Bud­get 2017... Ex­pect no profli­gacy

Many for­get that 2012 was an elec­tion year which caused ad­di­tional fis­cal slip­pages such that the Com­mis­sion warned us about a high debt to GDP ra­tio and that un­less we tight­ened our belts it could im­pose an Ex­ces­sive Deficit Mech­a­nism. Our col­lec­tive mem

Malta Independent - - BUSINESS & FINANCE - gmm@pkf­malta.com Mr Man­gion is a se­nior part­ner of the au­dit and con­sul­tancy firm PKF George M. Man­gion

Tighter fis­cal con­trol has re­warded us with bet­ter per­for­mance and it is en­cour­ag­ing that the debt-to-GDP ra­tio for 2015 also out­per­formed the Euro­pean Com­mis­sion Spring fore­casts and the Min­istry for Fi­nance debt pro­jec­tions. This re­flects the in­creased eco­nomic ac­tiv­ity and im­proved tax col­lec­tion which are the hall­marks of an econ­omy on the mend. All this was achieved with­out re­sort­ing to higher tax­a­tion or new aus­ter­ity mea­sures; in fact the top per­sonal tax rate for a man­ager’s salary is now capped at 24 per cent. Malta reg­is­tered a his­toric eco­nomic growth last year, with its GDP amount­ing to €8,796.5 mil­lion; how­ever Min­is­ter for Fi­nance Pro­fes­sor Sci­cluna noted that this was largely due to a 21.4 per cent increase in gross fixed cap­i­tal for­ma­tion – a sud­den launch of sev­eral EU-funded projects ahead of the dead­line to tap into struc­tural funds.

It goes with­out say­ing that our re­cov­ery has been hard-won, yet we can­not af­ford to turn the taps full on and start splurg­ing on ben­e­fits. It is tempt­ing to sug­gest no taxes on pen­sions (ir­re­spec­tive of ceil­ings) or that the gov­ern­ment dis­trib­utes this per­ceived trea­sure chest to re­duce ab­so­lute poverty. Such good tid­ings did not come by recit­ing Hail Marys but by the gov­ern­ment’s sheer de­ter­mi­na­tion to im­prove growth in pri­vate con­sump­tion but­tressed by fall­ing un­em­ploy­ment (now reach­ing a low of 3,700), higher ex­ports, lower en­ergy costs and a con­certed drive by Malta En­ter­prise and Fi­nanceMalta to at­tract new for­eign in­vest­ment.

One must men­tion the re­cent deal se­cured with Crane Cur­rency in USA to­gether with new China in­vest­ment in Ene­Malta – the ail­ing national util­ity (pre­vi­ously limp­ing along with €800 mil­lion in for­eign debts). The lat­ter has turned the ta­bles in its favour and the en­ergy sec­tor is now con­sol­i­dated by new cap­i­tal in­jected in the con­struc­tion of a gas power plant. There is a strong temp­ta­tion to re­turn to profli­gacy mode when we are less than two years away from a gen­eral elec­tion – this must be re­sisted. The pa­tient has shown signs of re­cov­ery but can­not af­ford to turn back the clock and in­dulge in old habits. Can we risk that?

The spendthrift will tell you for­get about to­mor­row – throw cau­tion to the wind and bor­row more to fix our pot­holed roads, increase wel­fare ben­e­fits and splurge on gen­er­ous pen­sion hand-outs to all. Lit­tle do they care how frag­ile tourism and gam­ing, the main pil­lars of our econ­omy, are. Can we rest on our lau­rels just be­cause in the first nine months of 2016, tourist ar­rivals broke all records?

In the third quar­ter of 2015 the num­ber of cruise liner calls in­creased to 102, from 91 a year ear­lier. As a re­sult, the num­ber of for­eign cruise liner pas­sen­gers rose to 192,570, an increase of 39,522 over the same quar­ter of 2014. These pos­i­tive trends are wel­come (if main­tained) and re­sult in bet­ter jobs. In fact, ac­cord­ing to the Labour Force Sur­vey (LFS), the un­em­ploy­ment rate stood at 5.4 per cent in the sec­ond quar­ter of 2015, down from 5.8 per cent a year ear­lier. As can be ex­pected with more shoul­ders to the wheel, more tax rev­enue has been col­lected that dur­ing the sec­ond quar­ter of 2015, rev­enue grew by 7.5 per cent.

The fi­nance min­is­ter was pru­dent and quickly dis­missed calls for the state to in­stantly dis­trib­ute more wealth, warn­ing that gov­ern­ment rev­enue has not yet reached a high enough level. Party apol­o­gists take an op­po­site view. They blow their trum­pets and rub their hands in glee say­ing that the econ­omy con­tin­ued to ex­pand ro­bustly in 2016, with real gross do­mes­tic prod­uct (GDP) re­flect­ing su­perla­tive re­sults gained by the tourist in­dus­try, fi­nan­cial ser­vices and the gam­ing sec­tors. Nat­u­rally, the proof of the pud­ding is the em­ploy­ment sta­tis­tics and these point to a healthy and steady im­prove­ment reach­ing his­tor­i­cally low lev­els.

Sadly, Ene­Malta will not gen­er­ate prof­its un­til 2017 even though the price of oil is only around $50 per bar­rel. Yet Ene­Malta has an­nounced its first ma­jor export or­der con­sist­ing of an €80 mil­lion wind farm project in Mon­tene­gro. The Op­po­si­tion claim there is cor­rup­tion in ev­ery closet and this has dirt­ied the wa­ters for our own squeaky clean fi­nan­cial ser­vices in­dus­try. It has also led to fe­ro­cious par­ti­san mud­sling­ing when a PN blog­ger re­vealed ahead of the Panama Pa­pers that a min­is­ter and a Chief of Staff in the Of­fice of the Prime Min­is­ter had both en­gaged lo­cal con­sul­tants to open trusts in New Zealand with a sub­sidiary in Panama.

The min­is­ter duly closed both en­ti­ties but was dis­ci­plined. He had to re­nounce his of­fice as deputy prime min­is­ter and lost his en­ergy and health port­fo­lio. So far no smok­ing gun has been found amid cries by PN ac­tivists of no smoke with­out a fire, yet there was no trace of mil­lions, or of Pi­casso paint­ings pop­u­lat­ing such trusts. Not­with­stand­ing this in­ter­nal is­sue, the Com­mis­sion is keener than ever to tackle del­i­cate mat­ters such as cor­po­rate tax avoid­ance in Europe.

This is es­ti­mated to cost EU coun­tries EUR 50-70 bil­lion a year in lost tax rev­enues. EU coun­tries have al­ready signed agree­ments to the shar­ing of in­for­ma­tion be­tween tax au­thor­i­ties. Plans are in the pipe­line that will re­quire multi­na­tion­als op­er­at­ing in the EU (only those with global rev­enues ex­ceed­ing EUR 750 mil­lion a year) to pub­lish key in­for­ma­tion on the domi­cile where they make their prof­its and where they pay their tax on a coun­try-by-coun­try ba­sis. The same rules would ap­ply to non-Euro­pean multi­na­tion­als do­ing business in Europe. In ad­di­tion, companies would have to pub­lish an ag­gre­gate fig­ure for to­tal taxes paid out­side the EU. Those pro­nounc­ing the virtues of fis­cal moral­ity say this pro­posal is a sim­ple, pro­por­tion­ate way to mon­i­tor multi­na­tion­als’ ac­count­abil­ity on tax mat­ters with­out dam­ag­ing their com­pet­i­tive­ness.

Pre-bud­get doc­u­ments re­veal that our econ­omy is on a good tra­jec­tory with an am­bi­tion to re­duce national debt to be­low the pre­scribed 60 per cent of GDP and a bal­anced bud­get. Did we hit the jack­pot? Does this mean there should be gen­er­ous state hand­outs to match the per­ceived feel-good fac­tor? Not sur­pris­ingly, the Gen­eral Work­ers Union (GWU) pre­sented a pro­posal for an increase in the min­i­mum wage – not across the board but by way of an ad­di­tional top-up from the gov­ern­ment.

Re­ally and truly the gov­ern­ment should re­sist pres­sure to beef up the min­i­mum wage beyond in­creases reg­u­lated by a so­cial pact signed many years ago. This func­tions through the COLA mech­a­nism. The Em­ploy­ers As­so­ci­a­tion say wages are to go up only when pro­duc­tiv­ity in­creases. They ad­vised the gov­ern­ment to keep both feet on the ground, con­sid­er­ing mount­ing com­pe­ti­tion on ex­ports by other Mediter­ranean na­tions.

As al­ways, for politi­cians the right mo­ment when to choose be­tween profli­gacy and belt tight­en­ing is an enigma. It may be com­pared to the com­plex­ity posed by the an­cient Greek philoso­pher Zeno (ca. 490–430 BC) who baf­fled the world with his un­solved set of para­doxes.

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