Hard decisions on expenditure and taxes

It is check-up time once again. This evening the Minister of Finance will give the nation a report on the state of health of our economy. He will prescribe medicine where he believes this is needed. The 2009 budget will arguably be set in the context of the most difficult international economic scenarios in the last several decades.

While we have been spared the worst effect of the recent financial markets crisis, we cannot expect to be untouched by what is going on around us. We have an open economy hugely dependent on foreign trade in goods and services. What happens in our foreign markets will impact on our economic prospects.

There are already various worrying signals coming from various sectors of our economy. For instance, our traditional manufacturing industries are experiencing an acceleration in their decline.

This is evidenced by the recent labour shedding and reduction by some manufacturing companies in productive capacity through the introduction of a four-day working week.

Operators in the tourism industry are forecasting a difficult 2009. Prospective tourists from Europe are facing their own uncertainties as a result of economic slowdowns in their countries.

The property industry is not faring much better with indications that the market is at best flat and at worst experiencing a significant decline.

Our situation is not unique. What direction can one expect from this budget that will restart the economic engine of growth? Following the recent massive increases in the cost of energy services for households and businesses, it would be very surprising that even more pressure is applied by increasing taxes.

I already believe that the recent revision in water and electricity tariffs, combined with the imminent hefty increase in the price of domestic gas, is going to affect the economy very negatively.

In fact, many would argue that this is the right time to reduce taxes, preferably by broadening the tax bands, to improve the spending power of households and give businesses a much needed stimulus to grow.

The consumption to income ratio has been declining in the last few years as a result of the government's effort to reduce the fiscal deficit. This, of course, is putting a check on economic growth by curbing private expenditure.

A tax reduction at this stage could also help to ease the pressures from the unions to increase wages as they see the buying power of their members eroding. The last thing we want now is being caught in a wage inflation spiral.

The pension problem has been put on the back burner following the burst of initiatives to address this issue in the last few years. Apart from extending the retirement age to the age of 65, the time may now be right to grant some tax concessions to those who are willing to save for their retirement.

Many approaching their retirement age in the next 10 years will only benefit marginally, if at all, from the pension reforms and face a bleak future if they rely substantially on the present pension system.

Tourism needs a boost if it is to regain the vitality it always had in our economic development. Budget measures aimed at increasing capital investment in this industry will help to mitigate the negative effects we are likely to suffer as a result of an economic slowdown in Europe. It will be a big mistake if we curtail public productive investment now on the pretext of balancing the books.

Likewise, we need to support our small and medium enterprises by helping them to modernise their businesses where they are still lagging behind their EU counterparts.

More concessions from bureaucratic regulations need to be granted if we really want to overcome this major stumbling block which is hindering our competitiveness.

The protection of the environment will undoubtedly get significant attention in this budget. One would expect measures to encourage people to invest in environmentally-friendly technology. Even if the economic effect of such measures will initially not be substantial, it will signify a change in the mindset of people who for too long have taken environmental issues too lightly.

Finally, but for me most important, we need to overhaul our educational system to ensure that we achieve better results for the money we are spending on this sector. I am not convinced that this is merely an educational issue. We need to look at, and address, the social and cultural factors that are making some of our students high achievers in the educational field while the others plod on in mediocrity.

Investment will not flow to Malta unless we have a sizeable population of skilled young people qualified in the various fields that today's economy demands. We can start by creating incentives for employers to invest more in the training of their staff so that training becomes a continuous process in their working lives.

The guiding principle of this budget should be one of restoring confidence and hope in the economy. This is the time for hard decisions on expenditure and taxes. It is the time to keep the engines of growth functioning.

It is the time for creating fiscal space. In these difficult and extraordinary circumstances, the time for strict fiscal rectitude can wait until later.