What will be overall thrust of this Budget: the promotion of economic growth or an attempt to cut down on the fiscal deficit?

It will be a balance between the two. We will continue to invest in job creation but we have to be conscious of the realities surrounding us. Fiscal consolidation is not an end in itself but a means to ensure that we remain an attractive place for people to invest in. We are all aware of what is happening around us particularly in countries such Spain, Greece, France, Portugal and Cyprus.

People looking at investment prospects are going to ask: “Where is it safe to put our money?” If Malta does not remain on the fiscal consolidation path, we will be grouped with the other countries encountering problems, and investors will not invest in Southern Europe. In order to project jobs we need to reduce our deficit. In terms of our objective, we have a tough balancing act, but there is no conflict between the two. The deficit for 2011 has to go below the three per cent mark, and our target is 2.8 or 2.9 per cent. We will meet our deficit target for this year which will be 3.8 per cent.

You have ruled out a tax cut in this Budget, something the PN promised in its manifesto. How realistic is it to expect such cuts within this legislature, especially when one considers the European Commission’s new system of monitoring the budgets of EU member states?

This is precisely why we must continue along the consolidation path. Unless we go below the three per cent deficit mark we will never have that flexibility. As you have just pointed out the scenario is becoming a bit more complicated, because in the difficult discussions taking place at a European level some countries are calling for a tightening of the fiscal rules, due to what countries like Greece and others have made Europe pass through.

This implies that we do not only take a country’s deficit into account, but that we ensure that within a reasonable timeframe all countries adhere to the 60 per cent public debt threshold, which is quite a challenge. It is a challenge for Malta, which has a debt of 69 per cent, which means we have a nine per cent debt level to address. It is even more difficult for some other countries, such as Greece, Italy and Belgium, which have very high levels of debt.

The government has not ruled out a tax cut within this legislature. Historically we have always tried as much as possible to reduce taxes on income and we believe that taxation should be more in terms of a consumption pattern, such as the polluter pays principle, rather than going into areas that tax income. When you tax income you are reducing the propensity for growth because you are creating a disincentive for people to make an extra effort. So, yes, we would still like to reduce income tax.

Is this the government’s last chance to introduce difficult or unpopular measures in a Budget considering that the next Budget will be close to a general election?

Including this Budget we still have three Budgets to go, so this is a mid-term Budget. I think everyone will agree that in the past years we’ve never really had difficult Budgets. We have had to take difficult decisions, like the energy issue. If you consider last year’s Budget, I remember the opposition saying that this must have been an election Budget, they thought we were going to call an election, as the measures looked so good. We came up with a Budget that the country needed in 2010, considering the global crisis, in order to help small businesses and job creation.

Over an eight year time span small businesses have grown. In 2000, small businesses, those employing between one and ten people, employed 40,000 people; today the figure is 60,000. We took specific measures to help this sector and the results are there for all to see. We did what we had to do for the economy. Last year we postponed our deficit reduction, this year we can’t postpone it as the economy is clearly moving back on track.

What areas will you be targeting when you focus on reducing the Budget?

We are talking primarily of cost reduction measures. We must continue exercising restraint in our expenditure, obviously not in the areas that are needed for our economy to grow such as education and incentives for industry. We are also conscious of our social responsibilities, so we will always give pensioners an automatic increase for example. So we are talking about areas where we feel we can exercise more restraint to ensure that we meet our targets.

Can you be a bit more specific?

It’s not as if we are attacking one specific area, the restraint will be across the government. If you were present for my meetings with ministers you’d see that I asked every minister to identify areas from his or her budget where we can restrain costs. These are not necessarily cuts, because revenue will grow. One has to ensure that expenditure grows at a slower pace than revenue to meet that gap. If that is not enough then you will have to take more drastic measures, but we don’t believe we are at that stage.

Are ministries and departments given a target to reduce expenditure like what is happening in the UK, for example?

That is difficult to do. I think that because we took tough decisions earlier and took them at our pace we are not at that stage. In reality we are talking about a one per cent deficit reduction. Other countries which have far greater deficits have had to introduce what they call austerity measures. We are not talking about austerity measures but responsibility. We need to have a responsible Budget. I’ve had a lot of Budget demands which, unfortunately, I have had to say no to. If we don’t want to see an increase in taxation then we have to restrain our expenditure.

Can we expect any major initiatives on pension reform?

No, there will be no major pension reform initiatives in this Budget. We expect the pension reform task force to publish its report by sometime next year, and discussions will be held then. However, as pointed out in the pre-Budget document the measure to waive off part of the service pension from the calculation of one’s social security pension will continue.

That effectively rules out any major pension reform within this legislature.

Not necessarily. A five year review mechanism is in place, and next year is that fifth year. The report will be published, a discussion held and some decisions will possibly be taken. We are one of the very few countries that have increased the pension age without any public uproar. Just look at the reaction in France. I think people in Malta appreciate the difficulties involved, and we have a “working culture” in this country. People would like to continue working, life expectancy has improved a lot – also due to the investment we have made in the health sector – and we have a better quality of life.

But hardly any progress has been made on the second and third pillars of pension reform. Isn’t this of concern to the government?

The second and third pillars have been postponed. We couldn’t have introduced the second pillar during the economic crisis. The second pillar will have a cost on employees because they will have to pay a higher contribution, and it will be a cost on employers and on the government, if a mandatory second pillar is introduced. In the present economic scenario the government felt it couldn’t impose that cost on the economy. We will await the report on pension reform and take it from there.

The third pillar concerns tax incentives which will encourage people to save more, and this is very important. You can’t introduce the third pillar without first introducing the second, unless you introduce the third and never introduce the second. If we first introduce the third pillar and people take up private pension schemes they might not be able to afford another scheme if we then introduce a mandatory second pillar. Another possibility is to introduce the second pillar on a voluntary basis.

Are you sticking to your forecast for GDP growth for 2010?

We are not on target for our GDP growth figures for this year because we had forecast a growth of 1.1 per cent and we are averaging four per cent, but I don’t mind not having been on target! Unlike some other European countries Malta has emerged from the economic crisis. I think the way we responded to the global economic crisis, especially the way we helped the manufacturing and tourism sectors has clearly paid off and we are witnessing the positive results.

The economic figures for this year seem encouraging. However, an economic review of the last decade is perhaps less encouraging: Our GDP per capita was 84 per cent of the EU average in 2000 but it fell to 78 per cent in 2009. Our employment rate was 57.2 per cent in 2000 and only increased to 58.8 per cent in 2009. Investment by the private sector amounted to 13.3 per cent of GDP in 2000 but fell to 11.3 per cent in 2009. Malta’s early school leavers’ record remains one of the worst in Europe. Will there be any measures in the Budget to address what looks like structural problems?

We still have more things to do to make our economy more competitive. We need increased productivity. We have made great strides forward in the educational sector. MCAST, for example, has done a lot for school leavers and our investment in this college has produced good results. Malta is still attractive in terms of foreign direct investment.

We still have a lot to do to improve the female participation rate in the labour market although we have done much to encourage this. We also need to encourage those women who are unofficially in the labour market to regularise their position because by not contributing national insurance they are putting their pension and other benefits at risk.

There are also structural issues which cannot really be addressed by the Budget, such as school times and how we involve our children after school hours in sports and other activities. The way our society is structured is not really conducive for women to really have a full time job because balancing working life with family life becomes very difficult.

What about fiscal incentives for job creation?

The Budget will continue to encourage investment and some schemes announced in last year’s Budget, such as the tax credits for SMEs are still in place.

But the GRTU has complained that the micro credit scheme for SMEs is still not in operation. Why do measures announced in a Budget speech take so long to be implemented?

A Budget is implemented in a 12 month period. Unfortunately the micro credit scheme for SMEs fell behind. The scheme is financed through EU funds, which means there is a whole process that has to be adhered to. The European Investment Fund is involved and we allocated €10 million to the Fund which matched that amount. We have agreed on an investment policy. Now a call has been issued to identify a financial institution to administer the scheme and the call closes in November.

The GRTU argues that considering the difficult economic situation the government should have made available its own €10m in funds to the SMEs soon after the Budget.

This can’t be done because we are not a licensed financial institution. The government cannot act as a banker, you have to have a banking licence to lend money. I would have to turn Malta Enterprise into a lending institution, and that means I will have to capitalise it. So there are rules which have to be respected. The government is not in the driving seat here, it is the European Investment Fund which has been entrusted by the EU to push forward such schemes.

The MHRA has appealed to you not to introduce any more government induced costs in this next Budget, saying the industry has witnessed a decline in profits over the past five years. Are you sympathetic to their plea?

I am sympathetic to their plea and I appreciate their position. However, the taxpayer is investing a lot in the tourism sector. Yes, tourism is important, it creates jobs, it creates a ripple effect on the economy, but we are investing a great deal in this sector. The government always tries to reduce costs on the private sector. However this does not mean that the water and electricity bills are government induced costs. I do not accept this argument.

The water and electricity rates are what it costs us to produce energy. We all consume it. If the hotels and restaurants don’t pay for it, who will pay for it? I don’t think it is right for consumers to pay the energy costs of hoteliers. For an economic sector to be sustainable it must be able to pay for its core expenses which include water and electricity. So if we can’t attract enough tourists to enable these costs to be covered then I would start questioning whether this sector should be given that much importance.

We have introduced a number of schemes to help the tourism sector and the MHRA appreciates this. If we had not revised the utility tariffs we would not have had the money to support the tourism industry, so hotels would have had cheaper bills but no tourists.

The internationalisation committee of the Chamber of Commerce has appealed for government funds or fiscal incentives in the Budget to boost Malta’s small but growing franchising sector. Do you believe this sector has potential for growth?

Yes, I do think this sector has potential. We need more franchise operations in Malta and we also need Maltese businesses to be franchised abroad. Malta Enterprise has already supported this sector and I believe we can do more for it to help it expand. The question is how. When you sell a franchise you sell a concept and document your business. Cafe Jubilee, for example, documents how it makes its coffee. How we can support the sector, whether it is in the documentation phase, or whatever, are things we can possibly consider.

15,000 people have not received a water and electricity bill this year and many consumers who had a query about their utility bill had to wait long hours at the Luqa offices of ARMS Ltd, only to receive shoddy treatment. Will the Budget contain any measures to ensure that ARMS Ltd becomes a more efficient company?

ARMS is not a budget issue, it has the necessary funds to carry out its work. We need to appreciate that ARMS has had a very challenging year. There was a transformation of the billing system, the IT system and the accounting system. A backlog was created and we need to keep in mind that Enemalta has over 200,000 accounts.

The 15,000 figure is not as large as it sounds: only 5,600 bills have not been issued which are old bills, the rest are new accounts. I think the billing situation is being regularised. Our real challenge is improving the service at the front office. We have sub-contracted the call centre to the World Aviation Group, and we are already witnessing good results. We have also appointed an experienced chief executive officer. The queuing time has now been reduced and we are reviewing the procedure involved when a name on a bill needs to be changed.

The Prime Minister has apologised for what has happened, this was the government’s failure and we have taken steps to address the situation.

What about measures to reform the way public services are offered? Many taxpayers feel they do not get value for money from the public sector?

This is a very difficult question. We get mixed messages on this issue. People treated at Mater Dei Hospital give very good feedback so I think I think we’re getting very good value for money there. Some might complain about the emergency section of Mater Dei but the problem there is not a lack of funds but of doctors.

There are areas in the public sector where we can do more and we need to tackle the issues to ensure better value for money. The bottom line, however, is this: when you look at what taxes we pay and the services we receive in this country, we get a good deal, especially when you compare our situation to that of many other European countries, and the situation they are going through at the moment.

Certainly not for roads.

We could do better, I agree, but a great deal of effort has been made on improving our roads, especially our main roads. We have also changed the way road works are carried out and we don’t just patch up roads but carry out extensive resurfacing. We are also working with the local councils to carry out road works in various localities through a public private partnership.