Brighter economic prospects

Last monday's Budget Speech was overshadowed by the sharp fuel and energy price increases that were announced a few days earlier. These measures will hurt people's pockets and so might have diminished the effects of the far-reaching measures provided in the government's financial estimates for next year.

In his Budget Speech the Prime Minister and Minister of Finance showed that Government is determined to tackle the main problems the country is facing, to reorganise its institutions to attain greater efficiency, and to achieve set targets.

The 2006 Budget has vision and contemplates a broader outlook than in the past. It is not possible here to deal with all aspects of the Budget Speech; I shall limit myself to those areas that tend to be less discussed but which are equally important.

Thus, for example, it is Government's goal to participate less in the marketplace. In this respect, it attempts to create more space for the private sector to operate. As a result, the accelerating tempo of the privatisation process should prove to be a bonanza to investors, primarily Maltese, one should hope.

Government's shareholding in Bank of Valletta and Tug Malta will be sold; the yacht marinas and Maltacom, too, will be privatised. The liberalisation of the importation and distribution of fuel, for the last 32 years an Enemalta monopoly, is also planned to take place next year.

Such policies should encourage the Maltese to invest their savings in shares rather than simply place them in banks' savings accounts. People may think that money held by banks is safer than those that are subject to market fluctuations. If this is the case then Government has to work hard to nurture an investment culture that is conducive to a more enterprising society. Circulation of money and funds available to enterprising people tend to generate more national wealth.

In fact, the Malta Stock Exchange needs a new lease of life from two different perspectives. More private and public companies should be encouraged to list with this institution; admittedly, the MSE did try to attract companies to list their equity on the Borza ta' Malta, but the effort has to be an ongoing process because it is not easy to depart from past inherent practices.

Though educating public opinion on investing in companies' shareholding is not really a hard task, encouraging private and public companies to be listed, ensuring that they are more transparent by providing greater details about their activities and prospects, should prove more difficult.

Besides the advantages to potential investors that Government's privatisation policy ought to provide, there are further advantages: Government will focus on its role as a regulator rather than an operator, thereby reducing the number of people on its payroll, which should lead to a reduction in public expenditure.

It is amply clear that Government is concerned about the plight of the private sector as a result of the recent additional costs placed upon it; to make matters worse, Government has burdened the private sector with an additional 50c a week as compensation to employees for fuel price increases. Fully aware that these authorised payments may have serious adverse affects, Government included a number of tax credits to small businesses, revised the capital gains tax, and allocated more funds to the tourist industry.

More than that, Government promised that the income tax system will be reformed in the coming year to ensure that present-day economic realities are met. It appears that there is cognisance of the fact that, with consistent yearly cost of living increases, the tax bands have to be reconsidered. The number of people being taxed at a higher income tax rate is rising steadily because the maximum taxable income for this bracket has remained the same for years.

Despite these offsetting measures that technically appear balanced and just, Malta stands to be worse off in terms of competing with other countries. Costs have increased for the producer and manufacturer even though workers have been compensated. Since costs per unit of production are higher, there is the likelihood that prices will rise, making our competitive rating decline even further.

It makes sense to the unions that workers have to be compensated for the relative increase in the cost of living to maintain the real wage level, and the workers themselves like the idea of having additional income. But if workers and unions take a longer-term view, they should perceive that with Malta's competitiveness threatened, employment opportunities are likely to be scarcer. Even those who are presently in employment may feel that their jobs are not entirely free from this threat.

True and pertinent is the question that should balance the equation between asking people, particularly workers, to contribute to the national coffers because of external factors influencing domestic market conditions and maintaining the real wage level. It is commonplace to remark that increased taxation lowers living standards and affects adversely the quality of life.

Government has made it abundantly clear that it wants to improve both. A deep soul-searching exercise should provide solutions. Enemalta's shortfalls could have been provided from other sources that were in a position to pay up without influencing Malta's competitiveness.

Ironically, on the same day Dr Gonzi, the Prime Minister and Minister of Finance, was delivering his Budget Speech, the price of crude oil closed at $59.76 per barrel - the first time since July that its quoted price has been below $60 - and natural gas was $12.205 per million BTUs.

To forestall a repeat situation when Malta was taken unawares by high oil prices, Dr Gonzi announced a number of potential measures: laying a cable between Malta and neighbouring countries, installation of a gas pipeline or gas storage plant, the possible building of wind farms, part compensation to those who are prepared to instal domestic solar energy. If, in this way, more energy is produced than domestically consumed, Enemalta is prepared to buy the excess to conserve that energy.

As international oil prices cannot remain stable for long - in fact they tend to fluctuate wildly - and with Malta so far totally dependent on this product for its energy needs, a new approach to this problem has become necessary. An oil study group within Enemalta should be set up.

Its role would be the continual research on all factors affecting the oil market. Its terms of reference should not be limited to the oil needs of industrialised and newly emerging countries. A complete study of all countries' oil reserves, transport and shipping needs, climatic conditions and people's expectations should be undertaken as an ongoing process.

In this way it is hoped that Enemalta would have a good grasp of potential price changes. One-off expert advice suffers from severe handicaps as only the immediate scenario is taken into consideration. It is not surprising that, in these circumstances, Government was advised to transfer the oil price hike onto consumers! The oil market is more sophisticated than that.

The Budget Speech contains other important points relating to environment, education, infrastructure and the creation of new machinery being contemplated to answer prevalent needs. What is significantly important is that Government has succeeded in controlling its deficit and there is the great likelihood that it will meet the Maastricht criteria. This fact has the added advantage that there will be less service payments to make and therefore more potential investment funds.

Though the people have had to undergo many hardships, there are good prospects for economic revival. It is not only a question of vision; Government's determination to succeed and excel seems to be paying dividends. If we work together there should be brighter economic prospects.

Dr Borda is an economist specialising in the economic development of small states