Yet another tax-and-spend binge

Outspoken economist Edward Scicluna sticks to his guns and wards off detractors by saying it as it is when it comes to the state of the economy.

As he peers from behind his spectacles, Edward Scicluna makes a gentle allusion to the state of the Maltese economy, as a hard-working bloke with a recurring drinking problem. “A nice good chap on the whole, but who has the habit of solving or drowning his problems in drink.”

For Scicluna, pointing year-in, year-out the problems that have faced various administrations that managed the Maltese economy, has not always come without confrontation. His blunt appraisal of the economy, made with a professor’s touch rather than anyone who might be enamoured of the establishment’s politicians, has often meant pointing out the stifling role politics plays in the economy – having to spell out, yet again, the unsustainable growth of the public sector workforce, the uncontrollable expenditure by the government, the failed attempts at rending Malta more competitive externally.

It’s déjà vu once again for the state of Malta’s finances. This year, it was predicted that Malta’s deficit would go down to 1.2% of the GDP, unprecedented for the past decade and a half. Instead it ballooned to 3.4% after government spending exploded to €200 million. In drinking terms, the economy has fallen off the wagon.

So should it just all go cold turkey? Or, as Scicluna asks, maybe ply our friend with a glass of red wine simply because it’s good for the heart, as government prepares to go back to its “spend and borrow” habits to survive the global recession? Although the Maltese economy has been industrious and resilient, Scicluna argues that since the mid-80s governments have taken up the bad habit of resolving too many of their economic problems by spending more, and borrowing more.

And this bad habit has grown and grown over time. “You have a clearly unproductive shipyard. What do you do? You borrow heavily to subsidise their wages and low productivity for two decades. You provide expensive university education for free with a small salary to the student to boot. You provide the most generous pension scheme in Europe, free health for all, keep over-staffed ministries and government departments, and so on. And how do you do it? Tax and spend. And when you cannot tax, just borrow and borrow.”

Surely the government has been warned that this is not sustainable. But like many alcoholics government has lacked the will power to act, Scicluna says. “So you join the EU and the eurozone in particular, to serve you as your Alcoholic Anonymous (AA). They have the tools to keep you in rein, and in any case you can always blame them for things you do against your will.” But wasn’t joining the eurozone a guarantee that we won’t fall back to the bad old ways?

“Without the EU and the euro, today our governance would have been in a shambles. That does not mean however we can sleep soundly just because we are in.” Only three years ago however, Scicluna had declared himself to be against Malta pegging the Maltese lira to the euro at a fixed rate upon entry into ERMII, the waiting stage for countries preparing to convert to the euro currency. He was also sceptical on whether Malta would pass the test to join the euro. Has history proved him wrong? Scicluna insists he had solid economic reasons for his doubts, insisting that it his duty to speak his mind as an economist. “As an economist I have an as-yet-unfulfilled wish to see our economy fly on its own through the principle of self-reliance, rather than through a series of well placed posts meant for the drunkard to hold onto,” Scicluna says, almost echoing Romano Prodi’s own description of Silvio Berlusconi in his management of the economy.

“That is why I was so insistent on the government and the Central Bank to go for the ERMII with an EU-suggested flexible rate with a band, rather than a fixed exchange rate. I would have wanted to test in real time, like modellers do with a wind tunnel, where the real rate of exchange really stood.”For Scicluna, having sound and sustainable foundations is even more relevant today. “This is the crux of today’s debate on this year’s Budget. The taxpayers have yet to see whether our administration has really and truly shed off its tax-and-spend binges, and to see the debt ratio falling without privatisation proceeds.”

Scicluna was sceptical on whether Malta could pass the euro test, not because of the inflation rate which he expected to go down (as it indeed did), but because he was concerned of the ever increasing ratio of public debt to GDP (how much of our wealth is taken up by debt), which was being paid off by one-off privatisations. “It appeared clearly to me, at the time, that our economy could not potentially face an external economic shock successfully.”Scicluna claims that he only came to this conclusion after consulting with the IMF and the EU for their respective stress tests carried out on the Maltese economy, using their sophisticated models. “This is why I was sceptical. I found that the Maltese economy fared badly in comparison with other EU member countries. The projected debt ratio, under these stress tests, exploded above the 100% mark.” Scicluna is aware that his comments have not gone down well with those in power.

“I am still blamed today by a small group of narrow-minded people for expressing this scepticism in public. But what is an economist for, if not to warn the economic managers of dangers ahead? I have been doing this unashamedly since the early 1980s under previous governments too, and see no reason why I should shut up.”For Scicluna the alarmingly high deficit, and government’s knee-jerk reaction to increase water and electricity tariffs, is just proof enough if it ever was needed that all the economic preparations needed for joining the eurozone, although carried out religiously, still lacked conviction.

“How do you explain a five-year collective agreement with the public sector employees to give them a small increase before we enter the eurozone, and a generous one thereafter? It is like tucking in a big beer belly trying to look flat for a Mr Muscle show, only to let it all out afterwards.” Malta is probably the only eurozone country which in its first year of membership broke its most sacred rule of all – breaching the 3% GDP ceiling for deficits. “Our rate of expenditure growth has left the deficit gap yawning much as it did way back at the end of 2003. Should it be a consolation to us that this rule has been relaxed for a while because of an impending economic hurricane? Who are we fooling?”

For the seasoned economist, the aim of having a budget surplus is to have of a cushion to protect us during a rainy day. But he now regrets the sight of seeing all the gains obtained from so much suffered economic pain evaporating in such a short time.

“It is a shame that our economy and its public finances in particular are now so unprepared for any possible future external shocks,” Scicluna says, fearing a return to the tax-and-borrow methods of the past.

“We are now divided as to how we should react. Tax more, or tax less? I think that it is so easy for an unreformed administration to reach for the bottle. Back to easy borrowing. Then tomorrow we shall see. This culture seems to be ingrained in our festa psyche and should find very few opponents.” But considering the international crisis, is that wrong?

“That is a very difficult question to answer. It’s like being advised to provide a bottle of red wine to an alcoholic friend because it’s said to be good for the heart.”

After first predicting last year that government’s growth projections had been too optimistic, to say that Scicluna is vindicated now that the deficit grew to over €200 million rather than falling, is an understatement.

“I am stunned that it has exceeded my worst expectations. Governments may go somewhat wrong on the revenue side as one could project the economy being more buoyant and therefore expect more income from taxes. What an economist would not understand is that the projections would go wrong too on expenditure side, as this depends on good planning. Normally variations are very small. To be way out as this budget shows we have done last year deserves a full explanation.”One of the worst mistakes committed in the past year was that of giving the impression that we had solved all of our problems.

“But to give the impression that we have made it, that we are at the top, and that we have turned the corner and that we are there and that we can now spend and give out the fruits for which we have toiled… the signal the people got was not correct. We were even told that the EU has given us an accolade and that all the central bankers were happy with Malta. But observant economists know that the funding problems in our education and health systems are still festering, ready to explode as soon as you let go a little bit.”

Scicluna warns that just as the government had to turn to cut the Enemalta deficit, next time round it might turn to students’ stipends. For it may still be taboo today to speak about cutting stipends, but when things get really rough the government might have a change of mind.

“In a moment of panic the government turned on everybody and ‘bit’ them. It did not spare businessmen, friendly hoteliers and the consumers. Everyone asked ‘why did you do this’?” Scicluna is convinced the government did not want to hurt anyone. “But it still bit everyone. And it will do the same to students and other sectors, unless expenditure is controlled.”

What Scicluna wants the country to avoid is shock therapy, saying it would be better to cut down on expenditure in a structured way than having to make sudden cuts. “I am sure the government didn’t want to give a shock but in fact it did, because it was constrained to do it.”

Scicluna also suggests the country should avoid letting the country’s political cycle take precedence over the management of its economic cycle. Scicluna doesn’t blame the man in the street for thinking that finances tend to go awry before and after every Maltese election.

Nor is he naïve enough to not expect governments from relaxing fiscal discipline just before the elections. Scicluna has studied this phenomenon when he was involved in a study of public finances in Canada between the 1950s and the 1970s.

“We found that like many other countries, public finances have a political cycle. Before an election public expenditure tends to be higher. It is normal that governments go a bit soft before an election. But there are variances and variances. To go wrong by 1% is one thing, but to lose control over expenditure by as much as 3% of the country’s GDP is another matter.”What makes Scicluna angry is that this is exactly what has happened in Malta. “In our case we broke the most important rule of the club we have just joined. In the first months of being a member of the euro club we have made a mess of it.

“Definitely we need to meet round the table and start afresh.”

Malta Today – Sunday, 09 November 2008

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