The subsidies regime

While I was having dinner with some very good friends of mine, it was stated that what distinguishes the United States from Europe is that the culture in the US is much more risk-friendly than in Europe, while in Europe, the culture is very much one of dependence on the state, which in the US it is not. This is evident from the fact that in Europe around 45 per cent of the gross domestic product is represented by government expenditure, while in the United States it is about ten percentage points less. This leads us to the conclusion that a significant part of the European economy is built on a subsidies regime.

This may sound like a condemnation of the European model. It is not and it cannot be from someone who is so staunchly pro-Europe. In effect I do not necessarily think that having some 45 per cent of one's gross domestic product represented by government expenditure is a bad thing for the economy. What this does lead me to is that we need to understand better the subsidies regime. One needs to keep in mind that the European Union has draconian rules on state aid, in that the state cannot assist commercial companies, whereby they gain an advantage over their competitors.

On the other hand the EU does not generally regulate against state subsidies in favour of the individual, because they are not seen to distort competition. This has led to the provision of a number of services by the state in most EU member states that are free of charge. But it is not enthusiastic about them. Unless there is some pervading social issue, the EU would tend to want to allow the market mechanism to operate in order to remove economic rigidities as much as possible. The current crisis, where banks and financial institutions have had to be bailed out, has led to a change of heart, and has again created a positive feeling about subsidies.

One should now expect a number of companies Europe-wide to demand the kind of treatment that banks have received and be bailed out by the governments of their respective countries. In Malta these phenomena are not so evident. What is evident is that we still ask for subsidies, inherited from the time of the dinosaurs, to remain as they are. The issue of the water and electricity charges is a case in point. But it is not an isolated case, as the Dockyard story shows so well. Subsidies are taken for granted and there is no real understanding as to who is paying for what.

Let us refocus on the water and electricity rates. The trade unions have asked the government to reduce the rates for water and electricity. The rates proposed by government reflect the cost of production, irrespective of whether they are economical or not. If Enemalta Corporation does not collect these moneys, it would need to do what it can to keep operating. This would mean using taxpayers' money to keep Enemalta Corporation afloat.

Using the taxpayers' money to finance Enemalta would make the fiscal deficit even larger and would mean going into a vicious circle. To break that circle would require two things - Enemalta would need to reduce its operating cost (therefore making a significant number of people redundant) or raise taxes even further. The first option would definitely not have the support of the trade unions, and so they must accept either higher taxes or leave the water and electricity rates at the new levels. The second option is also unpalatable as taxes cannot be reduced unless there is an accompanying reduction in government expenditure. It seems that we are incapable of understanding the conflict we have found ourselves in because we are so used to the subsidies regime that we have become slaves to it. We no longer appreciate where subsidies come from. In the 1970s the Labour government of the time created such an intricate web of cross-subsidisation that we did not know whether the water and electricity rates or the price we were paying for petrol were subsidised or whether they were subsidising something else. The business sector is usually also guilty of this lack of understanding and expects subsidies from the government, just like individuals do.

Where this should be leading us to is, to my mind, fairly obvious. We need to understand the real cost of the public services and merit goods that we make use of. We need to understand what we are paying for them and ideally, we should use the principle that the user pays and not somebody else. We need to understand that there is a cost to subsidies and that cost is being borne by the honest taxpayer and no-one else. This is not an equitable system and, even worse, it is creating inefficiencies in the economy.