Barely 24 hours after becoming Finance Minister Edward Scicluna was in Brussels to discuss the Cyprus bailout. A few weeks later he presented a Budget. He speaks to Kurt Sansone about his first month in office.
You made it a point to say this was not your Budget. How would your Budget have been different?
This is a difficult question [to answer] because you have to assess the situation and make your projections. This is something which we will do and I will be involved in, for the next Budget.
I have just met with the economic policy unit to see how they are working and drawing up their projections.
I used to be critical of the over-optimistic projections. I want to know why the projections were diverging from the EU’s and the International Monetary Fund’s.
This is why I cannot answer this question because it would be presumptuous for me to say how this Budget would have been different.
You claim the previous Government’s projections were over-optimistic and this is what may have prompted the deficit for last year to surpass three per cent. However, you have retained the same people. Don’t you think this could land you in trouble in years to come?
In a positive manner we will see where the structures have to be strengthened. I am not saying they are useless.
They are all my past students, all graduates and know their topic but there is room for improvement in the organisation and mechanisms used.
Motivation is also a factor. Are they proud of their work? I want them to be proud of their work because results can be better.
Let us move on to the revision of figures, which pushed the deficit above the three per cent mark…
I did not revise the figures. I only revised the estimates for the coming Budget.
This was the confusion created by the Opposition because I said the Budget drawn up by the outgoing Administration that I presented needed revision for reasons outlined in Parliament.
However, I did not revise the figures of last year.
The 2012 figures were coming out month by month for all to see from the NSO.
The big, bulging imbalance in the cash flow was seen from day one last year and when European Commissioner Olli Rehn told Tonio Fenech to cut €40 million in expenditure.
The forecast was off and when we pointed this out the minister used to tell us to wait until December. When the election was around he told us to wait for the April figures.
We waited until April but cash flow is meticulously covered by the Treasury in every country and there is no messing about with this.
You have put the deficit for last year at 3.3 per cent, which is above the EU benchmark and will prompt an excessive deficit procedure by Brussels. Don’t you fear this might stoke international concerns that Malta will need a bailout?
Yes, but what can I do about it? The implication is ‘why didn’t you cook the figures to come under three per cent…’
We are talking about some €20 million to reach three per cent.
No. Three per cent is still considered in excess of the Budget deficit figure.
So it could not have been avoided.
The [actual] deficit was one percentage point above that projected… I was in charge of legislation in the EU Parliament on statistical governance where we introduced sanctions for every government that tries to cook the figures or change them in any way. I would be the last person to do that.
Could the excessive deficit procedure have been avoided by shifting some payments?
This is taxpayers’ money… but this is the very mentality that the previous Government was kicked out for.
If our economy was so strong, if our flus were really fis-sod why did people change their government?
I can tell you it is this arrogance, lack of transparency that they wouldn’t know what the truth is.
In advanced countries… transparency and the truth are important characteristics and obviously sometimes it does not look good.
This in turn puts more pressure on me not to search for one-offs [one-off revenue injections] and make sure expenditure is constrained within what is planned. This will improve the system. Of course it is going to be harder.
Was your motivation to show up the previous Government?
No. I did not interfere in the process. If I had replaced the permanent secretary, the head of the National Statistics Office, the treasury and economic policy division by putting my people there and the data came out as it did, there would be some suspicion.
But I did not. These are the same people who worked the November estimates and I just told them to review the estimates for this year in view of new expenditure.
This had nothing to do with last year’s figures.
Do you think there is a chance of Malta getting away with facing sanctions of some sort?
The Commission will definitely be disappointed… but we have to put forward convincing plans and explain this is a new government with new standards.
This year we are aiming to go below three per cent.
There was a one-time slippage in the deficit that will have to be carried forward but the improvements in the deficit that have been promised to the Commission will continue. This year it will drop by 0.6 percentage points to 2.7 per cent.
Despite fiscal slippage you have retained the top income tax cut for this year and the next two years. How is this possible?
This is not a cut of the top rate of income tax. Those earning higher than €60,000 will still be paying 35 per cent.
This Budget widened the income band for middle income earners.
We don’t want people at the lower end to suffer but it could have been that middle income groups were heavily taxed.
These are graduates, families where both spouses work, with children at school and they are the main contributors of income tax.
This change will motivate them and encourage them to work more. We have to assess the economic impact of this tax cut.
But this will also mean a loss of revenue for the Government.
Not necessarily because these taxpayers are the main contributors of income tax.
Do you rule out imposing new taxes or increasing existing ones to make up for the reduction in revenue these three years?
Many politicians promise many things. I don’t promise anything.
I just promise that we will hopefully have economic growth and the tax burden will fall.
But if you ask me whether I will raise taxes on cigarettes and petrol, I will not promise anything on that.
So you will not rule it out.
Our overall objective is to stop public debt rising.
This is the first and most important objective because unless we do that we are pushing the country towards bankruptcy.
We saw this happening in other countries. The only situation a country can become bankrupt is if debt is allowed to spiral.
If we stabilise debt levels we would have stopped moving towards the danger zone. Other things will follow.
In principle we do not want to raise taxes but we have to keep check on the expenditure side and that is quite a mouthful.
What expenditure will you be targeting?
The three big pressures in this ministry are health, education and social payments.
They have to be watched all the time and new structures introduced to ease the pressure.
We have to change management styles, organisational set ups… to make them more efficient.
Does that mean cutting social payments?
It is not a question of cutting. We have to get more value for our money. Let us say in the health service we are not getting as much as other countries.
The first issue will be ‘We need more money’. If we are spending less on health than we have something wrong with our Budget allocation but if we are spending a ratio of our GDP that is the same as that of other countries and not getting the same value in return we have to reorganise our system.
An opinion piece you penned in The Times after attending your first meeting of euro group ministers on the Cyprus problem raised eyebrows in financial circles. People in the sector felt that your observations could have sent the wrong message about Malta’s financial sector. Were you being naive?
I do not follow why that affected the financial sector, honestly.
What I did was describe how, as a new Finance Minister, I was impressed and shocked by the state of a country in a near-bankruptcy situation asking for help from its colleagues… the lesson was in the last paragraph: that is something that I would never want myself or my country to experience.
This was the whole intention of the article, to show what happened throughout the night and how Cyprus was pressured because it had to ask for a bailout.
It had nothing to do with my country’s financial system.
It was a lesson for our country to learn and make sure not to play with public finances and debt.
This is something to take very seriously; otherwise we could end up in the same situation.
Could it not have been interpreted as saying ‘be careful because our banking system is as large as Cyprus’s’?
Why are you raising this issue? I cannot understand.
Maybe you would like to be more specific.
People in the industry did express some concern: could these comments raise question marks among international investors, who might have asked why was Malta’s Finance Minister so scared?
Not scared. I am just emphasising how important good economic governance is because you do not want to end up in that state.
If you want to give a religious interpretation, you are scared of hell and so make sure to live a good life. For the Finance Minister it was like that.
You’ve seen hell in one night and you say ‘no way, I want to lead the good life’ as far as public finance is concerned and I want to transmit that to my people.
Sometimes you speak like an academic; you observe, analyse and say things as they appear to you but don’t you realise that being a minister in such an important political role, every word you say, can and will be scrutinised and people might give interpretations?
Of course, and you have to bear the consequences.
But I have been in the European Parliament for four years and I saw how governments and politicians work and do not mind being like them rather than our traditional politician who is always wheeling and dealing and hiding.
Politics is always politics and I do not pretend European politics is more naive, but it is much more straightforward.
In the Cyprus bailout, the EU crossed what financial analysts describe as the red line of trust when depositors were forced to take a cut on their funds. Did you object to this during the meeting?
It is the troika that negotiates with the country: the European Central Bank, the IMF and the European Commission.
These are the powerful trio. They prepare the work and come with a proposal that is negotiated with the concerned country in front of everyone else.
I did raise questions on why the bailout was not going to be used for the banks.
But once an agreement is reached between the country and the troika, there is no point in stalling the deal.
The initial levy across all depositors was not suggested by the troika or by us. It came from Cyprus.
But that first agreement shocked the whole system.
Looking backwards, in a moment of weakness they agreed to spread the burden across all depositors.
But in the second meeting they decided it sent shocks and the troika imposed it as a condition that depositors with sums below €100,000 will not be touched.
In the past the burden was shouldered by the taxpayer whenever a bank failed. A difference must be made between small-time depositors and those who go into speculative banking.
The European Parliament was working on regulations for bank resolutions by introducing a living will for systemically important banks.
The regulations will in the future mean that large banks will have to be split up if they run into trouble with normal depositors and banking procedures going one way and the speculative part going another.
Investors, shareholders and large depositors in the speculative part will have to bear the cost of failure rather than taxpayers.
The Opposition has said it would have objected to the Cyprus bailout strategy.
That was very rich coming from a previous Prime Minister and Finance Minister from whom we heard not even a squeak when they were present for meetings that imposed austerity programmes on Greece, Portugal and Ireland.
In the wake of the Cyprus bailout questions were being raised by the international press on Malta’s own banking system. The Dutch Finance Minister who heads the euro group also let loose some disparaging comments about Malta and Luxembourg that were then retracted. The Government was slow to refute the claims being made. Why?
The damage from the Cypriot issue was not from the package because it was a one-off.
The damage was done when the president of the Eurogroup Jeroen Dijsselbloem – and I have a letter here which I sent him because I was very angry with the interview he gave – pre-empted the discussion in the European Parliament and the Council on how bank resolutions will be treated and said the Cyprus bailout was a template for the future.
To make it worse in our case, the interviewer from the Financial Times mentioned Malta and Luxembourg because they looked alike from afar and Mr Dijsselbloem responded as he did. When I called him on the phone…
You actually confronted him with this?
Of course I did. I called him and sent him a letter on the matter. His reply was that he did not mention the countries himself but they were brought up by the interviewer.
He may have been taken aback during the interview and his reply was not satisfactory. But he later retracted his comments.
But then media speculation started and this was intentional, started by some big countries.
These countries with evolving financial sectors have been trying to find this opportunity to thrash Cyprus, Malta and Luxembourg…
Which countries are these?
Number one would be Germany. They did not hide it and they say it everywhere.
The Netherlands would be next and from my experience in the European Parliament they look at Mediterranean countries with certain disdain.
It is not a correct view but unfortunately it comes out in the media.
Under this serious attack I sent for top advisers from the UK, I brought the heads of the Malta Financial Services Authority and Central Bank around the table.
We saw that everything was stable and it was just a media attack. We were advised it was no use to try and protest at that point in time.
Neither the FT nor The Economist, influential newspapers, came out with the nonsensical attacks that Malta was bankrupt, a tax haven and other shoddy descriptions used by other media outlets.
When Luxembourg, a very sophisticated jurisdiction with vast experience, came out with a perfect reaction, I brought the experts here to draft our own press statement.
We had to bear it out and now a report by the European Commission has confirmed that we are not at risk.
– The Sunday Times : Sunday, 14th April, 2013