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Kurt Sansone
Government’s imagination knows no bounds when it comes to introducing new taxes and running after every cent it is owed. And this course of action has until now, and with a not small helping hand from the EU, reaped positive dividends with statistics showing a healthy reduction in the government deficit and a positive turn around in the recurrent account.
But imagination is lacking when it comes to economic policy. With growth for this year estimated to reach 1.7 per cent and government’s forecast for next year expected to languish at 1.1 per cent, there is little to cheer about.
The budget presented on Monday shows a government good at housekeeping but very weak when it comes to managing the economy.
Sifting through the chaff of numbers presented by the Prime Minister on Monday shows that government’s total recurrent revenue for 2005 is expected to reach Lm913 million, a surplus of Lm54 million over total recurrent expenditure including public debt servicing.
This healthy situation is however underpinned by grants that are forthcoming from the EU and the Fifth Italian Protocol. By the end of this year, EU and other grants are expected to pour into public coffers an estimated Lm83 million. Next year government is estimating a further Lm82.5 million from such grants.
The capital expenditure programme, which tips public finances into a deficit, is estimated to reach Lm145.1 million by year’s end. This is heavily conditioned by the investment pouring into Mater Dei, which for 2005 totalled around Lm43 million.
In 2005 government raked in Lm2.5 million more than what it had forecast last year in income tax, an increase of Lm13.4 million over 2004.
It also collected Lm1.4 million more than what it forecast for VAT, which at Lm168.8 million represents an increase of Lm27.3 million over 2004. This increase in government’s VAT take cannot be isolated from the change in regulations undertaken on 1 May 2004 when VAT payments from importers were not collected at the point of entry but deferred to the point of sale. This means that a substantial amount of money that should have been collected in 2004 was deferred to 2005 thus bolstering this year’s receipts.
What government seems to have skimmed over is the drop in national insurance contributions by some Lm8 million when compared to its budget estimates announced last year. NI contributions in 2005 showed a marginal increase of Lm1.4 million over income generated in 2004. Despite government’s weak attempt at justifying this drop by saying that it was a result of government offloading employees from the public service onto the private sector, it could also be a signal of weak economic growth.
For 2006 government is estimating an increase of Lm17.5 million in income tax receipts, an additional increase of Lm13.3 million in VAT receipts and an increase of Lm2.7 million in national insurance contributions.
How government expects to collect so much more in income tax and national insurance next year is still a mystery when economic growth has been revised downwards to 1.1 per cent.
And it is growth that posits a worrying situation for government and the country. According to the convergence plan submitted to the EU, government was expecting economic growth to notch up modestly to 2.1 per cent in 2006 and 2007. But even these modest growth figures have now been revised downwards.
At 1.1 per cent growth government can hardly claim the economy is strong enough to provide a better living for everyone.
It is useless comparing Malta’s growth with that of established EU member states. Economist Gordon Cordina told Business Today earlier in the week that one had to compare like with like and it was best if Malta’s economic growth rate was compared to that of Slovenia and Cyprus. Both these countries have experienced growth rates far superior to Malta.
Cyprus is expecting an annual growth rate of 3.9 per cent for 2005 and 4.2 per cent next year. Slovenia’s growth rate for this year is 3.7 per cent and is expecting growth in the region of four per cent next year.
New member states such as Estonia, Lithuania and Latvia are also experiencing incredible growth rates above six per cent.
Economic growth in most of eastern Europe’s countries has also translated into higher than average inflation but with government forecasting an inflation rate of 3.1 per cent next year, Malta risks having both a sluggish economy and runaway inflation.
While fiscal consolidation and improvement is necessary and commendable, government cannot rest on its laurels. The Maltese economy needs to improve much more to ensure a better standard of living for its citizens.
The value of exports remains stuck on a downward trend, which is a clear indication of the country’s lack of competitiveness on an international level. Industry’s lack of competitiveness will be further compounded next year with the exorbitant increase in the surcharge on utility bills and a statutory weekly wage increase of Lm2.25. And quarterly statistics for economic growth published by the National Statistics Office show an extraordinary increase in inventories, an indication that the country is not able to sell what it is producing.
Unless exports pick up, the economy will continue producing dull growth.
While restating government’s commitment to focus on deficit reduction, the budget had little incentives for businesses. The much awaited tax relief did not come and an increase of slightly less than half a million in the vote for Malta Enterprise, a total of Lm2.3 million, is not much of an incentive to talk about.
In addition government has voted a total of Lm5 million in tax credits for companies that invest in research and development or set up back office or e-business operations in Malta.
Whether these incentives will be enough to stimulate the economy into performing at a higher gear is a different issue all together.
ksansone@mediatoday.com.mt
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