Leo Brincat, the Labour Party main spokesman for finance and the economy, believes that tax levels are not sustainable and there was no balance between tax collection and curtailing public expenditure. In an interview with Jesmond Bonello, Mr Brincat said the Labour Party was shortly expected to pronounce itself on the issue of whether a Labour government would keep VAT or not.

How do you see the economic situation?

The economic indicators speak for themselves. Most worrying is the general downturn in practically all key economic indicators. The government does not seem to be performing well in any area. The Nationalists are fast losing the reputation they had in the past for economic competence.

Do you see a deterioration?

The stock exchange was in decline long before equity started falling in the US. Tourism was already performing badly pre-September 11 of last year - although that obviously had a negative effect.

In manufacturing, although the economic services ministry and the Malta Development Corporation are trying to project the image that they can hardly cope with requests for investment, the information I have is that foreign direct investment (FDI) is not materialising. A new Labour administration would need to take a serious look at the Business Promotion Act.

What do you mean?

We will look at it afresh, especially to distance from it certain EU restrictions and impositions. FDI also needs a more aggressive marketing strategy. The general feeling I get when I meet people from the industrial sector is that the MDC is not performing.

The Federation of Industry might have different views but then some of its officials are high-ranking MDC directors. I am not saying that there is a conflict of interest because it is a good thing to have such people on the board, but perhaps they find it difficult to criticise their own performance.

What changes will you make to the MDC?

When we were in government, the MDC took a more aggressive approach. Although certain projects did not have time to materialise there seemed to be more projects in the pipeline than there are now.

Today, there seem to be more people on estate management than investment promotion. The whole concept of selling Malta also needs to be streamlined. I am not necessarily agreeing with the Malta Enterprise Board concept now being proposed, because it is being set up at the wrong time - so close to the general election - but the impression I have is that it is not going to be a leaner organisation. There is an urgent need to eliminate red tape and investors need to be reassured that they are going to be on a fast track.

Don't you think that being out of the EU, which will now also include central and eastern European countries, will make it much more difficult to attract FDI?

I don't think so. The person who made this point is someone with whom I am not normally in agreement: the French Ambassador Didier Destremau. He made two points: firstly, he said that when France looks around to see where to invest, it is not interested whether the country is in or out of the EU. Secondly, he asked why it should prefer Malta if, say, the Czech Republic or Slovenia offered the same package.

It is in our interest to come up with a package which these countries will be unable to match because of EU membership restrictions.

Don't you think that World Trade Organisation rules are becoming similar to EU constraints?

They have to be observed, obviously, but I don't think it is the same. In agriculture, for instance, the WTO makes certain concessions for small economies that are still in a state of development.

You are basically saying that the Maltese economy is in a bad state. Are you suggesting we are facing a recession?

I'm always very careful about using the word recession and I don't want to get involved in technicalities.

I prefer to use the word stagflation in the sense that we have economic stagnation due to both the domestic situation and external forces. At the same time, inflation has gone far beyond what government itself projected in its last budget and in the pre-accession programme it sent to the EU at the end of last year. Then you have unemployment figures going haywire when they should have been down to four per cent. If we look at the figures given in the labour force survey, unemployment has reached seven per cent. Even if we go by the Employment and Training Corporation figures, it is over five per cent. Inflation is also beyond control although it has dropped slightly in recent months.

But is the economic situation related to uncertainty because of a looming election?

The government is committed to holding at least two elections next year - the referendum and the general election - I don't think the local elections will be held.

The government will soon switch to election mode and find it even more difficult to introduce certain restraints on public expenditure and job creation. For instance, it has just issued a call for applications for principals, police and second secretaries in the public service.

Although the finance ministry has been relatively successful in raising revenue, in reality tax generation has gone beyond sustainable levels and there is no sense of balance between tax collection and curtailing public expenditure.

There needs to be the same self-discipline in government that is adopted by private companies. The problem will not be resolved by handing out consultancies or through the mushrooming of various authorities and bodies. Government needs to cut expenditure.

By how much?

I wouldn't like to make specific projections but what you need is a sense of direction. Unless you change mentality you cannot expect civil servants to make progress on their own initiative. One of the biggest obstacles we faced in government was when we tried to reduce costs.

There is a different school of thought which says that reducing public expenditure will have a negative domino effect on the economy.

Technically speaking, it will negatively affect the Gross Domestic Product. But if one can also sustain economic growth through private sector activity, starting with the multiplier effect of tourism, a great boost to FDI and other activities, one could make up for it.

Will reducing government expenditure be a priority for Labour?

Yes. Otherwise the deficit problem will continue to haunt us. The level of taxation in the country has also gone beyond saturation point.

Will Labour reduce taxes?

We will not make any empty promises but I believe there should be an appraisal of the tax system to see whether it has surpassed the sustainability level. On paper it seems to have done so. One will have to see what can be done in practical terms.

Will you be making an electoral promise in this sense?

The manifesto still has to be discussed. We are just committing ourselves at this stage to take a deep look at it - and if need be diligently review the existing tax structure.

How do you see the commercial situation in the country?

It is still dominated by cash flow problems.

In what way?

Up to a few months ago, the problems mainly affected property developers. Now they have reached very small traders. The liquidity problem runs right across the trading community. The country was living beyond its means in the early nineties and the effects of this are still being felt. Credit was allowed to get out of hand and the government deficit exploded at the same time.

I don't think that living beyond one's means is a local phenomenon and I am also not convinced that you can blame the government for the behaviour of an individual...

Granted. But consumption was being driven beyond sustainable levels which was unhealthy.

But can you blame the government for that?

Yes. I am not saying we should go back to protectionist policies and I am not necessarily trying to justify the pre-1987 policies which might have been somewhat inward looking and a bit restrictive. But even if we take the deficit problem, it was definitely fuelled in the early nineties and peaked in 1996.

In this day and age, no government has a say over consumers' behaviour.

But you can regulate trends affecting the flow of money in circulation and purchasing power. Today it is not a question of people living beyond their means but people not finding the means to maintain the living standards they enjoyed up till a few years ago.

What is a decent income for you?

I wouldn't quantify it in value terms but it should be something which would enable any family to retain the same standard of living it was enjoying a few years ago, as a minimum.

Are you suggesting that standard of living has gone down?

Prices here have become very similar to the ones you find even in certain Austrian regions, for example, where purchasing power is much higher.

What will you do if elected?

We have to offer a product which is competitive without selling cheap labour. I don't believe in going back to cheap labour but our competitive edge has to be retained.

For example, the Union Haddiema Maqghudin has often suggested that we should have some sort of agreement with the unions similar to the one they have in Ireland. Are they willing to have that kind of agreement?

At the same time, government has to play its part and ensure that it won't increase government induced costs. It is pointless calling on the unions to show restraint and at the same time increase government induced costs.

What happened at Air Malta, with all due respect to the new chief executive, will not help labour relations. I have always advocated restraint in collective agreement bargaining but how can one expect the people negotiating the Air Malta collective agreement at shop floor level to show restraint when we know the kind of package the CEO has been given? It is a matter of perception as well.

But in concrete terms, what will a Labour government do to make Malta more competitive?

If I had to prioritise the areas we would focus on, tourism will come before industry. I believe tourism should be the number one priority because of the multiplier effect it will generate and the positive spin-offs.

We are still a bit mystified by the reaction of the constituted bodies to the removal of TOSS and, as (tourism spokesman) Karmenu Vella pointed out recently, we sincerely hope that if we are elected, organisations like the Malta Hotels and Restaurants Association will not ask us to reintroduce it because they have remained completely mum over the government's decision to phase it out.

As I said earlier, more also needs to be done in the manufacturing sector. The only movement we have seen regards the companies that are already here.

The government seems to be refusing to grant another wage increase to civil servants. The opposition has accused the government of adopting a wage freeze. Do you believe they should be given another increase?

We criticised the government on two counts: firstly, because they used to criticise us when we introduced a wage freeze and secondly, government is being dishonest because it has introduced a wage freeze without actually calling it such.

Will a Labour government grant a wage increase to the civil service?

We have to look at the industrial scenario between now and the election. But as a result of these over-generous contracts for the high fliers, the union demands will be higher than they would normally be. One would have to reach realistic agreements which would retain our competitiveness but at the same time take account of the demands and conditions of the labour force.

But if you were in government now, would you grant an increase to the civil servants?

I wouldn't have made the mistake of loading the public sector wage bill through the previous collective agreement the way they did, nor would I have reached such agreements with high fliers. It is pointless trying to convince people to make sacrifices if you yourself are not showing self-discipline and restraint.

Private firms in Malta put cost containment as one of the top items on their agenda. Nothing is being done about it in the public sector.

Are you suggesting austerity measures?

It depends what you mean by austerity. We have to ensure that there are no measures that would have a negative impact on the lower and middle class.

There will be measures to enhance efficiency. But as a socialist party we will not sacrifice justice elements.

Obviously, we have to take stock of the situation and this is why we intend to have an independent audit as soon as we are elected.

I am not criticising the auditor general because he is one of the best people we have had in this role so far. But although he has made an effort to boost the manpower at the NAO, there is a considerable time gap until certain reports are prepared.

We cannot, as an incoming government, wait for a whole year to find out what the real financial situation is. This exercise will have to be carried out over the first couple of weeks.

We would also need to look into the civil service structure - not in the sense of dismissing civil servants but in the sense of stepping up productivity.

We also have to look at the way public corporations are run. We think the situation there is worse than in the government sector itself because there is a complete mismatch in the conditions of employment. In so far as the regulatory bodies are concerned, we feel there is a lot of duplication and there is a need for streamlining.

But will you dismantle such bodies? I am thinking of authorities which have been set up to tackle the regulatory aspect of certain sectors, like the Malta Communications Authority for instance.

We are not committing ourselves to retaining all these structures. If we want to have leaner organisations, we have to start from scratch and say 'how many of these organisations are necessary?' We have to separate the function from the structure.

Are you saying you will consider dismantling some entities?

You cannot have a leaner organisation if you are going to retain all these money gobbling entities. It is not just a question of whether they are run by Mr X or Mr Y. It is irresponsible to allow all these organisations to mushroom.

For instance, there are strong indications that the organisation of Malta Enterprise Board will not be set up by the time the election is due. Yet there are strong possibilities that the CEOs and the people running the show will be appointed before that. Is this fair? I think government should be cautious before taking certain strategic decisions and forcing certain people on a future administration.

Are you saying you will reduce the number of authorities?

Definitely. I cannot see how they can be made leaner without reducing them in number. This is one reason we have always voted against their establishment.

Do you think it will be a popular decision?

Among the people who have been calling on the government to curtail public expenditure, I would say yes.

Obviously not the employees involved...

I am not implying that people will be made redundant and I want to be clear on this point. That's why I'm saying that we have to distinguish between the function and the structure - and I will limit myself to this.

Fitch Credit Agency recently stated that "Staying out (of the EU) would damage Malta's creditworthiness unless a new government was clearly determined to retain and develop the parts of the EU acquis that are starting to enhance the efficiency and competitiveness of the Maltese economy." What is your reaction?

I met their chief economist when they were working on their report in Malta and I have now received their full report. What is interesting is that the report carried three particular items which I don't recall seeing in the local press.

First of all they are saying, and I am quoting, that: "Given our island's smallness, voters and politicians are made more aware of how decisions that might seen less important in larger countries will impinge on individuals."

Secondly, that "the financial terms along with the outcome of negotiations could influence Maltese voters heavily when it comes to the referendum."

Thirdly, and I see this as the most important point, is that "either option regarding membership may be politically viable, although neither is easy."

The fact that Fitch has categorically stated that "either option may be politically viable" shows that there is an alternative to membership.

To answer your question directly, there are many countries which are not in the EU whose creditworthiness has not been impaired despite their determination to stay outside the EU. I don't think that one can directly link creditworthiness with EU membership.

Now that we are months away from an election, don't you think it is about time the Labour Party pronounced itself on VAT?

It will and I believe it will do so very shortly.

Shortly...

I don't want to commit myself to the day because that is for the executive to decide. I have my views and other people have theirs. Ultimately the national executive decides what is referred to the general conference...

But we intend to pronounce ourselves on the issue. It would have been misleading to have postponed a decision by saying that we would want to know what the situation was like when we are in government. That would have been irresponsible and would have created uncertainty.

I am under the impression that some people are taking it for granted that you are not going to propose removing VAT again.

The cards are on the table. On one hand, we are saying that certain reservations we had on VAT still hold because we feel that it tends to be inflationary and its audit trail has proved that it is not as perfect as it seems on paper.

But at the same time we have to ask a crucial question: "Can Malta afford to change its indirect tax structure for the fourth time in so many years?" The answer to that question is very clear: it will be disruptive for the Maltese economy to go through certain changes and we will be addressing this question as well.

Which way does the scale tip?

We will be looking at the problem from a non-partisan point of view. We will not be saying that we must stick to a position A because we were in position A in 1996. At the same time we are not going to adopt position 'B' just because the Chamber of Commerce is saying so. It is not a question of pride or controversy. I feel that the delegates are mature enough to take the wisest decision in the circumstances.

What is your position?

All I can tell you is that we will take the most rational decision in the circumstances.

But what is your position on the subject...

It will be the most rational decision.

But are we in agreement that removing VAT will be disruptive?

I personally think so. If we had to remove VAT again, it would the fourth time in seven years that changes would be made to indirect taxation. It is pointless asking the question because the reply is automatic. This factor will be taken into consideration. Besides, we are waiting for the developments in the current row over whether the EU will be allowing Malta to retain a zero VAT rating on food and medicines.

From your experience as finance minister, are there things which you will try to avoid if Labour are elected?

One thing that will characterise the new Labour government will be that the key changes will be carried out in the first three months. There has to be a stronger dynamic in the first few months. We cannot afford the process of change to be prolonged because this will have a multiplier stalling effect on other areas of economic activity.

What are you expecting from this budget?

It will be more of an administrative budget than anything else. There might be some sweeteners but quite frankly, government is not in a financial situation to give out many.

Frankly, the budget will be irrelevant to the developments that will follow in the coming weeks. After November, the whole country will be in an election mode.

What will be the priorities of the Labour government so far as the economy is concerned?

It is a question of economic renewal. In the first few months we have to sow the seeds for survival. There is much to be done. The government has been complacent and although it might have got away with it in the first year or two, things are now going very badly. The writing is on the wall.