Budget speaking, naked

Whatever the Minister of Finance will be able to say on Wednesday during the Budget Speech for 2005, he cannot blame the state that we are in on anyone other than the government. The speech will usher in the seventh consecutive Financial Estimates since the Nationalist Party regained office in 1998, after a 22-month break during which a Labour administration presented two Budgets. A Nationalist government had presented nine other Budgets up to 1996.

To try to blame Labour for the way we are now will be as unconvincing as a boxer with a broken jaw and a mass of bruises and aches attributing his sorry state to the fact that he did not take part in the middle two of a series of 17 fights. The Budget Speech would be an exercise in foolishness if it included such an attempt. Do not bet that it will not, though. Foolishness is not as rare a quality as the elusive ability to get policy balance right.

The minister would be ill advised, also, if he huffed and puffed in the direction of the General Workers Union. Again, seek no guarantees that he will not do that. GWU-bashing tends to be as irresistible as blaming Labour for all the ills in the ward. It is also seen as a useful if short-sighted distraction from the prevailing reality.

Useful, because it might divert anger from the government, as well as attention. Short-sighted, because it will not add one gram of strength to the herculean effort required to shift the underlying public finances and the economy onto a path that inches forward in a sustainable manner.

Moving away from playing politics, the minister would also be wrong to claim that economic performance over the past three years in particular, with periods of negative growth not followed by compensating acceleration, is due to post-9/11 trauma, or to global weakness. Others have recovered strongly from the New York terror. The global economy too has rebounded.

In Malta things are either not turning round at all, or doing so too slowly. The government does admit to that. Instead, it persists in shooting its own objectives as well as the demands of inescapable reality with confusing doublespeak and an addiction to painting in dazzling dizzy colours rather than sober black and white.

The government insists that things are improving. In the same breath, it encourages demands for sacrifices from the workers, with employers saying that take-home pay and holidays must be cut, but that taxation must not be increased, not even directly on those who can carry a little more on our backs. Evasion is condemned with one side of the mouth, but measures to counter it are attacked with the other side.

There is a case to be made for tough, temporary measures, equitably spread across the board.

There is a case to stress that, with pain now, there will be a still harsher tomorrow.

That cannot be put forward confidently and understood readily if, at the same time, the government proclaims that problems are diminishing, that the tide is turning.

Yesterday's declaration by Prime Minister Fenech Adami, that money was not a problem, was untrue and therefore misleading. Today's assertion by Prime Minister Gonzi that money is not such a problem, that the deficit is on track and there is great light at the not-far-off end of the tunnel, is just as misleading.

It raises expectations, rather than reining them in.

There seems to be a congenital inability to tell it as it really is, to understand that only by revealing the naked truth can the country begin to attire itself in the right clothes. The Nationalist leaders might find some comfort that Opposition Leader Alfred Sant demonstrates that he is not immune to the malady.

Recently he followed Alfred Mifsud's reiterated lead to point out that the Central Bank's measurement shows that the real effective exchange rate of the Malta lira has been rising, thus making Maltese goods and services less competitive.

In the face of that reality, Dr Sant came up with a measure that might be termed bold - depreciate the exchange rate slowly so as to regain competitiveness, other things remaining equal. But he framed that prescription in an unrealistic supposition - that such depreciation would not have inflationary consequences.

A devaluation, the prescription implied by Mr Mifsud, would be bolder - a single shot which would have an immediate impact, provided the statutory mechanism that feeds price increases into cost-of-living wage increases was suspended, and that the unions could be persuaded not to press for compensation.

Devaluation can work in that context alone, for a limited time. It immediately raises the price of imports, absolutely and relatively to domestic output. It makes exports cheaper, if exporters reduce their foreign currency selling price, and also enhances profitability, if exporters are unable to pass on the margin to their clients in full. If there is spare capacity in the economy, output and exports would rise, and ultimately everybody might benefit.

I argued in detail the case against devaluation, in my Budget Speech for 1983, and have continued to do so through the years, because of the inflationary implications for a net importing country like Malta.

Though, particularly with the growth of income from services, the imbalance between what we buy from and sell to the outside world has diminished, Malta still runs a persistent deficit on its current account. When Mr Mifsud was coming out with his strong argument for a devaluation some months ago, he told me that I was going to be in disagreement in what he would be writing.

I replied that the inflationary implications still moulded my view, but there was certainly a case to discuss, and provoking it would be useful.

Dr Sant's approach - to lower the exchange rate gradually, rather than at one go - is what I have been expecting the Central Bank to promote, particularly along the path towards adopting the euro. It obviously would not have the same immediate impact on prices as a one-time devaluation. But it would be wrong to claim that it would not be inflationary.

The honest point to discuss is whether, in the circumstances, there can be any escaping from some sort of action, though doing anything by stealth may not work at all.

The Nationalists whooped with joy as they jumped on the Opposition Leader's words. They deliberately twisted his proposal to depreciate the lira by calling it devaluation as frequently as they could. They implicitly attacked John Dalli for devaluing in 1992, as if that had not been a government decision. Yet another distraction, however, will not make the reality any less bleak and demanding.

It is that reality which the finance minister will have to address on Wednesday, preferably without stooping to sad efforts to allocate blame and to mislead.

In reviewing the outturn for 2004, he will have to back any claim that government expenditure has been reined in, even cut, with minute detail. Politicians (including retired ones like myself) assert too easily. Assertion is never proof.

The minister, in line with the demands of reality and the logic of expectations, would be wise not to boast that expenditure was now under control, but to state instead that not enough was done, that waste and inefficiency would not be tolerated, that the higher up one was, starting with the President, the more incumbent it ought to be upon him or her to lead by example.

Peering into 2005 and beyond, the minister would be wise not to gloat over the negotiations with Skanska. A film star once purred that she had saved her husband a chunk of money. She had wanted to buy a $30,000 mink coat, but settled for one that cost $20,000. The husband, who had to pay up, was not taken in.

If he refers to the new hospital at all the finance minister would do well to forecast how much it will cost to run it. It has to be administered, but if the good citizenry remain blissfully unaware of how much it is going to cost, pleas for more correct recourse to free medical care and medicines and pills will be no more than hoarse whistling in the wind.

What needs to be said in the Budget Speech for 2005 should take less than half the average time spent on delivering the previous 17 budgets.

The prevailing and foreseeable reality speaks for itself.

The deficit will remain with us for a long, long time. It would take a miracle to achieve a surplus. The national debt will therefore continue to grow. The cost of servicing it will go on rising.

Taxes due must be collected, even if that reduces funds available for real investment, and purchasing power. New taxes cannot be ruled out, though next year would be too early, and higher indirect tax rates should be ruled out. The hike in the VAT rate to 18 per cent was a major cause of the Lm1.75 cost-of-living increase that will push up all labour costs from January 1, apart from any agreed rises and irrespective of productivity and competition.

The increase in the Retail Price Index is accelerating and lack of media focus or outright resort to spin by stating that the rate was slower than that in some EU countries will not camouflage that.

Unemployment is far much too high.

Stating the bald facts would be the best thing the finance minister could do. Doing so without weaving in any politics would allow him to present in stark if chilling light facing the country:

¤ Take drastic action and, maybe - but only maybe - survive.

¤ Do nothing, and perish.

Being honest and generous with the truth might make the people believe and accept.

Will the Budget Speech show that the finance minister can and is willing to rise to the reality of the situation?

That, more than anything else, is what will define it - as well as its relevance to the threatening future.