Intaxxati bil-moħbi

minn Edward Scicluna, Kandidat tal-PL ghall-elezzjonijiet tal-Parlament Ewropew 
  
l-orizzont - It-Tlieta 14 ta' April 2009 
  

Kulħadd jaċċetta li kull Gvern irid jintaxxa biex ikollu x’jonfoq fuq is-servizzi pubbliċi. Però għal kol lox hemm limitu. U dan japplika għat-taxxi wkoll. Mhux l-ewwel darba fl-istorja nisim għu b’rew wixti meta l-pajjiż iħoss li m'għan dux iħallas iżjed milli jmissu. It-tbatija, riżultat tal-piż tat-taxxa, tkun tant kbira li l-pop lu ma jkunx jiflaħ għaliha aktar. 
  
Dan il-gvernijiet jafuh. Biex iżidu d-dħul tagħhom b’mod si ni fikattiv dawn iridu bilfors idaħ ħlu xi taxxa ġdida, jew inkel la jgħollu r-rata ta’ taxxa li teżisti diġà. Hekk pereżempju ġara me ta ddaħħlet it-taxxa tal-VAT, kif ukoll meta din għolietilha r-rata minn 15 għal 18 fil-mija. 
  
U għalhekk il-Gvern jipprova skemi biex dan il-piż jiżdied kemm jista’ jkun mingħajr ma jinduna l-poplu. Irridu ngħidu li l-ekonomija tkejjel dan il-piż bħa la l-proporzjon tad-dħul naz zjonali li jinġabar f’taxxi. Sintendi anke jekk ma jitkejjilx il-piż ħafna drabi jinħass sew. It-taxxi ma jagħmlux il-Gvern popolari u għalhekk f’dan ir-rigward jekk jirnexxielu, huwa jipprova jaħbi idu. 
  
Fil-każ tal-Gvern Malti huwa ċar li hekk qed jiġri. 
  
Nieħdu l-ewwel mod. Kull sena minħabba l-għoli tal-prezzijiet, min iħaddem iżid il-pagi tal-ħaddiema biex dawn ilaħħqu mal-ħajja. Dan id-dħul m'huwiex reali għax fejn konna bqajna. Bi dħul miżjud b’ħamsa fil-mija biex tlaħħaq mal-ħajja li tkun għoliet b’ħamsa fil-mija ma tkun għamilt l-ebda gwadann. 
  
Mhux hekk għall-Gvern. Kontra dak li jsir f’ħafna pajjiżi oħra tal-Unjoni Ewropea, il-Gvern Malti ma jgħollix ’il fuq awtomatikament is-'ceiling' ta’ kull 'income tax bracket'. Għal hekk il-ħaddiem Malti jispiċċa jaqbeż is-'ceiling' u jibda jħallas iżjed taxxa mis-sena ta’ qabel. 
  
Għaliex għandhom ħaddiema jispiċċaw iħallsu iżjed 'income tax' jekk ikunu baqgħu kif kienu s-sena ta’ qabel? Huwa għalhekk li f’ħafna pajjiżi din it-taxxa moħbija mhix permessa u l-'bra ckets' jew 'ceilings' huma awto ma tikament aġġustati kull sena, f’sistema msejħa “index-linked”. 
  
Tant hawn Maltin li ma jafux b’din it-taxxa moħbija li meta kultant dan it-'tax bracket' jiġi rranġat, kulħadd jaħseb li dan hu xi att karitatevoli tal-Gvern li qed jaqta’ t-taxxa. Dan ġara dan l-aħħar. Sew qabel u sew wara l-elezzjoni ta’ sena ilu. Li jkun biss ġara hu li l-Gvern ikun radd lura xi ftit mit-taxxi li jkun ħa hu stess bil-moħbi fis-snin ta’ qabel. 
  
Iżda dan l-aħħar il-Gvern qed juża metodi ġodda kif iżid it-taxxi bil-moħbi jew kif jgħidu bl-Ingliż, “by sleight of hand”. F’ħakka ta’ għajn mingħajr ma tinduna jkun għolla l-piż tat-taxxi. Dan hu permezz taż-żieda ta’ tariffi monopolisitiċi wara t-tneħħija ta’ xi sussidji li kien hemm fuq dak is-servizz. Dan jinkludi iż-żieda fit-tariffa tal-gass fl-ewwel ta’ April, iż-żieda fil-kontijiet tad-dawl u l-ilma mill-ewwel ta’ Ottubru li għadda u ż-żieda mħabbra, iżda mhux attwata s’issa, fis-servizz tad-drenaġġ. X’qiegħed jiġri hawn?
  
Qabel ma nwieġeb din il-mistoqsija importanti rrid inkun ċar biex ma niġix ikkritikat li bħala ekonomista ninstema' li ma nemminx fil-liberalizzaz zjoni tas-swieq. Mhux qed ngħid li ċertu sussidji m’huwiex tajjeb li jitneħħew biex is-servizz jirrifletti kemm jiswielna biex nipproduċuh u biex inqassmuh. Dan japplika għall-gass, id-dawl u l-ilma u d-drenaġġ. 
  
Però din il-politika tas-suq m'għandiex tintuża mill-Gvern biex jgħolli l-piż tat-taxxi minn wara dahar il-poplu. Kif fil-fatt qed jiġri. Ħalli nfiehem aħjar. 
  
Lejlet li għola l-prezz taċ-ċilin dri tal-gass, l-ispejjeż tal-produz zjoni u distribuzzjoni kienu qed jitħallsu minn żewġ sorsi. Parti mill-konsumatur permezz tal-prezz issussidjat u parti mit-taxxi tagħna li kienu qed imorru biex jitħallas is-sussidju li l-Gvern kien jgħaddi lil Enemalta. 
  
X’ġara sew fl-1 ta’ April? Il-konsumatur ġie mitlub iħallas 37% tal-prezz ta’ qabel iżjed biex is-sussidju fuq il-gass jonqos sew. B’hekk jippermetti li l-Gvern ma jibqax iħallas il-'public service obligation' li fil-passat parti minnha kienet tmur għas-sussidju tal-gass. 
  
Mela filwaqt li l-ħaddiem Malti ntalab iżid il-kontribuzzjoni tiegħu permezz tal-prezz, l-istess ħaddiem ma ngħatax lura u lanqas ġie kkumpensat għall-fatt li issa m'għandux bżonn jikkontribwixxi mit-taxxi tiegħu għas-sussidju li issa se jitneħħa jew jonqos. Mela dan il-gwadann jekk ma ħadux min iħallas it-taxxa minn ħadu? Qtajtu sew. Id-differenza żamma l-Gvern Malti. Dan it-'trick' magħmul f’ħakka t’għajn se jippermetti l-Gvern idaħħal aktar taxxi, tant li se jgħolli l-piż tat-taxxa fil-pajjiż. Dan ġara wkoll fil-każ tad-dawl u ilma, fil-każ tal-gass u dalwaqt fil-każ tas-servizzi tad-drenaġġ. 
  
Fir-rapport ta’ stabbilità u konverġenza li l-Gvern Malti għadda lill-Kummissjoni Ewropea f’Diċembru li għadda huwa wiegħed li se jżid il-piż tat-taxxi (b’parti ta’ perċentwal tal-GDP) matul din is-sena li qegħdin fiha. Ħafna skantaw kif dan jista’ jsir. Qalu li żgur din is-sena l-Gvern mhux se jazzarda jdaħħal taxxi ġodda jew jgħolli r-rati ta’ taxxi li jeżistu. Dan veru, iżda bħalma rajna hawn fuq, il-Gvern għandu modi oħra kif jintaxxana iżjed, anke bil-moħbi. U allura l-wegħda tal-Gvern lill-Kummissjoni Ewropea ma kienet żball xejn. 
  
www.edwardscicluna.com 

Could interest rates in the Euro area go any lower?

Last Thursday, the European Central Bank (ECB) cut interest by 0.25 per cent to 1.25 per cent, falling short of analysts’ expectations of another 0.5 per cent rate cut. Business Today spoke to economic analyst – Labour candidate for EP elections and economist Edward Scicluna, about the ECB’s latest decision, the issue of non-standard measures and whether Maltese banks should cut their interest rates after the latest ECB cut, among other things. Report by CHARLOT ZAHRA

Edward Scicluna : “Too little too late”

What is your opinion about the ECB’s decision to cut interest rates at a historic low of 1.25 per cent?

Too little too late. The ECB does what some other Central Banks would have done with a bolder cut a month earlier. The overly conservative attitude of the ECB is now well established.What, do you think, led the ECB to exercise caution with cutting the interest rate this time around despite the worsening of the economic crisis in the euro area, especially the inflation figures? The ECB is more reluctant than the Federal Reserve to start using what it refers to as “non-standard” measures to support the Euro zone economy.The tiny and sparse cuts in the interest rates prove that the ECB wanted to take its time before reaching this unorthodox stage, which every central banker dreads.Resorting to quantitative easing and direct printing of money is not a light decision to take. It is still uncharted waters.

ECB Governor Jean-Claude Trichet reiterated his warning of using “non-standard” measures to support the Euro zone economy, saying that the ECB would be discussing the matter next month. Do think that the time is now ripe for non-standard economic measures or not? Why?

Quantitative easing is the term we use which a Central Bank may use in such an eventuality. It is similar to a tourniquet used in first aid; it may stop the haemorrhage but creates dangerous side effects.The printing of money sends shivers down the spine of any central banker. Can you imagine the European Central Bank getting to that stage in a country like Germany – where hyperinflation is likened to a volcano exploding in the middle of the town? Memories are hard to be forgotten.On the other hand, the downward risks are still there in spite of seeming observations of traces of an economic uplift on the horizon. Economic activity and asset prices are falling at a lesser rate.But one still needs to use all the monetary and fiscal instruments at one’s disposal to stop this dangerous beast. The 1930s devastation happened only 80 years ago.The stages being reached are still very similar. That’s why it is so scary. The G20 meeting has to be seen in this perspective.

Last month, Maltese banks did not pass on the full interest rate cut to clients, claiming that they wanted to protect depositors. In view of the current crisis facing the Maltese economy, do you agree with the banks’ approach? Why?

The fall in the central interest rates have stopped being effective because the banks are no longer responding in sympathy. Today’s banks are upping their rates rather than lowering them.The reason is simple to understand. Interest rates include a risk element. That risk element is increasing and the cautious and correct banks want to reflect it in their lending rates.And that is why soon the Central Banks have to do what the Japanese did in their decade long recession – quantitative easing.

In your view, should they now pass the full interest rate cut to their consumers, especially since the rate cut is smaller?

Governments may use cajoling, suasion and similar methods to get banks to respond to ECB rate changes. But there is a limit to what they can do.

Taxation by stealth

by Prof. Edward Scicluna

The Times of Malta - Wed 8th April 2009 
  

We define a tax burden as the ratio of revenue from taxation to the country's national income as measured by the GDP. This ratio varies over time and from country to country. What is definite about it is that, as the tax burden increases so does the pinch on one's pocket. 
  
Most of the time this tax burden can come about either by increasing a current tax rate, as has been the case with VAT, which was raised from 15 per cent to 18 per cent, or by introducing a brand new tax. The third way of increasing the tax burden, which is the subject of this contribution, is by stealth. Governments the world over have sneaky ways whereby revenues can be increased to such an extent that they push up the tax burden and this without the full knowledge of the taxpayer. 
  
I am not here referring to tax buoyancy. That is the quality of intelligently-designed taxes that can keep their due revenues growing at the same rate that the economy is expanding, if not more. Income tax and VAT fulfil this prerequisite. They can look after themselves and are able to fill the public coffers as the economy's growth manages to surge forward. For many that is understandable and find no objection. But for sneaky ways? 
  
The first sneaky way to increase the tax burden is by avoiding to inflation-proof the country's income tax. Most advanced countries are not allowed to use this form of hidden taxation. We all know that inflation, even if it were compensated by appropriate wage increases, such as with our local Cola arrangement, does nothing to add to our standard of living. So why should we pay income tax on our Cola and additional inflation-related wage and salary increases? Up to now the Maltese government has not put into place a system whereby each year the tax thresholds are increased automatically (index-linked) to account for nominal wage increases that do not add anything to the real take-home pay. 
  
Many tax payers do not perceive the effects of this nominal fiscal drag. The government knows this. So it may prefer to adjust tax brackets manually once every few years. What in effect is simply the restoring of real tax rates to their approximate pre-inflation levels appears to be a benevolent act of the government looking as if it is cutting taxes. Not surprisingly, such changes are usually made right before a general election or after, in fulfilment of a pre-election promise. 
  
The latest weapon to be used by the government to increase the tax burden by stealth is the increase of public monopoly tariffs following the removal of a government subsidy. This has been observed with tariff increases of electricity and water last October, the price hike of gas as of April 1 and the soon-to-be introduced drainage tariff. 
  
Let us be clear about the argument. One could make a good case for the introduction of earmarked tariffs for specific services such as water or drainage facilities to ensure the recovery of their cost. One may also make a similar good case for the removal of subsidies on certain services such as energy, water, gas and other public utilities to reflect their true cost to society. 
  
However, one should not use this change of policy to increase the tax burden by stealth. Let me explain. Take the price hike on gas cylinders. On the eve of the price hike, the production and distribution of gas on the island was paid for in two ways. One was paid directly by the consumer, admittedly at a relatively low price. The other was paid for, indirectly, by the taxpayer who ultimately finances the subsidy paid by the government to Enemalta to keep the price of a gas cylinder lower that the market would demand. 
  
What has changed on April 1? The consumer has been asked to shoulder a price hike, which permits the government to reduce its previous public service obligation subsidising the price of gas. So while the Maltese, with a consumer hat on, has been asked to make a higher contribution, he or she, this time wearing the tax payer hat, has not been compensated for the saving made on the reduced subsidy. The government has pocketed the difference. The same sneaky tax deal has occurred with water and electricity and soon would be applied to drainage services. 
  
If one had any doubt as to how the Maltese government has promised the EU, in its latest stability and convergence report, that the tax burden for Malta was to increase without the introduction of new taxes or the raising of current tax rates, now one knows how this is done. 
  
Prof. Scicluna will be contesting the European Parliament elections on behalf of the Labour Party. 
  
www.edwardscicluna.com 

The 'big R' has arrived

The economy went into a recession during the second half of 2008, confirming the widespread feeling that Malta was not going to remain unscathed by the "big R". 

Economic growth for the whole of 2008 reached 1.6 per cent, which, although positive, was still two percentage points lower than the previous year and half of what the government was forecasting in the budget.    Figures released by the National Statistics Office last Wednesday confirmed that last year the economy contracted in real terms in the third and fourth quarters after registering growth in the first half of the year.

Eurostat defines a recession as two successive negative quarter-on-quarter changes in constant-price GDP. The seasonally-adjusted data for last year, which made it possible to compare one quarter with the preceding one, showed that the economy contracted by 0.3 per cent in Q3 and a further one per cent in Q4.

Reacting to the news, economist and Labour MEP hopeful Edward Scicluna said he was amazed that the government's economists did not get wind of the GDP data for the third quarter when drawing up the budget last year. "The budget predictions were always looking too optimistic and the latest data confirms what some economists, including myself, had been warning," Prof. Scicluna said.  

A more shocking revelation for economist Karm Farrugia was the data for gross fixed capital formation, which measures public and private investment in the economy. "Gross fixed capital formation contracted by more than 14 per cent year-on-year. This is serious because capital investment is what pumps up an economy. It transpires that the government was not aware of the circumstances that suggested we could be heading into a recession and insisted on reducing its capital investment programme. "Unfortunately, people like myself were described as prophets of doom," Mr Farrugia said.   

Although Malta has not seen negative economic growth in years, economic analyst John Cassar White said it was not surprising considering the prevailing global recession. Mr Cassar White stressed that the most important figure to be worried about was the yearly growth rate, which for last year, although lower than predicted, was still positive. The NSO statistics show that GDP topped €5.7 billion in 2008. Growth in value added was generated in the transport, storage and communications sectors, financial intermediation, real estate, renting, business activities, public administration, education and health. There were also increases in wholesale and retail trade, quarrying and construction. Drops in value added were seen in agriculture, fishing, manufacturing, particularly of electrical and optical equipment, electricity, gas and water supply and hotels and restaurants.

The Times of Malta, Friday 13th March 2009 by Kurt Sansone and Christian Peregin 

Net gainers or net donors

Times of Malta, Friday 20th March 2009 by Prof. Edward Scicluna

The interview with EU Commissioner Dalia Grybauskaite which appeared in The Times last Tuesday misses the whole point at issue. It gives the impression that what matters mostly to the Maltese now is whether it was the Permanent Representative to Brussels, Richard Cachia Caruana or Labour leader Joseph Muscat who was right by a whiff of a few million euros either way, making us marginally net gainers or net donors vis-à-vis the EU.

Let us put the record straight.

As a member of the EU, Malta is gaining significantly in the environmental, social and economic fields through the various standards being imposed on our policy makers and operators, for example with respect to liquid and solid waste management, fiscal discipline and better legislation throughout. This is affecting positively our health, our standard of living and our various rights. It must be said that this would have been more positive had the government not dragged its feet with respect to various directives, besides the infringement this is giving rise to. Furthermore, a better negotiated treaty for various sections of the population would also have meant less suffering and less broken promises.

Coming to the financial package we recall the €855 million obtained for the 2007-13 budget period and how this was promised to revamp our economy. Nothing was said then about what were our dues, our EU membership fee, for that same period, and which we now roughly estimate to take about half that amount back to the EU.

Emphasis is also being made on the fact that we were record spenders with regard to pre-accession and transition facility funding. Agreed. But these were monies spent mostly on civil servants to train abroad (air fares, accommodation and fees) and twinning programmes with EU partner countries that provided, against payment, the training and consultancy on the island. Not so difficult to spend these monies.

The question here to ask is not whether we spent most of the money (mostly in foreign countries) but what benefits did we obtain from them. The various evaluation reports, including those carried out with the participation of the undersigned, might be seen on the web and can be judged on their own merits.

The problem with the 2007-13 Structural and Cohesion Funds is that they entail the planning, approval, building and completion of major projects. Various urban waste water treatment plants, waste recycling plants, incinerators, roads etc. It is an admitted fact that our Administration cannot cope adequately with these projects and, as a result, we are very late on most projects and risk losing funds if not completed in the agreed periods. So much so that, even according to the table provided by the EU Ambassador himself, in 2008 Malta finished a net gainer from the EU by some €5 million. Big deal!

To try to drag the Commission to underline that Malta need not be a net contributor is babyish at best. Of course, we know that these monies are due to us and perhaps they might not be lost to us. But can you imagine if a patient is given only half the medicinal dose due to him/her on two consecutive days in the comfort that the medicine will be alright in the fridge? Malta today is that patient. It needs its planned investment in full today.

Using half the amount over two consecutive years is no help to the economy. The EU has even allowed us to dip into the 2010 budget to help ride the recession. Keeping the funds for the future will not do us any good.

EC ‘too naïve’ to believe Malta’s fiscal deficit was a one-off

Business Today - Wednesday, 04 March 2009

Senior economist and Labour candidate for the European Parliament (EP) elections Edward Scicluna said that with its assessment of Malta’s Stability Programme for 2009, “once and for all the EU has clarified a point which I felt was being misunderstood by many local economic observers. “This refers to the quick conclusion reached, that while the impending recession necessitates some form of economic stimulus, and that since the EU Commission itself was encouraging many EU countries to initiate such a stimulus, Malta would be allowed to exceed the three per cent deficit,” Scicluna explained. “This, I had emphasised, applied only to countries which had enough room to manoeuvre. Surplus countries like the UK and Germany were given the go-ahead,” he said. “But an excessive deficit procedure was slapped on all those who have exceeded the three per cent limit.”

Asked whether he agreed with the European Commission’s assessment on Malta, Scicluna said: “Where I disagree is the politics played by the Commission vis-a-vis Malta. “I cannot believe the Commission is so naive as to believe that Malta can actually fall in line in a short while in view that our excessive deficit was merely due to a one-off fiscal slip,” Scicluna insisted. “Of course it could well be that the Commission is playing a game, calling Malta’s bluff that it would correct its excessive deficit in a few months,” he added.

Scicluna said that he agreed with the EC’s assessment “that the risks of Malta delivering on any of its promises are high. I would go one step further and state it is nearly impossible to deliver such promises at this stage of our economic cycle.” On the other hand, Scicluna disagreed with the European Commission asking Malta to lower its expenditure in the health sector as proposed in the EC’s assessment.

“With Malta experiencing a record fall in exports throughout 2008, and the ramifications on future employment outlook, and with the whole business and private sector baying for assistance, I cannot see Malta increasing effectively its tax burden and lowering public expenditure in its most suffering sector – health,” Scicluna told Business Today.

Scicluna said the Maltese were “eager” to see efficiency being raised so as to expand the level of service in their hospitals without necessarily spending more. “But I cannot see the Government raising efficiency by cutting costs. I wish the EU Commission could elaborate more on this subject,” the senior economist insisted.

“In the meantime just wait to hear noises from the Government side about stipends blaming the EC for pushing for their downward revision,” Scicluna told Business Today. Scicluna said that he “agreed fully” with the EC’s assessment that a significant part of the reduction of the budget debt during 2004-2007 was the result of one-off privatisations and sale of property. “If we exclude one-off privatisations the debt ratio cannot fall by its own accord unless we manage a surplus on our primary balance. “This was the only reason I thought the EC would fail us in the Euro test. They did not. Fine,” the senior economist told Business Today.

“Now we are facing problems and the EC is still saying it believes our Government’s conclusion that the public finances are sustainable and the glitch was a one time event. I fail to see the logic,” Scicluna insisted. Asked to elaborate on what other avenues the Government has to curb expenditure in view of the fact that there were few public entities suitable for privatisation, Scicluna explained: “The Government has to bite the bullet and ensure that public expenditures fall in line within what the country can bear to pay in taxes. It is that simple,” he told Business Today. “But the Government has been trying to avoid facing this home truth for years on end.

“Of course we may scream and say that this is definitely not the time to do it. And perhaps this time round we are right,” Scicluna explained. “But would the EC listen? Promises are promises,” he warned. In view of how the public finances performed last year, Scicluna was very sceptical about the Government’s ability to meet its budget deficit target of 1.5 per cent of GDP again this year, particularly in view of the economic recession that has hit the Euro area.

“Without giving figures from the top of my head, in the absence of an econometric model, I would say that I would be very surprised if we manage to squeeze ourselves inside the three per cent allowed cap during 2009,” Scicluna told BusinessToday.

Capital projects could re-ignite economy

Interview by Gerald Fenech, The Malta Business Weekly - 5th March 2009

The capital projects proposed by government could be the key for public finances to recover from the current state which saw the deficit expand by EUR74m in January. Statistics issued last week by the National Statistics Office showed that government debt increased by 117 per cent during January to EUR136.5m, more than double the amount of last year.

Speaking to The Malta Business Weekly, economist Edward Scicluna said that the islands should work hard on EU funded capital projects to receive payment for the work completed. While on paper, EU funded projects require partial government funding, the secondary linkages and tax proceeds from the economy leave a positive effect on public finances.

Prof. Scicluna, however, complained that the situation is precarious with expenditure rising in an unsustainable manner and figures for the whole 2008 still unavailable. “As a Maltese citizen I feel annoyed that government supplies the data to the EU Commission with regards to the Convergence and Stability Programme but does not find it necessary to publish it in Malta. The figures for January 2009 were published while those for the whole of 2008 are still not. Worse we are told that we need to wait till March or April to see last year’s full figures published.

“The data for January, taken on its own, shows a bleak picture of government finances. They give the lie to what has been promised to the EU Commission that the excessive deficit at the end of last year was a one-off due to the energy subsidy and the Dockyard early retirement scheme. I find it hard that the Commission can believe such an excuse.”

We also seem to have convinced the Commission that apart from this one-off item we could quickly bring the deficit under control by increasing the tax burden and reduce the public expenditure portion of the GDP.

“End of January figures show that this could be a dream. How can you promise to squeeze the economy at a time when it is asking for financial oxygen? With a clearly declining economic activity, one would be expected to collect less income tax, less national insurance contributions and over time less VAT.”

Asked which sectors have contributed towards the deficit ballooning in such a manner, Prof. Scicluna acknowledged that the energy benefit and the ’yard’s early retirement scheme did contribute towards the deteriorating state of public finances, although he adds a caveat that expenditure “exploded” across all sectors.

“According to government, it is the one-time EUR100m spent on the energy subsidy and early retirement scheme. The figures show that public expenditure exploded across all sectors, with some more than others. Wages took a spike in 2008 and remained high thereafter. Transfer payments too have increased. Since none of these public sectors have been restructured, this upward pressure is to be expected. What we are seeing is government containing expenditure by making it difficult for the entitled consumer to get his deserved service. Out of stock pills and hospital queues are a symptom of this ‘expenditure containment’ method. We all know that this is not sustainable.”

Prof. Scicluna also explained that the deficit will continue to grow as the economy worsens and more public sector money is put into the economy to prop up ailing sectors. “This is one of the tenets of macro-economic policy that during an oncoming recession the automatic stabilisers fire in. These are money from the public sector which automatically are paid to those who are being hit negatively by the current recession. This will benefit the economy, but obviously worsens the deficit. Beyond this, there is the more obvious fact that less income tax, national insurance contributions and VAT are collected when the economy falters.”

Asked whether government debt has become unsustainable in the long run, Prof. Scicluna explained that a slowdown in growth will further accelerate debt as the interest being paid by government to service the debt will probably be exceeded eventually.

“The debt ratio is made up of the gross debt and the GDP. For the ratio to stop growing we require that for the future, the rate of economic growth rises faster than the interest rate paid by the government to service that debt. Once the debt servicing rate of interest exceeds the rate of economic growth, the debt burden shoots up. The longer the recession the faster the burden grows.”

A piglet on Noah's Ark

Published on The Times of Malta - Wednesday 25th February 2009

In spite of the great foreboding 10 years ago, that the eurozone is not exactly the United States with its near optimum currency area characteristics, results have shown that it did pretty well. Its members saw satisfactory rates of economic growth, equally impressive rates of job creation and subdued inflation; really, a model of economic stability. This happened in spite of the lack of independent economic adjustment by the individual eurozone members normally used to independent monetary and exchange-rate policies.

However, it must be recalled that many of its promoters wished it would be much more. The euro was supposed to be an engine driving supply-side reforms across its member states, making them more productive and competitive than any other world economic block. Actually, this did happen with a number of eurozone countries. Germany, Austria, Finland and the Netherlands did indeed bite the bullet and duly implemented reforms to make their economies more flexible and more competitive.

With time, though, the zone was turned into an animal farm, with some animals being more equal than others. At one end a group of like-minded Mediterranean countries, nicknamed "PIGS" in view of the fact that the main protagonists were Portugal, Italy, Greece and Spain, were having a different view of the eurozone. Their view all along has been that the eurozone was itself a safe haven. It would serve them as a Noah's Ark in times of a global financial deluge.

Fine. So they made supernormal efforts to qualify and join at any cost. They increased taxation significantly and introduced one-off fiscal schemes, kept expenditure temporarily on hold and kept wage increase at bay until the euro test-time. One particular country, Greece, was even subsequently caught cheating and got fined.

As soon the euro test was over, these countries, having felt secure with having boarded what each believed is Noah's Ark, have gone back to their old practices and economic sinful behavior. The euro saw the end rather than the beginning of their economic reforms. Sounds familiar? The result now is that the eurozone is no longer seen as a top notch club of first-class economies but a club with two classes of members. The "PIGS" group is showing common symptoms: High effective exchange rate and endemically uncompetitive exports, rising unit labour costs, deteriorating current account balances and similar deterioration of its member's public finances. With an economy that seems to be and, in fact is, stuck, the feeling is dismal and general frustration is there for all to see. Feeling cosy within the eurozone, their respective peoples, however, have no appetite for painful reforms. In fact, their political masters have ruled this out in no uncertain terms.

In the face of greater global stress, a sharp rise in bond spreads are being observed for Portugal, Italy, Greece, and Spain. You cannot expect, in these testing times, that capital markets will be less forgiving of high public debt or rising budget deficits. To make matters worse, Standard & Poor's - a credit-rating agency - has recently downgraded Spain, Portugal and Greece.

Which brings us to our own predicament. Like the "PIGS", we too made strenuous and admittedly heroic efforts to join. We truly believed that we could not stay out in the cold. Even now, we are thankful that we are cosy within, watching the outside world fall apart. Non-eurozone island states like Iceland are pointed out to us like a Titanic film watched from the cosiness of our sitting room.

But are we sure we are not the piglet on Noah's Ark? Are not our symptoms very much akin to the "PIGS" family? Are not our exports and tourist services uncompetitive? With exports falling record heights when compared to all the other European Union countries, resulting in yawning current-account imbalances. Has not the IMF and, more recently, the EU warned us about the repercussions of unsustainable wage agreements in 2008? And how can we explain that we managed to break all three sacred vows we took when we joined the eurozone, namely not to exceed the three per cent deficit-GDP ratio, to keep inflation low and to maintain a declining debt ratio.

Most economic observers were fooled when they thought they heard the European Commission telling EU members to stimulate their economies through more spending. They thought that the message was meant for all the member countries irrespective of whether they had room to manoeuvre or not. Of course, they were wrong. It was only meant for surplus and not hugely indebted countries like the "PIGS" family and piglet Malta.

It must have come as quite a shock to many last week that Malta was close to be slapped by the EU's standard "excessive deficit procedure". Instead, we were given a reprieve. Unlike Latvia and the other wavering countries, we were smart enough to impress on the Commission that this state of economic affairs was a one-time quirk, almost a mirage. And, of course, we are now in for a bigger shock. Because the reprieve was conditioned by the promise that Malta would soon get its public finances in order in two principal ways; One, by cutting public expenditure as a result of a health reform and, two, by increasing the tax burden by nearly a percentage point of the GDP. Yes, you read well. This much is stated to have been promised in the European Commission's Assessment of Malta's Stability and Convergence Programme.

How we can promise this plan in the face of increasing pressure from the business and private community for some relief from the scourge of the impending recession boggles the mind of anyone, not least the economist.

Prof. Scicluna is a Labour candidate for the European Parliament elections