The white and black of the economy
The state of the economy remains on top of the public agenda. The prime minister harps on the white side. His stance is understandable. He does not want despondency to take hold, gloom to descend. He looks at the bright side, reckoning that to do otherwise would make things worse. Understandable, but not quite right. The best approach for the government, as for the private sector, is to be factual. The PM should set things out exactly the way they are.
The Retail Price Index, the measure of our inflation rate, remains on a trend higher than that of the rest of the EU.
There are no effects of any increase in VAT working through the moving average. Water and electricity tariffs are another matter, one shrouded in a grey mist as regards their full effect. If there are price rigidities, as the Central Bank Governor has often suggested, point out where competition is being impeded, and unleash the fair trading mechanism.
Grim but vacuous talk leads nowhere. Switching between statistical measures – ours and the EU’s – to suit the argument, loses the argument. The official side is best placed to say precisely what is black, not so black, and white. Stick to facts, do not reach for predictions from wishing wells.
Once the GDP has resumed growing, albeit slowly, but is perceived to be doing so mostly due to government expenditure, put what is taking place in perspective. That can be more palatable now that exports are growing again. But paint it as it is, warts and all. The private sector too should be more objective. To say that the government is paying too much attention to the Budget structural deficit is nonsensical. The government can never pay enough attention. The PM and the finance minister say public expenditure is being contained.
Yet they still do not signal truly grim intent by attacking the cost of the political administration, cutting outlays by the Cabinet and parliamentary secretaries to make the relative commensurate with Malta’s size. Nor, even, by cutting down bloated private secretariats.
It is odd for some to imply that the government should ease off on more efficient tax collection, on cornering tax evaders, and doing whatever else it can do to ensure that revenue flows the way it ought to. It is right to demand equity – treat all evaders equally. It cannot be right to equate collecting due to tax with a misshapen financial and economic policy, though frequent special schemes raise eyebrows.
Collected taxes reduce corporate cash flow and, in the personal sector, disposable income. It is true that is coinciding with lower purchasing power because of the rise in fuel and energy costs. But just to assert that, leads nowhere.
Keeping as a constant point the statement that government must spend efficiently, effectively, and give value to taxpayers for the money raised from them, the government would be irresponsible if it did not retain control of its finances as its first objective.
Fuel and energy costs should not be shunted out of perspective. The starting point remains efficient purchasing of Malta’s requirements, and clear statements about the cost of the inputs into our fuel and energy consumption. That said, the international price of oil is always what it is.
Experts advise that one should not factor in expectations of a substantial decline. Rather, they say, factor in the cost at its current level, plus some more, two or three years out.
The alternative to the government passing on higher oil costs to the consumer would be for it to pass the cost on to the taxpayer, or the public debt. To recommend that is to preach bad economic management. The effect of the oil hike is equivalent to a higher tax – except that the proceeds go to the oil industry chain, not to governments.
If the impact is not allowed through to industrial and personal consumers, the signals that must come from the price mechanism would be extinguished. The payment for the effect of costlier oil would not be made by the direct users. The only justification for a government subsidy is social.
The economy is in a state. There are growing burdens. They should be fairly distributed. The structural deficit is a burden. Its existence continues to fuel demand far above the level justified by our economic structure and performance. The public debt has soared. Servicing costs pile up.
Truly reducing the deficit will impact on the GDP, since government spending is a major component of it. Not reducing it will impact on this generation and many more beyond, as the servicing burden of the public debt in absolute terms will continue to rise.
What is required to get the economy out of its state is not any measure that will sustain or increase domestic consumption. The cure lies in higher investment in export-oriented activities. To fudge or distort by focusing on consumption, or by painting the picture bright, or dark, or whatever, gets the country nowhere, fast.