Economic woes

The state of public finances and of the economic situation are not matters that I usually talk or write about because I consider myself to be a layman in such matters. However, the EU Commission's warning to the government on its worsening financial situation as well as the comments and complaints made by ordinary people on the deterioration of their standard of living have focused attention on these issues, that are very intimately related.

Most businessmen in small and medium enterprises trace back the origin of our ills and the accompanying cash flow problem and erosion in our standard of living to the introduction of VAT. It is correct to state that VAT is an efficient method of tax collection that has resulted in an increase in tax revenue. What this has also meant is that certain products and services that were previously not taxed started being taxed with the consequential rise in the cost of products or services and, thus, in the cost of living.

This has effectively meant that the government has taken money (as tax) from the pockets of the ordinary citizens, money that previously these same citizens used to have at their disposal to spend as they wished.

This situation has resulted in one very serious problem. The ordinary citizen, to a great extent, usually uses his money wisely and invests it in a productive manner. On the other hand, a significant part of government expenditure goes to finance very dubious projects.

Hence, while previously a considerable sum of money was being invested wisely by our citizens, thus creating jobs and wealth, the money being collected by the government through taxation was being spent on Lm15,000 plus salaries for persons who do not deserve it and on ill-advised projects such as the Mater Dei Hospital and the new quays and ferry terminals for Gozo Channel - projects that never seem to be completed. Money invested in uncompleted projects means there is no return on investment.

To make matters worse, the government has appointed a host of authorities, commissions and committees to tackle various issues or administer various services that were previously administered by the public service. All the appointees are usually chosen solely on the basis of their political allegiance and not their capabilities or expertise.

The government thus found itself in the situation of giving budgets of millions of liri to be administered by boards/commissions/authorities made up of persons who, at best, have very superficial knowledge of the tasks they are responsible for. As a consequence, it is not unusual for such quangos to take very costly wrong decisions that have serious long term effects, such as the purchase of the RJ70 planes by Air Malta, or not take any decisions before problems get out of hand and then it is too late, as in the case with Malta Drydocks and Malta Shipbuilding.

This Nationalist government's political patronage has thus contributed in no small way to the horrendous deficit problem the country is currently facing.

As a solution to our fiscal problems the government had launched a privatisation programme (which has stalled over the years). Privatisation was heralded as a catalyst for economic growth and a significant contributor to the reduction of government deficit. The sale of Mid-Med Bank to HSBC was presented as a sure way of attracting foreign investment (to date none has materialised). The acquisition of Maltapost by the New Zealand firm Transend was presented as a way of catapulting our postal service into the 21st century. In fact, the opposite happened. Our postal service has never been as unreliable as it is now.

The government is now caught up in a vicious circle. It needs to generate more revenue to be able to finance its non-performing quangos and its white elephants. On the other hand, increased taxation has created a slump in the economic activity which, in turn, has reduced tax revenue.

To keep to its commitment, the government needs to increase taxation on the productive sector - thus in effect stifling it even further. The common complaint of all business people is that the government is taking more in taxes from them then they are left with. The government has become their silent (majority) partner. This situation coupled with excessive bureaucracy is slowly eroding the morale of our entrepreneurs and business people.

Rather than focusing on revenue generation, the government would be best advised to focus on waste in its own operations. It needs to streamline operations and do away with excessive bureaucracy. It needs to slim down its operations and remove the fat which has grown all over it, rendering it practically immobile. Taking an axe to the existing welfare state is not the solution but what is required is that the government generates enough income to maintain our present welfare state and, if possible, improve it.

The government needs to once again create business confidence. Our entrepreneurs and business people need to feel they are getting a reasonable return on their investment.

Increasing taxation, whether in a direct manner (such as the increase in VAT rate last budget) or indirectly through the introduction of new "fees" or revised fees for services rendered, will only serve to ensure that our country will continue in its economic stagnation.

Mr Buhagiar is shadow Minister for Public Works and Transport.