News • November 30 2003

Sour autumn’s chill

Charles Mangion, MLP deputy leader and finance spokesperson tells MATTHEW VELLA Dalli’s budget lacks the necessary ingredients for economic growth, and that now, the chickens have finally come home to roost.

In his first stint shadowing Finance Minister John Dalli, Charles Mangion is wary of the Nationalist government’s revenue-generating measures: the VAT increase, the increase in registration tax for the used vehicles, the increase in contributions to the homes for the elderly, and the lack of general direction that the budget has inspired. Lacking ideas, lacking direction, lacking planning. For Mangion his budget has signified the lack of vision needed to spur on the dire state of the Maltese economy.
But Mangion is also sceptical of John Dalli’s projections for economic growth, not least following two major overshoots: missing the target for a decreased fiscal deficit by at least Lm30 million, and having to face the burgeoning expense of the Lm200 million elephantine Mater Dei (estimated to cost Lm2 million a week to run once it is operational).
Dalli has had to act fast: he directed a 16 per cent increase in tobacco excise to a dedicated health account within the Consolidated Fund, and also a 3 per cent increase in VAT (now standing at 18 per cent), which in tandem are expected to generate something like Lm26 million for the health account. As the budget shows, Government is in dire need of finances to offset an accelerating expenditure which is growing faster than revenue. So Dalli reined in all possible forces: increasing VAT, registration fees for used vehicle imports (today with a market share of 40 per cent), got the elderly to pay more to stay in homes, and decided to means test beneficiaries of free medicines.
But would Labour have done without the increase of VAT?
"There was no need for an increase of three per cent in VAT, that’s for sure. Our estimates for this budget sees the weekly burden for Maltese and Gozitan families increasing by an additional Lm7.30 per week, in taxes and inflation. An extra Lm4.60 will be paid in taxation per week, whilst the inflation which government will create by the VAT increase will mean households will have to pay an additional Lm2.69 because of the increase in the cost of living. The additional tax burden is set to increase by Lm59 million in 2004, or eight per cent, whilst the average family’s income will only increase by just one per cent.
"The problem is that the VAT increase automatically will set in motion a contractionary effect on the economy, with the consumer’s purchasing power decreased. This means consumers will prioritise their expenditure from now on, and that means commerce is going to slow down. This sets in motion an inflationary process whereby trade unions will be again asking for more wage increases because workers will end up with less money in their pockets. Additionally, labour being derived from the level of demand, we can expect the decrease in demand for goods and services affecting employment as well."
I ask Charles Mangion whether Labour would support the trade unions if they start making new demands for wage increases within an economic environment of restrained disposable income and increasing costs for businesses.
"The unions are much more responsible when facing such an economic situation. Today they discuss the issue. But one has to understand that the demands will be there, maybe a smaller demand, but a demand nonetheless. If Dalli hadn’t increased VAT there would most probably never have been a self-induced inflation of two per cent. The unions will be caught between the fire and the deep blue sea. I don’t think the government’s bad decisions should be shouldered by the worker. The lower-income groups will suffer mostly from this VAT increase."
Charles Mangion says the budget should have concentrated on fostering economic growth, especially following the minimal recovery this year from two quarters of negative growth (ergo recession) at the end of 2002. He complains that no form of incentives have been given out to SMEs, with little more than Lm500,000 on offer for growth and seed capital. Lacking in creativity, there has been nothing done to identify the reason why general industry and business operators are complaining of their widening cost base. And the general dissatisfaction has seen lay-offs and relocation of factories to cheap labour countries such as China.
As these realities hit the island with vehement force, Mangion says Malta will have to face the demands of the new economy. Labour-intensive production will eventually have to be replaced by another form of resource in which we can compete, and that is knowledge and technical-based human resources, which are economically more feasible than in other countries. But the government, he says, is doing little to foster economic growth via industry and commerce. He complains that there is also a lack of educational boosting which can match the demands of foreign firms who would like to invest in Malta, and which search for university graduates but find little supply of the graduates they are looking for.
"Basically this budget has done little to address the fiscal deficit in terms of economic growth, but instead sought to create revenue-generating mechanisms which will affect growth negatively and even attack the social base of certain sectors. The consumer will be paying more from their incomes in terms of higher inflation and taxation. This is a fact. This affects the social perspective of the country. Government feels quite fine to pay millions and millions for the new hospital despite the evident expense of this project.
"So instead the state demanded Lm1.3 million from the elderly, by increasing their contribution to state homes for the elderly from 60 per cent of their pension to 80 per cent. Why not save that Lm1.3 million from the estimated Lm5 million being poured in the private-public partnership? And yet some people fail to realise how the elderly really need to feel secure at the end of the day knowing that they do have some disposable income left in their hands. They do feel the pinch. Instead we have had Lm3 million spent on consultancy reports in three years, and several other millions poured into foundations which always seem to be at the heart of some scandal or other. This is the expenditure the government should be curbing, and the abuse in the social services sector."
Mangion doubts how wise it will be for the state to close down the polyclinics on Sundays and in the night. He says St Luke’s hospital is mainly congested during the weekends especially because of accidents and emergencies. Once you are closing the primary health clinics, everyone will pour into SLH, Mangion says. He speaks of reorganising the health resources by having at least three or four regional clinics.
Mangion also believes little in what he feels are Dalli’s poor environmental arguments for the higher registration fees on used vehicle imports, a measure which has brought to end the feud between automobile concessionaires and used car importers. Mangion said that if the cars were harmful to the environment the government should have obliged the people by prohibiting them. Instead it suffices that whilst these cars are already being tested for their environmental compliance, the increase in registration tax has directly affected lower income groups which purchase these particular cars. "The fact that you are increasing the registration fee, does it in any way mitigate their harmful effect on the environment or the fact that we are becoming a dumping site for Japan’s used cars? I think the argument is quite fallacious. This is just a way to increase revenue when seeing that a lot of people were buying these cars."
Mangion also laments that pensions were not included in this year’s budget, saying that this issue has been postponed to the end of the European Parliament elections so as not to have a negative effect on the EP elections. "Most likely we shall see an increase in the national insurance contribution. Its effect will be restrictive to economic growth. It has been tried in Europe already. This may increase revenue, but if the economy shrinks, the increase in revenue will not be sustained by economic progress."
I ask him whether, despite differences in political argument, will Labour aim to converge with the Nationalist government’s proposals on pensions, which will reportedly also mean increasing the pensionable age to 65: "Until today the situation is not that bad. Contributions to pensions match the demand there is. Any reform which will be assuring the sustainability and if possible, the improvement of pensions, are aims which one would generally approve of. We have to see what the propositions of the government entail. We are conducting our own studies of the pensions problem, which is a problem that has to be addressed but that there are also other problems which have to be addressed in terms of government expenditure. This is a question of priorities. Wasteful expenditure has to be curbed to safeguard the sustainability of the social welfare base.
"This means that we should not aim to reduce our deficit in as short a time as possible to meet the Maastrict criteria, and to join the Euro, without expecting that this will cause enormous problems which will have to shouldered by the citizens. We have to aim for a medium-term solution and take our time. I don’t understand why we have to join the Euro so quickly, when other acceding countries like the Czech Republic have already postponed entry into the eurozone until 2010 to concentrate on economic growth instead. And this makes sense. The eurozone may provide certain fiscal discipline, but this should be imposed by ourselves in the first place. This hurry is so illogical when other countries like Germany justify their deficits with their economic problems to skirt off sanctions for breaching the Maastricht criteria."