What is missing from the Budget?

The Budget for 2012 has received mixed reactions from different quarters. Measures such as the adjustments to the income tax computation for guardians of children, the increase in children’s allowance and other family-friendly measures to improve disposal income are positive.

...we may face both economic turmoil and also a potential election campaign- Konrad Mizzi

The government’s change of position on maternity leave is also welcomed although this still needs to be agreed by the Malta Council for Economic and Social Development.

It is also fair to raise doubts on the expectations set out for 2012 based on the government’s performance of 2011. For instance, will the government manage to execute the planned capital expenditure programme or will big parts of this programme be terminated during the year? This happened in 2011 to help reduce the deficit.

Other assumptions with respect to increase in tax revenues in an uncertain economic climate have also been based on optimistic projections.

However, my biggest challenge to Finance Minister Tonio Fenech’s Budget is not related to what is included in his speech but rather on the important themes that have been omitted or not given sufficient importance in the government’s programme for 2012.

As government expenditure and levels of investment are limited by the current fiscal position, foreign direct investment is a critical theme for economic growth and job creation. However, the Budget has provided a limited focus on aspects of foreign direct investment for 2012. Some longer-term initiatives, such as the promotion of biotechnology, seem to be positive, although we have not yet seen the details of the government’s plans.

However, I would have expected the government to launch a strong and well-funded initiative to promote foreign investment in countries outside of Europe with the objective to support economic growth and employment.

Moreover, attracting investment into SmartCity was not even mentioned in the Budget and, according to government projections, this should account to significant job creation in 2012.

I was also surprised that the plights for help from the established manufacturing industry in Malta on aspects such as the introduction of service charges in industrial estates have been largely ignored.

On the revenue side of government finances, it is positive to note that VAT income has increased in 2011. This may possibly be attributed to tighter controls introduced in the aftermath of the VAT corruption scandal. However, the Budget does not set clear targets to address tax evasion in 2012 beyond mentioning the approved merger of the various tax departments into a new organisation and the introduction of IT solutions. Structural change and the introduction of information technology alone will not help reduce the size of the shadow economy, which, according to the European Commission, accounts to 26 per cent of our economy.

Another area that deserved more focus is the state of the construction and housing sector. Some positive incentives were introduced to enable regeneration of properties in urban town centres. However, this is not sufficient, given serious concerns on the slowdown in major construction projects and the impact this may have on housing developments and loan portfolios, which have funded such developments.

The increases in cement levies are also not helpful in the prevailing climate. The construction sector requires a coordinated programme to support the industry and not just a few scattered initiatives.

In my opinion, Mr Fenech did not give sufficient consideration to the possible scenario where the eurozone economies decline significantly. What should Malta do if faced with such a scenario?

The Finance Minister has made no reference to a Plan B to address such circumstances. It is also a well-known secret that many European countries are putting in place such plans. I hope that the minister takes note of this and acts by drawing up a plan to address such a situation.

I also expected that minister would have re-prioritised some expenditure to set up a special fund to support economic development if and when the eurozone crisis deepens. The absence of such as a fund will limit the government’s ability to respond to such a crisis and protect jobs.

In this context, it is critical that the Minister of Finance and the Prime Minister will be vigilant on economic developments and will retain the prerogative to re-prioritise spending during the forthcoming year to address developments in an uncertain European economic climate.

I hope that the themes discussed, which include the need for additional support to enterprise and industry and the construction sector, are also reconsidered by the government during the coming months through ongoing engagement with the constituted bodies in the Malta Council for Economic and Social Development.

I also hope that the Prime Minister will be committed to engage and consult with the opposition during the difficult year ahead to ensure stability during a period where we may face both economic turmoil and also a potential election campaign.

Dr Mizzi is a management consultant.