His hands on the cash register | Edward Scicluna

Edward Scicluna has a simple solution to keep Malta’s deficit under 3% – keep things as they are. But not without his hawkish attention to what government departments are spending. Now he claims he has already made €20 million in savings from 195 separate areas

Matthew Vella
8 October 2013, 12:00am
Edward Scicluna will present a budget that is expected to keep the deficit below 3% for 2013
Edward Scicluna will present a budget that is expected to keep the deficit below 3% for 2013

The new finance ministry is cut out for Prof. Edward Scicluna. The economist seems unencumbered with the kind of nasty political swashbuckling that the larger finance and economic affairs ministry of the past 30 years had to endure. Complaints about privatisation projects, sale of government land, tendering procedures. All controversial privatisation and economic affairs are left to other ministers like Chris Cardona and Edward Zammit Lewis. All that seems left for Scicluna, an economist at heart whose political hat was only donned recently when Labour pushed him to become MEP, is to keep tabs on what government departments are spending and raking in.

Still, this is not without its own struggle. For example, Scicluna has to battle against forecasts that Malta's GDP, already within the European Commission's corrective 'excessive deficit procedure', come down to below 3% GDP when forecasts from the European Commission, the IMF, and credit rating agencies claim the budget will blow up to 3.6%. But Scicluna seems at ease, because as he soon explains, he is to keep his hand firmly on the till to make sure that the slippage last incurred in 2012 (a percentage point) does not get worse. In a nutshell, we're keeping things as they are to stay under the 3% mark.

"Surely the EC's, IMF's and the rating agencies' forecasts have to be taken seriously. But they are underestimating our resolve to keep the deficit we estimated last April - a revised figure from last November's budget - as it stands. From my end, it looks simple enough, even though it is not simple in reality."

The original plan back in November was of arriving at a budget deficit of 1.7% for 2013. For 2012 it was 2.3%, and the previous administration was aiming at cutting 0.6 points and bringing it down to 1.7%. There was a one percent slippage in 2012, and from 2.3% the deficit ran up to 3.3%.

"The slippage was mostly on the revenue side, with a highly optimistic projection that did not materialise," in part, Scicluna says, due to uncertainty within the suffering construction industry, that led to a further decrease in revenues.

"My job was to look at the 2013 budget in March when we were elected. I too felt that it had been over-optimistic. There were some losses in the first three months and some expenditure commitments before the election. But I calculated that the 1% slippage would continue for this year - so I simply added one point on the 1.7%, and that makes it 2.7%. I said it would not be easy, but with a lot of effort we will make it. The Commission and the IMF were sceptical about us keeping spending and revenues where they were, and that is why they forecast a higher deficit."

As Scicluna says, his job seems to be focused entirely on keeping matters as they are - a hawkish minister unencumbered with little else but to keep spending and revenues sound. "Rather than asking myself, 'why did the EC say that?', I am more concerned about my estimates and whether I will meet them. I'm making sure the estimated revenues do come, and that I don't allow - and this is the hardest part - any higher expenditure more than has already been estimated by the ministries," Scicluna says, who at the time of our interview has only finished meeting with the heads of all government departments to survey the cash flow situation.

"I get a blow-by-blow account of what's happening. I can't lose track of this even for a week," he says, running his fingers through a ream of papers with the latest figures. "Until August, we are down €0.6 million on the revenue side, which is nothing from a total revenue of €2 billion. On the spending side, we have underspent by €2 million. As long as I am in charge of the cash register, I can see that we are ok on spending and on revenue," he says, aptly outlining his job description.

But staying under the 3% threshold also requires proper deficit-reduction measures. If he is not selling off the family silver, as he recently quipped over Nationalist privatisation, where have the cuts in the "inefficiencies" taken place?

"There have been cuts, cuts which took place without any fanfares. We reviewed areas where we felt there were inefficiencies and I estimated around €20 million in spending has been reducing, affecting some 195 line items. We instructed people that they would not be spending more than their allocated budget. And sometimes you hit a live wire and they come complaining here, telling us how 'we've hurt them'. It wasn't easy but we managed.

"Then there is the spending that is considered to be normal pressures, which are then reflected on a supplementary budget, where over-spending takes place. But we have kept spending down by bluntly saying no."

On the taxation side, Scicluna says the government's next challenge is to improve its tax collection efforts by improving its own IT systems to keep track of what is owed to the state, even though, as he puts it, he is not a keen 'moralist' on tax collection. When I point out that over €1 billion in unpaid taxes, arrears, fines and penalties remain uncollected (a good chunk of which gets written off throughout the years), Scicluna says that he makes a difference between people who are unable to make ends meet and postponing payments, and those who are actually evading tax.

"I don't mind picturing them [the latter] as parasites: people who want to ride without paying. But when in government, I don't like that kind of morality. I ask myself: is a person getting away with it? Who is making it easy for him? I'd blame myself. It's our computer systems that should be in place for this kind of thing, and we're still not there yet. I only learnt that the Joint Office [which manages lands passed from the Church into the hands of the State] have an IT system in place to keep track of arrears it is owed."

So how wise would the tax cuts be in this current state of affairs? In November the Nationalist government promised a gradual, three-year tax cut from the top tier brackets of €59,000 incomes downwards, from 35% to 25%. Labour had no choice but to take on these tax cuts, a political manoeuvre designed at taking on the budget lock stock and barrel when it was clear that the imploding Gonzi administration would be unable to carry it through.

Scicluna seems at ease. "There is no shortfall. The way we see it, it's a shift from direct to indirect taxation," he says, giving off the impression that income retained will find its way into government coffers through VAT receipts from increased private consumption spending.

"Malta will continue to receive the same revenue from taxation. It's definitely a shift from direct to indirect tax, and we are seeing it the same way as the previous administration did. For each three percentage points of tax cut, we estimate the loss of revenue to be €11-€12 million - so in total we're looking at a total burden of anything less than €40 million. And this will be done gradually, and not an expansionary budget in which tax is simply being cut. We are incentivising higher, and middle to middle-higher taxpayers, who are the bulk of taxpayers, and giving them less of a burden.

"I think more is being made of it than is actually involved. The great concern will be income distribution and poverty, and what we must not do is skew income distribution, especially since over the last four years, poverty in Malta has increased."

Formerly a critic of the improperly-spent EU funds under the Nationalist administration, Scicluna says the government's programme for economic growth will include making the most of EU funds through an ambitious capital expenditure programme.

"It's a Dr-Jekyll-and-Mr-Hyde situation: I'd like to see a 3% growth, and that's what our programme is actually geared for, 2-3% and eventually 4% growth. But we cannot expect miracles. So on the other hand, with my finance minister's hat of prudence, I'm trying to forecast a picture of less exuberance. Because if growth does not materialise, we don't want to end up in another excessive deficit procedure.

"The growth forecast of 1.7% has to be taken as is. I don't say it with pleasure, and it's even more pessimistic than the IMF's or the EC's, restricting my revenue forecasts and even spending projections. So what I did was to ask the Auditor General - in the absence of a fiscal council that oversees the budgetary process, which we will do in the coming year - to commission an expert's report into the growth model, and see whether the forecast was realistic. The report will be published soon, and this model will ensure nobody fiddles with the rate of economic growth as was done in the past."

Scicluna says he hopes the government will be seeing new revenues in the form of foreign influxes through the global residence scheme, a property scheme aimed at tax exiles mainly, and through the diversification of the economy. He mentions as an example the maritime projects earmarked for the former shipbuilding area, or land reclamation. "Malta cannot have one sector that is always growing - and of course, we would not stop it from growing - because it creates a risk. Whether they be the banks or financial institutions [which in total are eight times the size of the Maltese GDP, both core domestic and international banks] or ST Microelectronics... if you don't diversify they become giants and systemic risks."

I ask him whether it makes sense to promote land reclamation projects for a construction industry that is already underperforming, has a dormant over-supply of housing, and is responsible for the largest percentage of corporate non-performing loans with Maltese banks.

"It's not my job to go into that," Scicluna says, pointing out the limits of his ministry. Wouldn't it be unwise to give a dampened industry like construction a new playground to play in, giving the current state of affairs?

"That's a risk for the banks, and the warning that banks are being given is to be strongly capitalised. It's not that credit should not be given to construction, but banks that should be well capitalized for this credit, and it's up to banks to find their gearing ratio when it comes to this credit."

The impression is that the government will be giving out land to keep the construction industry happy, at the cost of creating further unused stock.

"Financial stability depends on banks being sound. It's up to the Central Bank and the MFSA to see that institutions are well capitalized for this kind of credit. Let's say foreign investors go for it... the financing would be coming in from outside, so the financial problem is no longer on the desk."

But surely as finance minister, he believes in discouraging land hoarding...

"Any finance minister would discourage waste of any resources being used. It could be in a hospital or land itself. Of course, it's a concern, and we must discourage it."

As finance minister, Scicluna has also politically come to terms with the reality of the university stipends he once suggested were a drag on government finances. "When I had made those comments, stipends were a high proportion of the minimum wage at 80%. Now, even being tagged at the COLA, they have fallen to 20% of the minimum wage. So they are no longer the cost they were in the beginning. Young people at this age want money. If people fail and don't achieve qualifications, they will consign themselves to a life of misery. We will retain stipends, because they serve as incentives for people to keep on studying, and they encourage children to continue right on into tertiary education."

Scicluna is also, expectedly, a supporter of the new Chinese acquisition that will see some €200 million in capital injected into Enemalta in the form of a part-privatisation that however, will see the government retaining control on the enterprise. But he refutes a suggestion that with the new gas plant in the hands of a private company selling gas to Enemalta, and a reported 35% control of Enemalta itself held by the Chinese, the Maltese are losing more control on their energy.

"Any fuel has to come from outside Malta, unless we find oil... all our fuel is purchased from abroad, but we don't spend sleepless nights over the fact that all our fuel is imported. The issue at stake is: is Enemalta staying in government hands? Yes.

"It's a big, big plus to have a strategic partner. Since I've taken up office, Enemalta has been a nightmare, and the first item on the agenda for every delegation from the Commission, the IMF and the rating agencies. They ask us how it's going to survive, and how we're going to cut the tariffs and make it feasible.

"Take the interconnector. Someone is producing the energy in France and distributing it through Italy and to Malta. Again, do we lose any sleep over 'who owns this energy'? Control is what is important: control on decisions, tariffs, and distribution. €200 million is a capital injection that writes a good chunk of our contingent liabilities and debts, when you consider that government has issued €1 billion in letters of comfort for Enemalta's debts. Additionally, the Chinese share will be shouldering a good part of the company. And that in total writes off €400 million of government guarantees."

In passing Scicluna mentions energy minister Konrad Mizzi, who recently was taken to task over the employment of his wife Sai Mizzi Liang as an investment promotion envoy for Malta Enteprise, on a reported salary of €33,000. I ask Scicluna whether, in the context of Mizzi having moved from a handsome private sector salary to his minister's salary, he is happy with his own salary. As an MEP for the socialists and democrats, Scicluna was paid close to €90,000 a year before he decided to be  appointed minister with less than half his former salary.

"It was very unfortunate that the government salaries' increase happened the way it did," referring to the way Lawrence Gonzi increased ministers' salaries and topped it up with their parliamentary honorarium back in 2008 without making it public.

"The matter to be discussed is how much should be paid: if this is determined by an independent body, it could be argued and discussed at length and probably solved, something that will probably happen only in the second legislature, if re-elected. From my position in life, I can afford giving five years of service to the country without counting the euros... but obviously I am insulted at the salary a minister gets," Scicluna says when I mention government chief executives half his age on standard salaries of €65,000.

"Cabinet salaries must be reviewed in a proper, and pre-announced manner. If we want to attract good people to government, if we want a new generation of good people to govern us, we need to pay higher salaries. They needn't be higher than those in the private sector. Even members of the Obama administration left the private sector for a cut in their salaries to serve their country."

Equally, Scicluna says that ministers should also give better declarations of the assets they hold, but says that the system as employed by the House of Representatives "is lousy" and that he is not - as formerly estimated by MaltaToday - the second-highest earning minister of the Muscat government.

"The declarations as they stand are lousy, they are not clear. We need something clear, and there is room for improvement. The European Parliament's declaration has guidelines. In our case, if someone declares they hold shares, the question is at what value should they be declared: their market value or the value at which they were bought? It's so uneven, it is unfair."
Matthew Vella is executive editor at MaltaToday.