Deficits, taxation and democracy in Europe
As I write, European Union leaders are meeting for their 19th emergency meeting. This is the 19th meeting in three years in relation to what is fundamentally the same crisis.
The mantra of “austerity” has been replaced by the mantra of “growth”. The mantra of “more Europe” smacks of communism under another name.
The uselessness of these meetings at European level is only matched by the abysmal ignorance (to be read as meaning lack of knowledge) of the citizens of eurozone countries in relation to what is going on at EU level.
Malta is going through a time period as a result of the eurozone crisis, the world recession and Brussels’s expansionist objectives that could be historic if the powers that be were paying enough attention to notice.
An adverse situation often brings with it an opportunity to reinvent oneself. As a country we have this opportunity now.
The European Union was built on the ideals of a common security policy and free trade. Long live the European Union.
This was not enough for the would-be rulers of the European continent and then came the euro and the eurozone. The misinformation that is now widely disseminated across the EU is that the euro and the EU are somehow inextricably linked and one cannot exist without the other.
It is said that should the euro collapse it would be the end of the EU and in order to save the EU we must do whatever it takes to save the euro. Nothing could be further from the truth.
We are told that we should be ready to sacrifice what we hold most dear to this cause. Trivial matters like our hard-won democracy should also go on the sacrificial altar to save the euro.
Like every good citizen I am overly critical of my country. However I am also fiercely patriotic.
Amid this chaos, Malta should forge its own independent future as one of the many and diverse members of the EU but not slave to any of them, and a master of its own destiny. The diversity within the EU is its strength.
I am more than a little gratified by both the government and opposition in Malta awakening to the threat facing our country and have made definitive statements in defence of our island state.
The fundamental issues are annual government deficits, dangerously high government borrowing levels, and an economy that certainly has all the ingredients to do well but has been robbed of the tools which it would need to prosper.
Every €100 million we lend to Greece and Spain and other sundry bankrupt eurozone countries – which by the way we clearly need to borrow ourselves – add approximately 1.5 per cent to the government’s debt-to-GDP ratio. We have guaranteed €700 million to the bailout effort.
Do the math. If our GDP drops, as it may well do in a recession, the situation would get dramatically worse.
As most eurozone governments are running at a deficit, they are now necessarily borrowing funds in order to lend them to other countries under bailout schemes. Nobody really believes that the countries lending the funds will ever be repaid.
We need to urgently restore a sense of sanity and reason in the way we manage our financial affairs.
Malta’s current debt-to-GDP ratio is already at 72 per cent.
For the benefit of the uninitiated, I would point out that at 80 per cent Malta is in bailout territory. We are sadly following the path already travelled by Greece, Spain, Ireland and Portugal, Cyprus and, dare I say, Italy and France.
That path ends up in bankruptcy and painful bailouts and a further erosion of our democratic rights as central control from Brussels (read Germany and France) takes an even stronger hold.
It would make for a truly historic moment if Malta could see that the solution is actually quite simple.
It is normally the case that it is not solutions that are complicated or difficult to achieve.
Mostly, the difficulty lies in the inability to let go of mental concepts, ideas and pet strategies that one would have been championing as this is perceived as a loss of face or a reflection of having been wrong in the past.
This is a fallacy and an error in logical thinking.
We are all wrong most of the time and sometimes we happen to be right.
This is borne out by overwhelming evidence in everyday life.
Changing stance and strategy when necessary is a mark of wisdom and common sense.
Everything changes all the time. Things get complicated often only to change.
The government needs to cost less and funds should be freed into the hands of entrepreneurs for the latter to invest and create jobs.
Entrepreneurs would increase supply that would create jobs with the resultant increase in consumer spending.
Nothing releases money quicker into corporate bank accounts – thereby laying the foundations for increased productive capacity and growth – than lower taxation.
Lower personal taxation would also stimulate demand.
Entrepreneurs are expert at creating productive capacity and jobs and consumers are expert at spending.
The bold move would be to lower the top income tax rate in Malta for companies and persons alike from 35 per cent to 15 per cent over a four-year period, in steps of five per cent between 2013 to 2016. The deficit would need to be allowed to go above the three per cent of GDP magic threshold for the interim period.
At the end, government coffers will swell as tax compliance would increase dramatically and the government would also have in the meantime implemented some effective good housekeeping measures.
The resulting budget surpluses would then reverse the downward spiral of deficits and of the forever increasing government borrowing.
This would also be a very attractive regime for international business and foreign direct investment (Portman International’s neck of the woods).
“What about the euro?” you may ask.
Hold on, I seem to remember there once was a currency by that name.
Mr Marinelli is chief executive of Portman International.