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Unions be warned
Budget 2005 was a mitigation exercise between various lobby groups, which however left wage-earners to shoulder the burden of government’s renewed drive to increase its revenue. In a sense it was a continuation of the budget delivered last year by former minister John Dalli, which had started a claw-back on the standard of living by raising VAT to 18 per cent.
Budget 2005 was also a warning to the unions that the Prime Minister was going to play tough if they refused to sign a social pact. Gonzi went ahead and implemented the measure linked to public holidays despite there being no agreement on it at the MCESD.
It still has to be seen whether the PM has similar tough measures up his sleeve aimed at edging up productivity and whether he will be introducing them throughout the next year.
The hardest measures Gonzi delivered on Wednesday were the 17 per cent surcharge on water and electricity consumption and the trimming of four days vacation leave for next year by putting a stop to the practice whereby public holidays falling on the weekend were added to employees’ optional vacation leave.
The latter measure means that over the next three years employees will experience a total loss of 10 days leave. For employers this measure was a God-send. They will be gaining 10 more productive working days over three years. This was quantified by Gonzi as an increase of two per cent in productivity.
Change in lifestyle
It remains to be seen how effective this measure will be in boosting the waning economy but it has definitely created a stir among employees, who for the first time in many years are seeing their job conditions being eaten away.
“It is the sacrifice employees will have to shoulder,” Gonzi said after the budget when asked about the loss of vacation leave. To that statement he could have easily added ‘this is the start of a change in lifestyle’, as employees are being asked to work more, phone less and turn down their air conditioning.
Unwittingly, on Wednesday, Gonzi proposed a change in discourse to that which the Nationalist Party had been championing for the last 12 years. Successive Nationalist administrations since 1992 talked of wealth in terms of the number of cars bought, mobile phone usage, air condition sales and the purchase of other tangible goods by middle class Malta.
Contrary to the Mintoffian philosophy of the late seventies and eighties, the PN had transformed these goods into everyday commodities rather than luxuries. For the last decade, ‘wealth’ (‘Gid’) was a constant buzz word for the PN as it staked its claim on the growing middle class.
But on Wednesday Gonzi and Co. reversed all this. At the pre-budget press conference Parliamentary Secretary Tonio Fenech described mobile phones as a luxury. To add insult to injury travel abroad, another staple in the middle class’ diet, was further shackled with an increase of Lm10 in the passenger tax.
However, it is the utility bills surcharge that will add a disproportionate burden on the middle and lower classes. The 17 per cent tax is intended to mitigate the negative impact of international oil prices that have gone haywire since August. It is structured in such a way as to fluctuate every six months depending on the international price of oil.
The amount households will eventually pay totally depends on their level of consumption. This is another measure that requires a change in lifestyle.
Even if the surcharge may be considered a necessary evil, the general public remains unconvinced that the additional revenue will not be going to finance inefficiencies within Enemalta rather than pay for the higher price of fuel oil.
Expenditure control
The new fiscal measures (mobile telephony tax, cigarette rise, passenger departure tax, eco-contribution, fuel surcharge and bus ticket increase) are expected to crank up public coffers with an additional Lm21.8 million. There seems to be little space for more taxes apart from measures that have never been considered to target land hoarding and speculation.
Government has come to the end of the line as far as revenue generation goes. The next logical step is to address its expenditure, which for 2005 is expected to be slightly less than one billion liri.
But Budget 2005 contains little if any measures that specifically target public expenditure. There is no escaping the fact that Government’s two major expenditure pillars remain the public service wage bill (more than Lm200 million) and social security benefits (more than Lm210 million).
Gonzi proposed the amalgamation of certain authorities and entities and insisted ‘extra’ civil service employees had to be redeployed within the public sector. These two measures bereft of detail, coupled with a freeze on fresh employment with the civil service are expected to contribute to a reduction in Government expenditure.
The extent of savings nonetheless remains unknown. Gonzi gave no medium to long term commitment to reduce the size of the public sector according to specific year-on-year targets. The issue remains a political hot potato.
Gonzi said no government entity would be allowed to buy new cars or change existing ones in 2005. This will have no impact on expenditure levels but it is a cosmetic decision to show that Government itself means business.
While few people expect Government to trim the social budget a greater emphasis is expected on curtailing abuse. A tough-talking Gonzi did pronounce his Government’s commitment to target abuse linked to boarded-out individuals and registered unemployed who work in the black economy.
The result of any crackdown on abuses in these two aspects of social expenditure will hopefully be felt in a year’s time.
Slow recovery
With economic growth registering a more than sluggish 0.6 per cent for 2004 and a forecast growth of 1.5 per cent for next year, things do not bode well for a speedy recovery. Gonzi announced a number of financial incentives for industry including a vote of Lm1.85 million for Malta Enterprise and a venture capital fund to the tune of Lm900,000. A deeper analysis of the figures presented in Parliament reveal the dearth of inventiveness in the budget.
The vote for Malta Enterprise (ME), Lm2.3 million in recurrent expenditure and Lm1.85 million in capital expenditure, is little more than what was budgeted for the government entity in last year’s budget. Sources told this newspaper that ME’s overall budget has only increased by a few hundreds of thousands contrary to the impression given in Parliament.
As for the venture capital fund, a positive initiative to encourage young people set up their own companies, analysts argue that Lm900,000 spread over three years is too few an amount to have any lasting impact.
The tourism sector rubbed its hands at Gonzi’s proposal to offer a partial refund on expenses made for the organisation of conferences. But there is little solace in the fact that the Malta Tourism Authority retained the same budget it had this year; Lm8.5 million. The difference for 2005 is that Gonzi will only forward Lm8 million and top that up by Lm0.5 million if the MTA reaches its target to attract more tourists to Malta.
Legitimacy problem
As for the eco-tax, Gonzi announced a wider list of products, which include shampoos, toothpaste and cleaning products in plastic containers. Again, the principle behind the eco-tax as introduced does not encourage consumer choice for less polluting products. The eco-tax rates applicable for the new range of products have yet to be announced but Government is expecting a total revenue intake of Lm6.5 million for 2005 from the eco-contribution. In all probability, with household products now falling under the scheme, this will lead to further pressure on the cost of living.
All in all Budget 2005 is hard to pin down with one word. Gonzi has shown he intends turning round the economy and bringing public finances in order. He is doing what his predecessor chose to ignore for far too long. For economists the rhythm may be too slow even if they argue that it is better late than never.
But with a 16-year legacy during which money was not a problem Gonzi does have a political legitimacy problem when asking for workers to do sacrifices. The Lm9 million outlay on Dar Malta and the Mater Dei construction cost, set at Lm45 million more than had been previously budgeted in 2000, do not help to legitimise the call for a general sharing of the burden.
And even if Gonzi won the battle of perceptions as regards the budget, he still has not convinced the general public that the mess the country is in is not due to the thriftiness of previous Nationalist administrations of which he formed an integral part.
kurt@newsworksltd.com
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