When the Central Bank governor speaks

There is so much political trash being thrown our way through the media from the two major political parties, that many of us often miss out on important economic and political statements made, from time to time, by the people leading our public institutions.

A typical example was the speech made last month by the governor of the Central Bank, Michael Bonello, to the Institute of Financial Services. In my opinion it was one of the most courageous and thought-provoking speeches made on the economy this year.

Although I did not agree with everything Mr Bonello said, I really do admire his ability to speak his mind, particularly when he challenges the political and economic status quo.

The most important issue raised by the governor is his questioning of whether Government will be able to continue providing "free" healthcare to everyone, irrespective of means. He has bravely treaded on sensitive political ground because in Malta free health services to all have become a sacred cow.

We may choose to ignore his remark but the facts stare us in the face. Over the next 10 to 20 years, the large number of so-called baby boomers (those born in the decade after World War II) will enter their golden years.

Due to improved healthcare they will (happily) live longer. However, the fact remains that the longer they live the more state-funded healthcare they will require. This will cost more. In addition, the inflation rate of health-related products and services is increasing at a much higher rate than general inflation.

In the meantime surgeons and specialists continue to prescribe the latest and most technologically advanced treatment, which means higher costs. Then there is the additional expenditure needed to operate Mater Dei Hospital, a recurrent cost that the Prime Minister himself is still unable to quantify.

Despite these immense challenges, the Central Bank governor did not suggest that state-funded healthcare be abolished. He simply questioned whether it is going to be financially sustainable for Government to continue providing world-class healthcare to everyone, irrespective of their personal means. The question, I suspect, was rhetorical. Perhaps Mr Bonello is trying to start a national debate on healthcare reform.

John Dalli's proposal

While Government and Opposition will avoid the issue of healthcare reform when we are so close to a general election, the Greens remain open to discussion. We believe that the best solution to the problem can be found if every avenue for reform is explored. A national debate on reform should be initiated, in which every proposal should be considered and evaluated.

There are the more conventional solutions like the promotion of private healthcare insurance through tax benefits; an initiative this government oddly continues to ignore. Another interesting proposal was made recently by former Finance Minister John Dalli, writing in this paper.

He said distinction should be made between "life-saving" treatment and "life-enhancing" treatment. He then suggested that Government should continue to provide "life-saving" treatment free of charge to everyone.

However, Mr Dalli recommended that the entitlement to "life-enhancement" treatment should be means-tested.

This would mean that those who can afford it would have to pay, in whole or in part, for such treatment - a sort of burden-sharing arrangement. I believe his suggestion should be explored; naturally, one would have to clearly define what is "life-saving" and what is "life-enhancing".

Let me throw in one more proposal to widen the debate further. I believe that there exists an anomaly in the funding of healthcare. Both pensions and healthcare should be funded by National Insurance contributions. At present NI contributions by employers and employees are capped at 20 per cent of every employee's income of some Lm6,750 per annum.

Ideally the contributions should be split into two separate portions: one for pensions and one for health.

The portion of our contribution that will be earmarked for pensions (say three-quarters of the total 20 per cent) should remain capped, since pension income is capped. However, there is no reason why the portion that would be earmarked for healthcare (say the remaining one quarter) should remain capped on the basis of an annual income of Lm6,750.

This means that at present we have a very regressive system of financing healthcare, where those earning Lm6,750 and those earning Lm50,000 a year contribute towards healthcare in the same amount. What I would suggest is that capping of National Insurance contribution should be optional for those who take out adequate private health insurance.

Student stipends

The other issue the Central Bank governor questioned in his speech is the financial and social logic of providing stipends to all students irrespective of their (family's) means. He challenged the wisdom of this political decision in the light of the fact that our University is starved of funding for investment and research.

He suggested a trade-off between the cost of stipends and the quality of our University. He even made some suggestions, one of which is to convert more of the stipend into a low-interest easy-repayment loan.

The governor seems to be arguing that the maintenance of the stipend for all university students, irrespective of means, is not sustainable. I disagree with him on this.

Even though I would agree that the stipend system may be serving to foster a money-no-problem culture among some students, the system itself is financially sustainable. Let me explain. Whereas over the next 20 years the number of people over 60 will increase dramatically, the population of those of university age (18-25) will decrease, due to a declining birth rate.

The students currently at University were born in the Eighties, when the birth rate was some 5,200 annually. In 20 years' time those entering University will be the children born today, when the birth rate is less than 4,000 per annum.

Therefore, even if the percentage of those taking up a University education will increase, the overall number of students at university will probably stabilise or increase marginally. For this reason the Lm8 million spent by Government on stipends today will not increase drastically. The sustainability issue in this regard is non-existent!

The governor did make an additional argument that the conversion of the stipends into a loan could mean additional funds for the University for research and investment. While his argument is valid, I believe that it is somewhat misleading. Funding the University and paying for stipends are mutually exclusive budgetary decisions.

Government is able to increase funds to the University whether or not it retains, removes or increases stipends. Obviously, the much-needed additional funds for University need to be sourced elsewhere.

The Greens believe that additional funds for University can, and will, be made available if the rate of tax compliance in Malta (currently standing at 65 per cent) increases.

Whether or not one agrees with any of the governor's proposals, his ad hoc contributions to the political and economic debate are intellectually stimulating and politically challenging. It is truly a pity that he is not given more space in the media to share his thoughts with us on a more regular basis. What this country needs is more policy and less politics!

Mr Fenech is spokesman on finance, the economy and tourism of Alternattiva Demokratika - the Green Party.