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We need to use carrots and sticks

You rounded off your Budget speech by saying it was time to start taking “tough decisions”. However, there was nothing of the sort. Why?

Decisions are tough and will be taken now. The government will not shirk its responsibility even though such decisions will have medium- to long-term effects. Some problems have been accumulating over the last two decades, be it waste management, public transport or traffic congestion.

However, housing is more of a recent phenomenon as it was a result of the increase in tourism and the influx of foreign workers, which in turn fuelled rent rates.

 

Finance Minister discusses the long-term economic and social vision of the 2018 Budget – by Keith Micallef

 

What are these tough decisions?

They are tough because they cannot be addressed by throwing money at the problem, like increasing pensions by €2 per week. Waste and traffic congestion have to do with people’s behaviour. If waste management and recycling are taking years to be accepted by the public, this has a negative impact on the volume of waste being dumped. We have to educate and give incentives to promote recycling, like we did for construction waste where we have been successful.

So we are now constrained to take tougher decisions, like finding the technology to dispose of this waste or postpone it by 10 further years at the cost of using 50 to 80 tumuli of land. So society needs to accept that we have to change to accept less waste and even change the way we collect waste like plastic.

Is the government mulling fiscal measures, fines and taxes?

Of course. We will use all the carrots and sticks we can lay our hands on. As for public transport, it is difficult to change the mentality as young people do not trust the system. Like their parents, they love their cars. Persuading a family to walk short distances – up to a kilometre – rather than use the car is not easy. But this is what happens in large cities abroad.

This does not mean that parents should not use their own cars to pick up their children from, say, ballet lessons. On the other hand, anyone who religiously makes a morning trip to Valletta and returns in the afternoon can use public transport.

Giving free bus cards to teenagers encourages them to use public transport. I have received e-mails from people who decided to buy a pedelec thanks to the budget measures. I am sure there will be others. I would not downplay the positive impact of small measures.

Is the government considering a form of circulation tax to discourage vehicle use in certain areas?

The toughness is the elephant in the room – it is the most obvious but the most difficult to accept. We should be generous with the carrots and use the stick as a last resort because we need to use persuasion. Don’t try to look for solutions by bringing in foreign consultants. The problem is us. We need to increase pedestrian areas and bus lanes, especially when constructing new roads, as it is pointless to promote public transport when buses are getting stuck in traffic.

How is the government trying to diversify the economy so as not to be over-reliant on sectors like gaming and financial services which are very volatile, especially if Malta is forced to change its tax regime by Brussels?

The fact that Malta is growing at such a fast pace is instilling fear in certain quarters that this will be followed by a sharp drop – like vertigo. The €50 million surplus is a cushion. The fact that this year we could afford €35 million of discretionary expenditure is another cushion. If something wrong happens, there is about one per cent of GDP to be used.

However, nobody wants to reach that stage. On a daily basis, big countries that have difficulty trying to reform their own economy are blaming their problems on other countries. All this chasing of tax havens and blaming Ireland, Malta, Cyprus and so on, is partly due to this.

So far we have emerged unscathed. We are addressing most of the ways international countries avoid tax by playing countries against each other through the anti-tax avoidance directive (ATD 1 and 2). Out there they are not happy because it is still about a year away from being implemented.

Malta’s non-classical tax system has been left intact by the OECD (Organisation for Economic Cooperation and Development), apart from the fact that was also deemed as valid when Malta joined the EU. Whatever the media in Germany and France say, it is a valid regime. It is not true that we have a five per cent tax, as the refund is taxable in the respective jurisdictions.

But how does this Budget aim to diversify the economy?

It is already broad based as it comprises manufacturing, financial services, gaming, tourism, maritime, yachting and aviation, while logistics is coming up. One day we hope that the American University of Malta will have 4,000 foreign students and the same for Barts Medical School.

As for the new sectors, like blockchain, cryptocurrency, fintech, we are working to attract companies like Alibaba who would be interested in pilot projects. Secondly, there is also the Brexit area where we have appointed a task force to tap potential opportunities.

You promised a ‘quality of life’ Budget but where are the measures to ease congestion, reduce the disruption of construction and safeguard the environment?

One interpretation is that these problems have become major issues and the government is not shirking. Personally, I think that it has more to do with the fact that bread and butter issues have become history. The prime objective of a poor, unemployed person would be to get a job, but once somebody is leading a relatively comfortable life they start looking at education, health and how to have more leisure time. That explains all this enthusiasm for the extra day of leave.

The relatively high female participation and low unemployment is shifting the focus from basic needs to others like the environment. However, there are still pockets of society that are vulnerable.

The Budget speech included the setting up of a road agency which will supervise the €700 million project to upgrade the road network. When will this seven-year project be completed? Why was there the need to set up this entity when there is Transport Malta?

A country which is aiming to be among the top in Europe cannot have such a road infrastructure. We deserve better. Contrary to the past, when public spending on roads was abysmally low, this government is going to inject more funds.

But spending more is not enough as sooner or later roads may have to be trenched for utility services. However, this by itself will not solve traffic congestion.  So we must ensure that new roads have a bus lane.

Some will get carried away by imagination and talk about trains, underground, monorail. My concern is to have bus lanes so that they are faster than private cars.

Apart from the engineering aspect, the agency will take a holistic approach to encourage other modes of transport by increasing pedestrian areas, bicycle lanes and encourage carpooling.

When will this seven-year plan formally start?

The speech said the agency will be up and running in 2019. However, roads will start being built beforehand.

Are you saying the project will be ready in 2026, which would be nine not seven years from now, nearly two legislatures?

The seven-year cycle does not mean it is a straight line and then you fall off a cliff.

Can we have a definite date?

It’s still a seven-year plan. It’s like spray painting which needs a lot of preparatory work before the actual job starts.

But the Labour manifesto said a seven-year plan.

Yes, but let me give you another example. In an exam if you are given two hours to complete it, you do not start straightaway but you take your time to read the questions.

The Budget made little reference to the sustainability of pensions. Is this no longer a time bomb?

Such a conclusion is not mine but that of a strategy group which had presented its report in 2015. As EU members we also carry out regular analysis and get a second opinion from the World Bank.  The conclusion is based on a number of assumptions like demographic trends, work participation rate and life expectancy. At the moment these parameters, which are not set by the government, are showing that we are no longer in the red zone, as we were some years ago, but amber turning green. My comfort comes from the fact that we have entrenched into the law an obligation to carry out a review every five years.

It was also announced that the citizenship scheme (IIP) will be renewed. Originally the programme had a capping of 1,800 main applicants. What is the new limit being set by the government?

Cyprus is raising a billion euros from a similar scheme. I cannot understand all this fuss about the number of applicants. We are not putting it in proportion to what Portugal and Cyprus are getting. Malta’s programme is quite modest.

Are you suggesting increasing the price to buy a passport?

What I mean is that we are doing nothing out of this world when compared to other EU Member States in terms of numbers. Malta’s programme is not affecting the overall number of non-EU members acquiring citizenship. The government is quite safe to continue with the programme, depending on the market. It is a good way to create a wealth fund through investment, for the benefit of future governments as well.

But will the cap be increased?

My reading is that the current pace will continue. But I don’t know when the existing IIP limit will be reached. The government is explicitly saying that this pace will continue beyond that cap.

Monday 16th October  2017


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