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A smooth transition to the euro will give credibility to the government on the eve of the election. So will the opening of the new hospital. As the man who spearheaded both processes, parliamentary secretary Tonio Fenech is proud of his accomplishments, but warns that an election in November could jeopardise the government’s two main objectives. By James Debono
One thing about Tonio Fenech: you can’t complain that he lacks optimism.
“The euro changeover process will be a big success for the country,” he informs me in his office at Maison Demandols. “This is something which will make the government proud. The people will recognise that the government has acted correctly. Inflation is a risk, but all the indications we have are positive.”
 Although the Commission’s final assessment on whether Malta will be eligible for the euro will only be issued in May, Fenech insists that “all the indications suggest that this assessment should not be a negative one.”
But according to the parliamentary secretary, the logistics accompanying euro adoption militate against an early election in November.
“I have no competence to advise the Prime Minister on the best date for the election,” he explains. Nonetheless, on purely logistical and technical grounds Fenech advises against a November election.
“I believe that an election held before Malta adopts the euro could be somewhat disruptive,” he adds, pointing out that the euro changeover would require a lot of logistical preparation in the last three months of the year, when maximum security will be required.
“The forces of order will have to be on the alert due to the movements of money in the country. Logistically, the country will be on maximum alert.”
Since an election also requires maximum security, holding one in the midst of this process could pose problems. And to complicate matters further, the country will also witness the migration of patients and services from St Luke’s to Mater Dei at roughly the same time.
“These are two moments which from a logistics perspective are very delicate. I think that there are risks posed by an election in this period.”
According to Fenech, those stipulating a November election should heed the Prime Minister who has excluded an election in 2007.
But the government seems to have already speeded up the clock. For example, this year’s pre-budget document will be presented a month earlier than usual. But Tonio Fenech excludes an early budget, claiming that it will be held in October, as has been the case in the past years. The government simply wants a longer consultation period before the summer break.
Near-certainty of a favourable European Commission verdict on Euro adoption in January 2008 has also spurred the government to address the risks posed by the vast amounts of undeclared money in circulation.
By giving citizens a once-only opportunity to regularise their position with regard to monies kept hidden from the exchequer’s gaze, Tonio Fenech heeded the advice of leading economists, who warned of negative consequences for the economy if people continue to channel these monies into the property market. But he also risks confirming the perception that tax evaders are being appeased to the detriment of law-abiding citizens.
Through the new system, tax evaders can register their monies with commercial banks, stockbrokers and other authorised intermediaries, without being asked about the provenance of their funds: apart, this is, from signing a declaration that the money did not come from money laundering activities. These monies will be kept for a year in special deposits from which they will gain no interests.
That said, government will not let the tax evaders get off Scot-free. A four per cent fee on previously undeclared currencies, and a six per cent fee on deposits in local banks, will still have to be paid. But these people are nonetheless being offered a chance to clean up their act.
“This is a unique opportunity for these people to come clean. If they are ever asked why are they declaring Lm15,000 instead of Lm5,000, they can now present a certificate showing that they are clean.”
He also warns that no such chance will be offered in the future.
“I hope that these people will not go back to the old bad ways, expecting the government to announce yet another scheme. Most probably there will never be another opportunity to declare these monies.”
Fenech admits a sense of unease with the social implications of this measure. In October 2006, despite warnings by economists on the potential harm of undeclared funds, Tonio Fenech had declared that it was still too early in the day to decide whether to grant an amnesty to those who have kept thousands of liri in circulation without ever declaring them.
Economists like Prof. Edward Scicluna, among others, had already warned that the vast amount of money in circulation – estimated at Lm 500 million – was being channelled into property. The Central Bank calculates that the amount of currency in circulation in a healthy economy should be half this amount: Lm 250 million.
Fenech had also said there was a moral aspect that government would have to consider before declaring yet another amnesty, as law-abiding citizens will feel that they always lose out to those who just break the law.
“It’s a double-edged sword,” Fenech said in 2006. “This point is always raised whenever we have to consider an amnesty, although we’ve never granted an amnesty for cash in Malta. We need to make a good analysis before deciding.”
But now that the government is geared for 1 January 2008 as the date for the introduction of the euro, for Fenech the choice was inevitable.
“Everything is being done in its right time. The need for this measure is dictated by the fact that Malta is adopting the euro. It did not make sense to introduce the measure last year, when Malta had not yet met all the criteria set by Maastricht.”
Tonio Fenech is still uncomfortable with the idea of amnesties for tax evaders.
“Our duty is to combat fiscal evasion and not to promote an alternative for those who have evaded tax. Yet on this issue we were faced with realities that could not be ignored.”
But according to Fenech it would have been irresponsible for government to ignore the vast amounts of money in circulation on the eve of the adoption of the euro, as this could wreak economic havoc. According to Fenech, the risks posed by these monies to the economy are twofold. For one thing, people would have still tried to convert their Maltese liras into euros. Depositing undeclared funds in the bank is not an option for the tax evader. Banks are obliged to ask for the provenance of any deposits of more than Lm 5,000. If the bank is not convinced by the explanation given, it is legally obliged to report the case to the authorities.
“To avoid this some people are seeking other avenues to convert their money. Some have already started converting liras in to euros on the black market. This entails risks, as false currency could penetrate the market to the great detriment of the people involved. Many people are not used to this currency, and are not familiar with the security features and water marks.”
But a much more serious risk is that people with undeclared monies would have ended up investing in property and other activities which offer a quick financial return.
The parliamentary secretary acknowledges that the government had indications that people were buying more properties. “The risk was that people would have started over-declaring, rather than under-declaring the value of property. This would have fuelled artificial inflation.”
Fenech insists that on the eve of the adoption of the euro, the economy needs stability, not uncertainty.
“If we did not address this reality, we would have created a lot of uncertainty in the property market, which would have impacted the larger economy through its multiplier effect. This would have fuelled demands for wage increases, assistance for those seeking a first home, and other inflationary pressures.”
But will the government turn a blind eye to persons who have been receiving social security benefits, while earning thousands of liri from the black economy?
Fenech explains that the government will not know the names of people registering undeclared monies.
“People will simply go to register their monies with a stockbroker, a bank or anyone licensed by the MFSA. This data will only be available to the Central Bank. The Central Bank will not reveal any information to the government.”
The Central Bank is only bound to reveal information in cases involving people who try to benefit from the scheme while being investigated for money laundering activities.
Before registering their monies in the scheme, people will have to sign a declaration that their undeclared monies do not originate from money laundering activities. If they lie, they could be in big trouble, warns Fenech.
By imposing a charge of four per cent on undeclared cash and six per cent on undeclared bank deposits, the government could also benefit from an injection of funds.
“If all the extra Lm 250 million in the economy were declared, the government potentially could earn Lm 9 million. It is only fair that the government gains revenue from this measure.”
Fenech did not want to emulate the example of some European countries, which simply announced that they were suspending money-laundering regulations for a number of months before euro adoption.
“For us, this was not fair on those who had always paid their taxes. Imposing a penal contribution on those registering undeclared money was only fair.”
By achieving the Maastricht criteria for Euro adoption the government can boast of reaching the targets it had set three years ago in its convergence plan. Tonio Fenech lists other figures indicating an economic turnaround:
Part one register unemployment has declined from 7,000 to 6,000. Inflation has fallen to 2.2 per cent. The surcharge has gone down from 67 per cent to 45 per cent. And Malta has seen its GDP grow by 2.9 per cent, with Central Bank estimating 3.4 per cent growth for next year. Tourism and manufacturing are also picking up, according to Fenech. But somehow, these positive statistics have yet to be translated into a feel good atmosphere in the country.
The parliamentary secretary insists that statistics are not the best barometer to measure a country’s feel good factor. “Evidently, the economy is turning around. All these indicators suggest that the economy is working. But how quickly that wealth trickles down to people is another matter.”
He also says that the feel good factor depends on people’s perceptions. He even acknowledges that the tax cuts announced in the last budget did not match everyone’s expectations.
“In the last budget we decreased the tax burden in a way that a single person could have saved Lm130 a year. A married couple in which both partners work could have saved up to Lm250.”
One factor which annulled the impact of these tax cuts was the increase in interest rates. “Rising interest rates have taken a bite out of the money saved by families due to the budget tax cuts,” Fenech admits.
According to Fenech, the government is trying to address this factor, bearing in mind that interest rates are rising on an international level.
“Economic growth is a double-edged sword. When economies grow, central banks tend to intervene to decrease the risk of inflation. In this way, they serve to cool down an overheated economy. By raising interest rates, banks send a message to the people not to take out more loans to spend more money. It is an incentive to save rather than spend.”
Fenech also contends it is difficult to generate a feel good factor because in the past few years, peoples’ expectations have continued to rise.
“In the last budget the government might well have left an extra Lm250 in peoples’ pockets, but that does not mean it has matched individual expectations. When I visit people in their homes, I realise that past luxuries are now considered as needs. More people are now paying bills for cable and Internet subscriptions. Five years ago, people did not spend the same amount of money on these things.”
Considering the fact that the sustainability of Malta’s finances will still be under the EC’s supervision even after a favourable verdict on the euro, how much room for manoeuvre will government have in the next budget to further decrease the fiscal burden?
Fenech insists that the next budget will have no bearing on the EC’s assessment, as this will be issued in May and based on last year’s budget. He also insists that the government retains discretion regarding which measures it chooses to introduce in a budget. But he acknowledges that the EU can start infringement procedures in case of excessive deficits. Malta will still have to keep in line with the fiscal discipline imposed by the Commission.
How far can the government decrease the fiscal burden in the next budget without endangering the country’s finances?
Fenech is cautious, insisting that it is too early to pronounce himself on tax cuts. “What is certain is that I have no intention of introducing new taxes. The last budget was the second consecutive budget without taxes.”
He also points out that the taxes introduced three years ago were introduced to make up for a shortfall of money and can be easily be decreased or removed in the future, as has already happened in the case of travel tax.
According to Fenech, the current rate of economic growth permits measures aimed at persons in need, particular projects and tax cuts. “I think that the government will have latitude to reach these goals without the need to increase taxes.”
But he denies any insinuation that a more generous budget this year will simply be an electoral gimmick. “This programme was not started on the eve of an electoral budget,” he says, pointing out that many had speculated that last year’s budget was also a pre-electoral budget.
Tonio Fenech has also taken upon himself the task of spearheading the logistical transition to Mater Dei.
“Ninety per cent of the new hospital is ready. What remain are a few finishing touches. The only big work now taking place is the dentistry unit, which was not included in the original contract.”
But what will actually happen on July 1 – the date earmarked for the opening of the new hospital?
Tonio Fenech candidly admits that the real migration from St Luke’s will take place in the following three or four months.
“One cannot effect the migration before the opening of the hospital. People would also like to have some time to see the new hospital. One cannot organise open days for people to see the wards with the patients already there. Patients are not there for show.”
How long will this period last?
“The plan is to have open days only during the first few days. The migration process will start immediately and will last between three and four months.”
But he would not exclude delays. “We should remember that we are not moving beds, but persons who are already receiving a cure. We cannot move someone in a critical state simply because the ward has to be moved. So don’t blame me if it takes a bit longer than that.”
The health bill is expected to rise with the opening of the new hospital. Electricity costs will increase despite the emphasis on energy conservation in the new building. Added to this are ever-growing medicine prices. Is the sustainability of the health system in question?
“Patients now deserve air-conditioning in summer. The energy bill is bound to rise.” But Fenech points out for the past five or six years, we have been spending a capital expenditure of Lm 40 million a year on building the new hospital. As from next year, we will not be spending this money. These funds will be released to fund the greater bill on operational costs.”
But taking the growing bill on medicines into account, is the health system sustainable?
“In the end it is up to the Maltese to choose whether to pay taxes to fund the health system or to have less taxes and less funds for the health system. The financial sustainability depends on the government’s investment in the health system.”
He recalls that when, in 2003, the government had raised the VAT rate from 15 per cent to 18 per cent, this was done to redress increasing health costs.
But was the increase in VAT directly allocated to the health fund?
“The health budget increased. This shows that the funds ended up financing this increase.”
Should we also look at more radical solutions like means testing?
Fenech shies away from hinting any charges for hospital services but favours a greater rationalisation of the system.
“An element of means testing already exists through the pink and yellow cards entitling patients to free medicines. We can definitely introduce electronic cards entitling patients only to what is theirs by right.”
jdebono@mediatoday.com.mt |
