Budget objectives in context

As Prime Minister, Eddie Fenech Adami used to say that he wanted to turn Budget Day into just another ordinary day. His successor would not say the same thing today. Over the past five years Budget Day has always been billed as a day which would influence economic performance and the very life of people for the coming year. The build-up to last Monday was no different.

If there was a difference it lay in the number of kites flown well before D-Day arrived. The Finance Minister passes by the Malta Council for Economic and Social Development the thoughts that would underlie his budget proposals for the coming year. He would also suggest in outline that he would be - or would not be - putting forward.

Briefing the MCESD in this manner ensures that there are some leaks of what is said. This time round the Prime Minister and his finance man left little to the imagination. From months ago they made clear two things - the Budget would not include any new taxation, and it would aim to generate jobs.

The taxation kite was taken with a pinch of salt by the general public and economic operators. For the Prime Minister and the Minister of Finance were careful to fly another kite. Written all over it was the message that water and electricity tariffs would rise, and heftily so. Tariffs are not a tax. They are a cost input for families and businesses alike. However since the source is a government-owned organisation - Enemalta - with the government's heavy hand very evident in how it is run there is a widespread feeling that the government can and should control these tariffs.

The authorities try to explain the basic truth, which is that, if Enemalta does not recoup its outlays on oil and running expenses, plus past losses, the shortfall has to come from taxation. Few accept that reasoning, since there continues to be public and monopolistic supply of water and electricity.

The popular belief is that the government is kidding when it says taxes - as opposed to the tax yield - are not going up, yet at the same time it sets out the millions of euro Enemalta has to recover for its operations in the current year, and in the coming year when the cost of its oil products has risen massively from its year-ago low and seems set to continue to rise.

That is a perception problem the government has to deal with as best as it can, but will never be able to do so long that supply remains in the monopolistic hands of a government-owned organisation.

The second main objective of the Budget is easier to understand, but far less so to accomplish, though try one must. The Finance Minister has outlined measures to help economic operators, in particular small businesses. Whether his objective will be reached or reasonably approached will depend on two things.

Firstly, what will be the level of economic activity next year and how that will translate into real disposable income to restore consumption. In that regard, though there will not be new taxes to erode income, disposable income will be whittled away by the increase in water and electricity tariffs and by relatively high inflation in general.

The Finance Minister is mildly targeting high prices. He is getting stick from the business sector for attempting that, due to an almost religious belief in market forces. The extent to which the reiterated promise to monitor prices will be implemented remains to be seen. It had already been made in the case of medicines, and did not work with discernible success.

Secondly the creation of jobs will depend on the recovery of overseas demand. The global economy is inching out of recession. In fact Australia seems to feel that its underlying recovery could soon trigger another inflationary trend, and has raised interest rates twice within a few weeks. But what counts for Malta will be the extent to which its main markets will recover.

For manufactured exports that mainly means the European Union market. Recovery is visible there, but it is forecast to be slow from now through 2010. It is also suggested that it will not be reflected in jobs creation, which is a bad signal for our tourism industry. That signal is intensified to the extent that it comes from the UK. There not only does recession linger and jobs are and will remain scarce.

Sterling, though it has recovered somewhat this last fortnight, remains weak and could grow weaker relative to the euro, with parity between the two not an unlikely scenario. That will continue to affect Malta and other euro countries as destinations for British tourists. We shall be in the same boat as others in the eurozone, which is where competitiveness, marketing and competitive attractions will come into play.

No, Budget Day is no ordinary day. And neither is the end of the story.