Fabian Demicoli

Lessen the burdens and the economy will grow

The
Maltese economy is not growing and the reasons are not so difficult to decipher.
Government economic policy over the last 10 years has much to blame for the mess
we are in today. If we do not take serious action as from this year we are going
to face an even graver situation in the next few years.

The GRTU will
shortly publish an analysis of the government's mismanagement of national
finances based on a study made by the economist, Prof. Joseph Falzon, of the
Department of Banking and Finance of the University of Malta.

Prof.
Falzon studies the recent history of the government's financial balance and the
government's total debt on the background of the government's expenditure and
total revenue and works on trend projections up to the year 2012. From this
analysis a conclusion can be made as to what needs to be done to save ourselves
from the dangers that lie ahead of us if we fail to act seriously now.

In a
nutshell the situation is this. We are today faced with a national debt of Lm1.2
billion (one thousand two hundred million). If no serious action is taken as
from this year to correct the trend that has been with us since 1990, the
national debt will, by the year 2012, reach a staggering Lm2.5 billion. In
relative terms this means that our total gross domestic product will not be
enough to cover our national debt. In 1990 the national debt was Lm204 million.
In 2000 it reached Lm925 million. In 2003 it shot up to Lm1,218 million. In 1992
government expenditure was 44.3 per cent.

An extremely worrying factor is
that the annual percentage change in the national debt has since 1990
outstripped the annual percentage increase in GDP.

The cause of the
problem is the government's persistent budget deficit. Since 1982 Malta has
suffered continuous and increasing deficits in public finance. As a ratio to GDP
the government's budget deficit shows one consistent rise from 12.29 per cent in
1986 to the all time high ratio of government debt to GDP of 71.13 per cent in
2003.

If no serious action is taken and the trend continues, by 2012 the
national debt will be 101 per cent of GDP. It is on this backdrop that the Malta
Council for Economic and Social Development has been meeting regularly over this
long hot summer in one big combined effort by the social partners and the
government to reach agreement on a social pact that will bind us all, workers'
trade unions, employers and enterprise organisations and civil society, to steer
the country away from this debacle.

Unfortunately, left on its own, the
government has over the last 10 years striven to continue with the trend of
increasing public expenditure by Lm50 million a year and forcing everyone to pay
up more in taxes so that it can cope with its unleashed public spending spree.
The government every year says that it is working hard to rein in the public
deficit. But we all know that it has failed. And it will continue to fail unless
the government changes tack. The government blames all of us for its failure.
The public is not paying enough taxes they tell us. They know, however, that the
government's perennial public deficit is not primarily the result of its failure
to squeeze enough taxes from business and private taxpayers. Its gravest error
is its inefficiency to control and cut public expenditure.

Public expenditure
has increased progressively from the 32 per cent ratio to GDP 40 years ago, to
the 50 per cent that it is today. The last decade has shown a total government
expenditure trend of around 48 per cent of GDP while the trend of total revenue
is forecast to be only 41.5 per cent of GDP.

The government is faced with
a problem: How to equate its public spending trend to its public revenue trend.
The government could either push up revenue by creating new layers of taxation
or reduce expenditure to the level of its known achievable revenue. The
government has effectively opted to raise the level of public revenue to the
level of public expenditure. The total result of this fallacious policy is the
unacceptable slow growth that the Maltese economy has been forced to follow as a
result. The government blames it on all the world and on all of us. The truth,
however, is that little Malta is sustaining a public sector that is too big for
all of us to carry and we cannot carry the increasing burden and at the same
time run faster.

The crux of the problem is that GDP must grow at a
higher annual growth rate than it has been doing over the last years. Given a
regular sustained growth of GDP the government will be able to improve its money
intake without an increase in the general level of taxation. But it must control
public expenditure.

The government cannot continue with the spending trend of
Lm50 million increases per year. Fortunately, the government has now committed
itself to Brussels, according to its Convergence Plan, to increase public
expenditure over the next three years by only Lm30 million a year.

This
effectively means that the government will continue to meet the natural increase
in expenditure due to incremental wage increases as per agreements and letters
of appointment already committed and will face the natural increase in
expenditure on all other commitments, but will not enter into new commitments.
This may not be enough given the resistance of the economy to start pushing
ahead in the sectors that really matter. Unless the economy starts growing at a
greater and faster rate there is no way the government can manage to receive
more and the more it spends the more resistant to growth the economy
becomes.

If the government succeeds in freezing additional commitments of
expenditure and hold only to existing commitments, unless new ones are as a
result of cutbacks elsewhere, it will move in the right direction. This on its
own will not give Malta the respite it needs to save our country from a grave
situation of a national debt that equals total GDP by 2012.

To save
ourselves from this economic disaster the government must strive now to obtain a
greater growth of GDP. Prof. Falzon estimates that an increase of 16 per cent of
GDP is needed to achieve a balance between what the government can effectively
get as revenue from the economy and what the government can afford to spend
without deflating the economy out of its needed growth strategy. This could
happen if GDP could grow at four per cent per year in nominal terms over the
next four years. The growing economy will cause public revenue to equate to
public expenditure.

The good news is that a serious and effective social
pact can lead to an achievement of this target without many sacrifices. It is
achievable and with serious planning it can happen. It will not, however, happen
if the government does not venture into serious changes in its approach to
taxation. Malta cannot continue to castigate the people it needs to push
national productivity up, register a marked increase in investment and bring
back the enthusiasm of entrepreneurs.

Malta's fiscal structure is too
much of a punishment on producers. The fiscal structure must be reformed. The
government must stop castigating the middle class. It is this class that is
capable of working harder, saving more, investing more, and striving hardest to
push the economy forward.

The last 10 years have been one continuous ride
by the government on the back of the middle class. They are the people who pay
the taxes, whether they are direct taxation on incomes or indirect on spending.
The current government strategy is to push the 43 per cent of GDP that it is now
receiving in revenue to 50 per cent so that it can meet its commitments on the
current level of expenditure.

If this is the strategy that the government
will follow after the next budget it will be a disaster on all levels, economic,
social and political. Taxation as a ratio of GDP must go down. It will happen if
the government agrees on a freeze of public expenditure. If the current
expenditure trend continues the GDP will not grow. The resources that matter
must be made available to those who can make the economy grow. Money is made to
work best by those who earn it and not by the government that spends
it.

The GDP needs to grow in the sectors that really matter: Exports and
tourism. What is happening now is that the GDP is effectively growing only as a
result of increased government taxation which bolsters the government
contribution to GDP and by other internal transfer payments that bolster the
contribution to GDP, of such sectors as banking, insurance, estate development
and local trading.

This is not good enough. The government must now
embark on an enterprise-driven policy. Its commitment to the MCESD must be one
of a cutback in public expenditure and a freeze on additional expenditure and a
reduction of the general level of taxation.

The economy must grow by 16
per cent in a short span of years. If it will not do so the future is bleak. But
we are still in time to correct course. A four per cent growth in GDP over the
next four years is achievable. As the social partners work harder to conclude
the social pact this target may be
achieved.

 

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