infrastructure or other services such as health, pensions and benefits and that these will remain sustainable."
With the welfare reform blue print expected to be finalised by June next year I ask the minister what issues he expects to tackle.
As regards pensions he explains the retirement age should reflect the reality that people are living longer today. "We have to adjourn the system but nobody is saying that we will not have a pension. However, we have to remove the socialist concept that the government pension should be the only income pensioners benefit from."
A big problem concerns the health sector where the country has to find alternative sources of revenue: "We departed with the concept that health should be free for everybody but gradually we have come to the point where the health provision has become limitless. Everybody takes everything for free. The expenses in the health sector are rising exponentially and if uncontrolled they may even rise by up to 20 per cent per year. It is natural for the expense to increase because people are living longer and medical research is ongoing. We have to decide up to what level we should be offering a completely free service. There are certain cures that can continue to be offered for free because they are related to illnesses while other cures are more inclined to improve quality of life and so these could have their costs shared. The reform has to enter into these finer details."
It’s all right to speak about these problems now, still fresh into another five-year mandate. The obvious question is how did the Nationalist government not forecast these problems five years ago?
"Five years ago we did not have this type of escalation in the cost of medicines. Research has developed a lot. It is in these last few years that research and development in the medical sector has contributed to mushrooming costs," Dalli answers.
I argue that pension reform has been on the agenda for years and nothing concrete has been achieved. Dalli agrees: "We have been trying for four years. Our first attempt did not give us the desired results we hoped for. Now we are in our second attempt and it looks as if we are on the right track. We have amalgamated the Commission for pension reform with the MCESD so as not to duplicate work."
It is often said that social and economic reform, the social pact as it has been called in the budget, should be undertaken with the consensus of all social partners. I suggest that the search for consensus will eventually be a recipe for doing nothing.
Minister Dalli responds with his characteristic optimism. "I don’t share this fear because though we are seeking consensus, government is determined to take the required decisions. That is our frame of mind. In the run-up to the budget we shared information with the constituted partners. And the same will apply for social reform where we will provide the social partners with all the details. We need to discuss and analyse the problem from all angles. We want the changes to be implemented by consensus but ultimately if there are those who are scared of change, government has the responsibility to take its decisions."
The minister has no hesitations about the target date agreed with the social partners: "In June we should have a social pact agreed to by all parties and waiting for the final signature. From now until June a number of intensive meetings will be held between government and all constituted bodies."
Job creation has been a sore point for the last few months with unemployment edging up and the manufacturing industry hitting rocky ground. But Mr Dalli does not agree with criticism that the budget did not address job creation.
He talks of the industrial investment programmes announced in the budget, which would provide new factories for modern-day needs. "Jobs are created in sectors that require plants, general infrastructure and human resources of high quality. We cannot attract investment unless our university produces graduates in various disciplines. Investment is coming because there are the right human resources. When we speak to prospective investors they visit the university and see for themselves the type of graduates."
And according to John Dalli the ideal investment Malta should target is in the areas of biotechnology, pharmaceuticals, electronics, sophisticated printing and industrial services.
Any analysis of the Maltese economy cannot be complete without reference to the Euro. The budget speech has produced what is possibly the clearest policy statement that government intends taking Malta into the eurozone as soon as possible after EU membership. Isn’t this an ambitious target given the conditions laid down for Euro adoption, I ask Dalli.
"No, because our economy is open and totally dependent on foreign markets. It is common sense to remove the element of risk created by foreign exchange fluctuations as soon as possible. Whenever we price our products the formula includes an element of risk due to the exchange rate. When this finishes, things will be clearer for all without having businessmen using the exchange rate in a way which is favourable to them. The same holds water when we export. We are giving a commitment to reduce the deficit and we are going to do our best not to miss the targets. The figures available are indicative that we can reach the projected deficit targets by 2006, which will make us likely candidates to join the eurozone as soon as possible."
Before I leave I ask him about the three per cent hike in VAT and whether there was consensus in Cabinet on the measure.
"There was consensus between all ministers. It is not an increase that is across the board as some have been saying because the zero rate and the reduced rate have not changed and the items in those two categories account for more than half of consumption."
Irrespective of the efforts that have been made to curb tax evasion at a household level VAT is still being evaded like hot cakes. The minister concurs.
"The only control is to strengthen our intelligence through the Tax Compliance Unit. These are things that are developed over a period of time. I am happy with the TCU’s work and I am confident that further down the line the unit will deliver more. But controlling VAT evasion is also the responsibility of the Maltese public. They have an interest in ensuring that VAT is not evaded by asking for the receipt. The Maltese public could have shown a bigger civic conscious than that displayed so far. Who evades VAT is doing so with the co-operation of the public."