Hard thinking before the President's speech

The Cabinet will be making the final touches to the President's speech in the coming few days. It will do so against a mixed background. It will be a celebratory one - the Nationalists won an election they should have lost were it not for an inept Labour campaign. But the victory was skimpy: the electorate did not put in a government enjoying an absolute majority at the polls. The economic background is also mixed, particularly in terms of prospects as influenced by global developments.

This is turning out to be one of the toughest of years. The price of crude oil is reaching giddying heights. It could grow more astronomical. Having breached the $100 a barrel barrier and rushed on to $120, analysts are saying that $200 could be in sight.

The impact of soaring crude on oil derivatives and their use in economic activity and normal living is predictable. The cost of goods and services all over the globe is moving up, even if the credit crunch and attendant decline in equity markets are competing for attention. Higher cost translates into higher prices. Inflation is rearing its ugly head, even as economies slow down.

There is more. High crude oil prices have intensified a search for bio fuels, leading to land being taken out of cultivation for food to be replaced instead with crops that can be turned into oil substitutes. That is driving up the price of grain and related food even faster than crude oil is rising. The bell is tolling for the poorer countries, with millions of the wretched of the earth on the brink of death by starvation. It is tolling for other countries too, for nowhere is an island immune to the consequences of the circumstances.

Malta certainly is not. The economy has proved resilient for the last two years. Growth has been impressive. The year to date has not yet seen a downturn. But the alarm signal is already flashing on the inflation front. The months ahead, and perhaps well beyond, could prove much harder.

Against this backcloth, does it make sense for the government to prepare to go ahead with its promise to slash income tax in the budget for 2009? Will it carry that commitment further in the President's speech on Saturday? I believe it would be foolhardy to do so. It was expected that government revenue would remain buoyant as income tax at 2008 rates bit into higher incomes. But from now on, into the coming two years the government is going to need all the net revenue it can get. That is required not only in the context of the aim of a balanced budget by 2010. The government will have to respond, at some point in time, to the socio-economic effects of mounting energy and food costs.

It cannot influence international trends. But it will have to weigh domestic action. Rather than forfeiting revenue through tax cuts, it will have to consider reducing other taxes and also raising expenditure to mitigate the harsh impact of energy and food costs, in addition to proposing new revenue-raising measures.

Pre-election promises will need to be framed within the context of unfolding grim realities. That thought should not be far away from the final draft of the President's speech.