Government math is “flawed” says economist

Government’s calculation showing how a reduction of public holidays which fall on a weekend will increase productivity by around 1.5 per cent in 2005 is flawed and the workings presented to the social partners are “a childish attempt at economic estimation” according to economist Edward Scicluna.

Speaking to The Malta Financial and Business Times, the former MCESD chairman said the calculation was flawed because whoever worked it out had simply “assumed” the data required to compute the result, something that not even a first year university student would have done. Describing the calculation as “incredible”, Prof. Scicluna said the statistics for capital input and man-hours, required by the scientific formula used (the Cobb-Douglas production function) by government’s economic advisors, are not available and hence had been merely assumed.

The four-page document presented to the social partn0ers containing the complex scientific workings clearly states on its second page that the “value of capital stock for 1973 was assumed to be equal to 20 per cent of GDP for that year”. The formula took into account data between 1973 and 2003. Similarly, the report states that “in the absence of man-hours data” for the 30-year period “employment data” was used, which however may not convey the true picture of man-hours worked.

An insult

Government’s anonymous economic advisors came in for some scathing criticism from Prof. Scicluna. “Whoever worked out the calculation simply assumed the numbers for labour and capital services. If this calculation is the best form of study to be presented by the government’s economists to the social partners then we are truly in a pitiful state,” the former MCESD chairman said.

“I am angry because I feel the Prime Minister was being insulted when he was presented with such a childish attempt at econometric estimation wrapped in pseudo scientific notation solely to impress. Not even a first year university economics undergraduate would have ‘assumed’ such data let alone somebody who is giving the country’s prime minister such important advice,” Scicluna told this newspaper.

But Government’s estimate that a reduction in public holidays would increase productivity by 1.5 per cent has come in for some serious criticism by two former finance ministers.

Lino Spiteri

Economist Lino Spiteri and former finance minister John Dalli have both remarked that the public holiday measure would marginally lower the cost of labour rather than increase productivity.

Writing in The Times last week, Lino Spiteri argued that the increase in productivity is artificial and risks being wiped out by statutory wage increases due to a higher cost of living. The former Labour finance minister suggested that the reduction in labour costs achieved by having fewer holidays will be neutralised by the Lm1.75 a week cost-of-living wage increase for 2005.

Spiteri argued that unless prices cooled down, any prospective gain from the public holiday measure risked being wiped out by the statutory mechanism which determines the yearly increase in wages based on the cost of living for the previous year. “The increase in the 12 months to last September results in a statutory cost-of-living increase of Lm91 for 2005, which is well above the likely average value of reduction in labour costs resulting from fewer annual holidays,” Spiteri wrote.

John Dalli

Similarly, John Dalli writing in The Sunday Times three days ago remarked that reducing the labour costs by “a couple of percentage points” would not be enough to restore the country’s competitiveness. “What Malta needs is much more than that,” Dalli wrote. The former Nationalist finance minister said that an increase in productivity would come about by greater investment in innovation, a fix on regulations and tariffs as well as a concerted effort to trim bureaucracy.

Despite the flak from various quarters Parliamentary Secretary Tonio Fenech yesterday stood his ground saying that the public holiday measure had to be viewed within the context of a budget that also provided incentives for industry. Speaking on Smash TV programme ‘Int X’tahseb?’ yesterday evening, Fenech remarked tongue-in-cheek that Lino Spiteri and John Dalli were “comfortable sitting in their armchairs”.

Nonetheless, Fenech had no concrete answer as to why Government did not calculate the impact of the taxation measures announced in the budget on the cost of living and industry. Economists fear that the introduction of eco-taxation, duty on mobile telephony, the price hike of kerosene and the 17 per cent surcharge on utility bills in 2005 are expected to have an impact on the cost of living further diluting any positive impact that may be derived from the public holiday measure.

9 February 2005 By Kurt Sansone

Leave a Reply

Your email address will not be published. Required fields are marked *