Time to be bold and brave

The Chamber of Commerce is perturbed with the recent public finances statistics as published by the National Statistics Office.

According to NSO news releases (numbers 64 and 65), total government debt increased by Lm64.3 million to Lm1,077 million as at last December. This is equivalent to a 6.3 per cent increase when compared to the amount outstanding in December 2001.

Similarly, it has transpired that the difference between recurrent revenue and total expenditure stood at Lm87.7 million at the end of 2002.

Therefore, the structural deficit increased by Lm2.4 million in December 2002, rather than declining to Lm78 million as was projected in last November's budget speech.

The Chamber is equally perturbed by early figures pertaining to the first quarter of the current year which indicate a bleaker picture for 2003. In fact, the structural deficit for the January-March 2003 period stood at Lm57.6 million, increasing by Lm25.7 million (or 50 per cent) when compared to the same period last year.

The Chamber follows the escalation of these figures with utmost concern because of the numerous potential macroeconomic consequences. Implications on taxation, the interest rate, inflation, foreign reserves and currency stability, among others, must not be overlooked because these affect, in turn, aggregate demand, consumption patterns and, ultimately, commercial activity.

Consequently, the Chamber urges the government to give priority to this problem. It also appeals to the social partners to unite and ensure there is a national concerted effort to solve this problem before it escalates further with more detrimental effects to the country.

The Chamber believes the government cannot be expected to solve these issues on its own. However, neither can the taxpayer, including the private sector, resolve these issues by being made to carry further burdens.

It is an issue which falls within the remit of the Malta Council for Economic and Social Development and one which requires full cooperation from all social partners.

It is for this reason that the Chamber of Commerce takes its participation at MCESD with utmost significance and strives to perform its responsibilities towards its members in the best way possible.

It is also for this reason that the Chamber has repeatedly called for a strengthening of this council with back-up research staff in a number of areas.

During last year's consultations leading to the national budget, the Chamber recommended that the government ascertain concrete progress in effectively tackling the structural deficit and prepare anti-deficit measures which are neutral to business activity. The Chamber strongly believes that the private sector is in no position to absorb any further taxation.

The Chamber appealed for the deficit problem to be tackled from an expenditure side through the elimination of inefficiencies and wastages in public resources.

There is still widespread abuse and a mistaken mentality that defrauding the public coffers is perfectly justifiable. This must be eliminated once and for all. Last October, prior to the budget, the Chamber recommended that this could be tackled by a review in the fiscal system.

The Chamber continues to believe that industry and business in general, and even the greater majority of workers, are being highly taxed to the extent that the current tax policy is acting as a disincentive for effort, investment and innovation on the part of employers and a further disincentive on work and effort on the part of the local workforce.

This is obviously detrimental to the economy due to the multiplier effect of investment on the rest of the economy particularly through employment.

It is also affecting the economy in such a way that people, in some cases, may and are being tempted to perform undeclared economic activities. This triggers further abuse if social security contributions are included in the equation.

People who perform undeclared work may also continue to fall below the necessary thresholds related to social benefits. In the process, they are therefore not merely depriving the government from its rightful tax revenue but also drain the same coffers with the social benefit they are unjustly receiving.

The mentality to avail oneself of any social benefit that may come about, whether deserved or not, must be resolutely stopped.

The Chamber believes that those social benefits which serve merely to disincentivise work and effort should be removed so as to eliminate their undesirable consequences. At the same time, those truly deserving cases should be entitled to adequate benefits which rightly reflect the realities of today's requirements.

For similar reasons, the Chamber continues to forcefully recommend that the current system of tax parameters is altered in such a way as to rectify the disincentive problem and augmenting Malta's progress towards enhanced national competitiveness.

A reduction in the tax burden is conducive towards an increase in revenue particularly through the inclusion of underground economic operators into the fiscal system.

Within this context, the government may consider a gradual harmonisation in marginal tax rates applying to direct and indirect taxation. This could possibly be implemented in a pre-specified period of time. This measure shall also serve as an incentive for investment and a stimulus to aggregate demand.

Proper enforcement should be administered in order to ascertain that the government's aim of including a higher portion of work performed under the tax net is achieved.

The enforcement task would be appeased by the very reduction in tax rates which would render tax evasion a less viable practice. Thus, it may serve to instil greater fiscal morality and higher tax revenues.

With more disposable incomes, consumers may be encouraged to spend more, thereby generating more tax revenues under VAT. Investigations by the VAT department should cover those persons who are not even VAT registered rather than concentrate on trivialities and create investigations on those persons or companies known for their efficiency in abiding by the law.

The Chamber also observes abuse in terms of persons availing themselves of certain commodities such as medicines for which they are entitled but for which they have no need whatsoever.

Under previous administrations, the Chamber had welcomed the introduction of a nominal charge on certain state-provided commodities and services and calls for their re-instatement.

Such measures help to instil a mentality among the public at large that everything has a cost and, hence, should not be wasted even though it is procurable at no charge. For this reason, the Chamber believes that similar measures should be carefully widespread in line with social considerations.

It is also evident that the government's difficulty in reducing the structural deficit lies in the huge public-sector payroll which is influenced by the high government participation rate in the economy.

The Chamber is concerned with the fact that the government wage-bill has continued to soar regardless of the fact that little or no means exists to gauge increases in productivity.

Moreover, the public sector continues to suffer from an over-manning situation in many areas, particularly in unskilled grades. This problem is further compounded by a shortage of certain specialised expertise.

In this regard, the Chamber urges the proliferation of more public-private partnerships such as the one introduced late last year for general embellishment tasks and which is already showing the desired results.

In the Chamber's view, one of the recipes for lasting economic success for Malta would be to enable the public sector to shift workers to more productive use within more efficient working practices.

If released to more productive use in the private sector, where they are badly needed, the input of this section of the workforce would invariably enhance their contribution towards a further strengthening of Malta's competitiveness.

Competitiveness of the local economy as well as the solving of the country's deficit problem also requires the curtailing of abuse among certain public servants who do not give their fair day's work.

There still exists an element of truancy among certain workers who register their attendance at work and leave shortly after to perform work elsewhere.

There is also an element of people who are demotivated and undisciplined. This leads to a lower output than expected either because these people perform their tasks most inefficiently or because they avail themselves of sick leave in an abusive manner.

There is yet further abuse in the number of people who, each year, seek exoneration from their duties on false medical grounds. This malady applies to the public and private sector alike.

In this regard, the medical profession should ensure that none of its members, knowingly or unknowingly, becomes associated with this malpractice.

The country must realise that the situation is not favourable and does not permit this complacency to continue to prevail.

I have had other occasions to speak publicly about the fact that the country is living beyond its means. The writing has been on the wall long enough for all to see - the government, workers and entrepreneurs. The social partners must realise that if the ship goes under, we shall all sink with it, without any exception.

In the light of all this, the Chamber continues to urge the government to ensure that concrete steps are taken in making judicious use of public funds and further tackling the deficit problem.

The Chamber acknowledges that the situation in the country still requires hard and responsible decisions which must be taken without further delay.

The country cannot escape from the economic realities and challenges it faces and the Chamber prefers any remedial action not to be postponed further. Otherwise, the country would have to endure even harder and drastic measures at a subsequent date.

Although we are convinced that more FDI will come our way after EU membership and create more employment opportunities, we must not sit complacently and wait for this to happen.

Action to rectify our deficit must be taken now. Abuse of our social benefit system, evasion of VAT, undeclared work, etc., must be stopped forthwith if we are to make it.

In the last budget, the Chamber recommended to the government that it should strive to: stimulate economic momentum through entrepreneurship and work, increase the spending power of workers and tackle further the deficit problem by ensuring judicious use of public funds.

In addressing these objectives, the government should ascertain concrete progress in its privatisation programme as well as in effectively tackling the structural deficit and implementing the welfare reform.

The Chamber is convinced that, if stimulated by a correct dose of fiscal policy, the private sector can kick-start economic momentum. If this is complemented with disciplined public spending and a cut-down on abuses, the country should gradually redeem itself from the current difficulties it is facing.

Mr Fava is president of the Chamber of Commerce